Page 1 of 20

Journal for Studies in Management and Planning

Available at http://edupediapublications.org/journals/index.php/JSMaP/

e-ISSN: 2395-0463

Volume 02 Issue 4

April 2016

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 231

Financial Sector Liberalization in Ethiopia: Resistance,

Justification and Its Credibility

Tefera Assefa

Lecturer and Department Head

Department of Public Administration and Development Management

College of Business and Economics

Dilla University

Email: teferaasefa@gmail.com

Abstract

The paper concerned with the assessment of

resistance, justification and the credibility of

this justification in financial sector

liberalization in Ethiopia. Financial

liberalization is an integral part of the

overall economic liberalization. It is a set of

operational reforms and policy measures

designed to deregulate and transform the

financial system and its structure with the

view to achieving a liberalized market- oriented system within an appropriate

regulatory framework. The full financial

liberalization involve six main dimension:

the elimination of credit controls, the

deregulation of interest rates, free entry into

the banking sector, bank autonomy, private

ownership of banks, and the liberalization of

international capital flows. Most of these

dimensions are lacking in Ethiopia because

they lack political supports and the

politician resists the proposal and advice

from international financial institution. The

paper attempted to address the details of the

political resistance and justification of the

politicians for resisting financial sector

liberalization. The credibility and soundness

of the justification was also assessed. For

this purpose data were collected from

different secondary data such as journals,

article and books. Manuals and reports

were also used to substantiate secondary

data. Qualitative research approach was

used in analysis of the data. It is found that

financial sector liberalization in Ethiopia is

very low in comparison with some

neighboring countries and the sector

remains poor and under developed. The

majority of populations are out of reach of

Page 2 of 20

Journal for Studies in Management and Planning

Available at http://edupediapublications.org/journals/index.php/JSMaP/

e-ISSN: 2395-0463

Volume 02 Issue 4

April 2016

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 232

financial service in the country. Because of

the unbalanced concentration of the sectors

in the urban areas, majority portion of rural

population suffers from acute shortage of

financial infrastructure and serves. Based

on the above point, it is also found that the

justification for not to liberalize is not sound

and credible.

Key Words: Ethiopia, El Niño, Financial

Liberalization, Financial repression,

economic liberalization and prohibitionist

policy

1. Introduction

1.1 Background of the

paper

Economic liberalization encompasses the

processes, including government policies

that promote free trade, deregulation,

elimination of subsidies, price controls and

rationing systems, and, often, the

downsizing or privatization of public

services (Woodward, 1992) cited in UN,

2010. Economic liberalization has been

central to adjustment policies introduced in

developing countries since the late 1970s,

mostly in the context of the conditions for

lending set by international financial

institutions. Thus, government policies were

redirected to follow a non-interventionist, or

laissez-faire, approach to economic activity,

relying on market forces for the allocation of

resources. It was argued that market- oriented policy reforms would spur growth

and accelerate poverty reduction.

Financial liberalization is an integrated part

of overall economic liberalization.

Specifically, the objective of financial

liberalization is to promote the role of the

market and to minimize the role of the state

in determining who gets and gives credit and

at what price, or as stated by McKinnon

(1973) quoted in Baswir (n.d) , the primary

objective of financial liberalization is to

eliminate financial sectors from ‘financial

repression’. As cited in Sulaiman et al

(2012), Johnston and Sundararajan (1999)

viewed financial liberalization as a set of

operational reforms and policy measures

designed to deregulate and transform the

financial system and its structure with the

view to achieving a liberalized market- oriented system within an appropriate

regulatory framework.

Financial liberalization, broadly defined, can

be characterized as the process of allowing

markets to determine who gets and grants

credit and at what price. As cited in Hailay,

2014 (Abiad and Mody, 2003; Kabir and

Hoque, 2007; Odhiambo, 2011) put that the

full financial liberalization involves six main

Page 3 of 20

Journal for Studies in Management and Planning

Available at http://edupediapublications.org/journals/index.php/JSMaP/

e-ISSN: 2395-0463

Volume 02 Issue 4

April 2016

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 233

dimensions: the elimination of credit

controls, the deregulation of interest rates,

free entry into the banking sector, bank

autonomy, private ownership of banks, and

the liberalization of international capital

flows .

As it was stated in different literatures,

economic liberalization in Ethiopia is very

low in comparison with neighboring

countries. Financial sector, trade, cash

follow, development banking system and

foreign investment in Ethiopia is still

underdeveloped and highly controlled by

government. Stock exchange and foreign

bank is some of prerequisite for and

determinant of foreign investment in a given

country. But in Ethiopia there is not such

stock exchange and foreign bank to facilitate

and attract foreign investment to the

country. Ethiopia has increased its

involvement in international trade, although

less rapidly than other countries. The trade is

even reduced from time to time in Ethiopia.

As indicated in World Trade Indicators

2009/10, Ethiopia maintained its 2007, 5.9

percent real trade (in constant 2000 U.S.

dollars) growth rate of goods and services in

2008, though this is expected to fall to 3.7

percent in 2009. Exports of goods and

services growth slowed down significantly

from 10.2 percent in 2007 to 3.1 percent in

2008, while import growth almost doubled

from 3.8 percent to 7.3 percent. (Reinert,

2006; Dejene et al, 2011)

The financial system of Ethiopia is

underdeveloped. There is no stock exchange

and of the 19 banks that exist, three state

owned banks dominate the sector (Brook,

2015). There is no foreign bank in the

country, and the system remains isolated

from the effects of globalization while

policy‐makers fear that liberalization will

lead to loss of control over the economy.

The government controls interest rates and

sets them below the high inflation rate.

Corruption, though strictly sanctioned,

remains a concern. The National Bank of

Ethiopia is the country’s central bank. The

state‐owned Commercial Bank of Ethiopia is

the largest bank in Ethiopia and controls

~2/3 of the assets of the entire banking

system. The Central Bank has a monopoly

on all foreign exchange transactions and

supervises all foreign exchange payments

and remittances. The currency, the Birr, is

not convertible. The government carefully

monitors and controls its movement and as a

result, it trades in a very narrow range. The

Birr is widely considered to be overvalued

particularly in light of Ethiopia’s high

inflation rate. (Kiyota et al, 2007; UNDP,