An Analysis of Financial Sector and Credit Policies during the Derg Period and Post-Derg Reforms

Abstract

The paper provides systematic analysis of the past and current financial sector, credit, and other related policies in Ethiopia based on a critical examination of the provisions of the numerous proclamations, regulations, and directives governing economic activities in the country, the incentive/dis-incentive elements contained in them, and their consequences, it also gives an assessment of developments in the financial sector following the reform, as well as the depth and structure of the financial sector.

A severe form of financial repression which, unlike many other financially repressed economies when suppression was generally through taxes, stamp duties and an un-conducive legal framework, mainly took the form of outright prohibition and was driven by ideology, existed during the Derg regime. Financial institutions were effectively reduced into mere instruments for channelling private sector resources for public sector use. The government also reserved for itself a large share of the income transfers from ultimate lenders (i.e savers) to borrowers resulting from ceilings on interest rates. Restrictions on private sector access to credit together with the stringent absolute limit on single borrower loans served as effective instruments in suppressing the private sector A marked increase in the magnitude of loanable funds of the banking system, mainly due to a switch out of non-earning existing assets, and a fundamental shift in the flow of credit towards the private sector occurred during the post-Derg period. Entry into the financial sector has been slow but steady. However, concentration in terms of ownership, asset portfolio, as well as institutional, sectoral and geographic distribution of intermediation services, remains too high. Besides, some regulatory issues of critical significance remain yet to be addressed.