# 2.1. Central bank financing of the government

The National Bank of Ethiopia (NBE) is not independent from the government. While the NBE is legally an “autonomous institution” as stated in both the 1994 and 2008 NBE Establishment Proclamations,<sup>25</sup> it is required to meet the government’s requests for credits and advances for each fiscal year (Article 13.1). Over time, the status and purpose of the NBE have evolved, with the 2008 Proclamation making it less autonomous and less oriented toward macroeconomic stability than the 1994 Proclamation that established the NBE. A new article was introduced in the 2008 Proclamation to make the NBE explicitly accountable to the Prime Minister (Article 3.4) and the purpose of the NBE was amended to include “a stable rate of exchange” and “activities that are conducive to rapid economic development” (Article 4) as opposed to “balanced growth of the economy”.<sup>26</sup> The relation of the NBE with the government was also amended. While the 1994 Proclamation set numerous constraining limits to government borrowing from the NBE (Article 25.3) and subjected it to the “maintenance of monetary stability and balance of payment equilibrium” (Article 25.2),<sup>27</sup> the 2008 Proclamation removed the limits to government borrowing and subjected it only to the “maintenance of price and exchange stability” without specific references to internal and external imbalances (Article 13.1). Another important change in the 2008 Proclamation was to authorize the NBE to issue its own debt and payment instruments (Article 5.3).

The NBE is engaged in large direct and indirect quasi‐fiscal operations. One effect of the NBE’s dependence on the government is that the NBE provides direct advances to the government to finance the budget on an annual basis. In 2017/18, the NBE extended advances of birr24.5 billion to finance the government deficit (1.1 percent of GDP). The outstanding NBE advances to the government are large and have been growing over time. As of end‐September 2018, the NBE’s outstanding claims on the government amounted to birr 166.7 billion (corresponding to 7.6 percent of GDP or 95.3 percent of the monetary base or reserve money). These claims increased by 18.1 percent during 2017/18 and by an average of 20 percent over the past five fiscal years. The NBE also provides indirect financing to the government by extending credit to the Development Bank of Ethiopia (DBE) to purchase T‐bills. In 2017/18, such credit amounted to birr 17 billion. Thus, the total direct and indirect financing of the government by the NBE amounted to birr 41.5 billion in 2017/18. In addition, the NBE provides indirect financing of SOEs by granting liquidity to the Commercial Bank of Ethiopia (CBE) in the form of 5‐year bonds, which amounted to birr 27 billion in 2016/17.<sup>28</sup>

> 25 Proclamation No. 83/1994 and Proclamation No. 591/2008.

> 26 According to the 1994 Proclamation, “ _The purpose of the Bank, by which it shall be guided in all its actions, is to foster monetary stability, a sound financial system and such other credit and exchange conditions as are conducive to the balanced growth of the economy of Ethiopia_ ”. In the 2008 Proclamation, “ _The purpose of the Bank is to maintain stable rate of price and exchange, to foster a healthy financial system and to undertake such other related activities as are conducive to rapid economic development of Ethiopia_ ”.

> 27 Including (i) limiting the direct advances to the government to 15 percent of the past 3‐year average annual ordinary revenue of the government; (ii) limiting the total amount of (short‐term) Treasury Bills purchased and held as security by the NBE and those purchased by banks and other financial institutions to 25 percent of the past 3‐year average annual ordinary revenue of the government; and (iii) limiting the total amount of (longer‐term) government bonds held by the NBE and by banks and other financial institutions to 50 percent of the past 3‐year average annual ordinary revenue of the government.

> 28 NBE (2017). Annual Report 2016/17.

10