VZCZCXRO0384
RR RUEHROV
DE RUEHDS #1640/01 1681405
ZNR UUUUU ZZH
R 161405Z JUN 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 0975
INFO RUCNIAD/IGAD COLLECTIVE
RUEHGV/USMISSION GENEVA 4276
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001640 
 
SIPDIS 
DEPT FOR AF/E AND EEB 
DEPT PLEASE PASS TO USTR BILL JACKSON 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EAGR ET
SUBJECT: PARLIAMENT CONSIDERS TWO BANKING LAWS 
 
¶1. SUMMARY: The National Bank of Ethiopia (NBE, Ethiopia's central 
bank) presented an amendment to the monetary and banking 
proclamation to Parliament on June 2. The principal objectives of 
the amendment include removing the borrowing ceiling of the 
Government of Ethiopia (GoE) from the NBE, introducing a deposit 
insurance payment system including electronic payments and interbank 
check clearances, increasing NBE's paid up capital, and empowering 
NBE to undertake functions pursuant to its mandate of ensuring price 
and exchange rate stability. The Parliament also discussed a revised 
Banking Business Proclamation on June 5, which gives enormous power 
to the National Bank and continues to prohibit foreign investment in 
the financial services sector. Opposition members of Parliament 
(MPs) criticized the bill as contradictory to the ideology of a 
market economy, while advocates argued that strong regulation 
ensures a healthy financial system and macroeconomic stability. The 
Parliament referred both bills to the Budget and Finance Standing 
Committee for further scrutiny.  END SUMMARY 
 
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BACKGROUND 
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¶2. The National Bank of Ethiopia was established during the Imperial 
Regime by order No 30 of 1963 to undertake the conventional central 
banking functions.  NBE was reestablished by Proclamation No 99 of 
1976 by the Derg to perform socialist central banking functions. 
After the fall of the Derg regime in 1991, NBE was reestablished by 
the Monetary and Banking Proclamation No 83 of 1994.  Subsequently, 
the Licensing and Supervision of Banking Business Proclamation No 84 
of 1994 was issued in which the National Bank of Ethiopia was given 
the power to license and supervise banking and insurance businesses 
in the country This proclamation also limited the establishment of 
private bank and insurance businesses to Ethiopian nationals only. 
 
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NATIONAL BANK OF ETHIOPIA PROCLAMATION 
-------------------------------------- 
 
¶3. The proposed amendment to the monetary and banking proclamation 
stated that it has been in place for over fourteen years and needs 
to be amended to fit into the changing economic realities in the 
country. The Governor of NBE, Teklewold Atnafu, told Parliament that 
the principal objective of amending the law is to increase the 
Bank's independence in implementing prudent monetary policy to 
ensure price and exchange rate stability as well as such other 
functions conducive to the balanced growth of the Ethiopian economy. 
 The new law states that there is no need to put a ceiling on 
government borrowing from NBE. While the current proclamation 
imposes a ceiling of 15 percent of the annual government revenue on 
direct advance, 25 percent on treasury bills, and 50 percent on 
government bonds, NBE advances loans to government simply in 
consultation with the Ministry Finance and Economic Development and 
in line with price stability objectives. In view of enabling the NBE 
to bear costs associated with managing liquidity of the economy the 
Bank's paid up capital is raised from $5.2 million to $52.2 million. 
Whereas previously NBE was accountable to the Council of Ministers, 
the Bank is now directly accountable to the Prime Minster, and the 
Governor and Vice Governor of the Bank will be members of the board 
of directors of the Bank with five other members, including the 
chairman, appointed by the government.  The law also has additional 
provisions that grant power to NBE to establish a deposit insurance 
scheme for commercial banks, improve and modernize the payment 
system of the country by automating commercial banks' services, 
introducing an electronic payment system, and other improvements, 
maintain international financial reporting standards, and establish 
an audit committee for the board of directors. 
 
----------------------------- 
BANKING BUSINESS PROCLAMATION 
----------------------------- 
 
¶4. The Parliament also discussed amending the Licensing and 
Supervision of Banking Business Proclamation No 84 of 1994 to the 
Banking Business Proclamation.  The draft revised Proclamation is 
very stringent and gives more power to NBE.  The law stipulates that 
NBE will decide the minimum paid up capital of banks operating in 
Ethiopia. The appointment of directors, CEOs and senior officers of 
banks must meet standard criteria set by NBE. It also prohibits an 
individual who has borrowed money from a bank in which he or she is 
a share holder from voting as a board member. The law limits equity 
shares held by individuals and institutions, except for the GoE, to 
5 percent of the total subscribed capital of a bank.  Article 2(8) 
of this proclamation reiterates the prohibition on foreign nationals 
and/or organizations opening banks or branch offices in Ethiopia. 
 
¶5. Opposition MPs criticized the bill as contradictory to the 
ideology of a market economy.  Temesgen Zewede, a member of the 
opposition, said "This is typical of command economy policy. Why 
 
ADDIS ABAB 00001640  002 OF 002 
 
 
should the central bank restrict the voices of share holders? After 
all, it is their bank." Advocates of the revised bill, on the other 
hand, argued that strong regulation ensures the health of the 
financial system and macroeconomic stability. 
 
¶6. COMMENT. The new National Bank of Ethiopia Proclamation   gives 
an enormous mandate to the Bank to ensure price and exchange rate 
stability as well as perform other functions conducive to the 
balanced growth of the Ethiopian economy.  Nonetheless, with NBE 
accountable to the Prime Minster, the Governor and Vice Governor 
political appointees and the board of directors appointed by the 
government, it would be naive to expect that the Bank will implement 
an independent monetary policy.  The Banking Business Proclamation 
gives rigorous power to the National Bank strongly to control 
banking business in the country.  This law limits the maximum equity 
share of entities to 5 percent of a bank's capital, and influential 
share holders are not allowed to own shares in other banks, which 
discourages investment in the sector.  Moreover the law still 
prohibits foreign investment in the sector despite the fact that the 
country desperately needs foreign capital inflows and its 
application to WTO requires liberalizing the service sector.  In 
practice, these revised laws may not bring significant changes other 
than harnessing government controls in the sector in particular and 
in the economy in general. END COMMENT 
 
YAMAMOTO