Prepared by Shuang Ding.
A Financial Institutions Proclamation (No. 94/1997) was also passed in March 1997. It provides for the role and obligations of the financial institutions that are tailored to the functions of the BE, to facilitate an effective and efficient regulation of the financial system.
The comparison undertaken below is based; the IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies: Declaration of Principles; the Supporting Document to the Code, Part 2—Good Transparency Practices for Monetary Policy by Central Banks. The authorities agree in principle with most of the issues raised in the paper. They have separately reviewed the existing provisions of the Proclamation and are considering possible modifications, as described below.
Article 5 provides that “the principal objective of the Bank shall be to manage money and credit in the Eritrean economy, subject to the provisions of this Proclamation with the purpose of safeguarding the value of the national currency.”
Article 6 provides that “(1) the Bank shall support the general economic objectives of the Government within the limits of its principal monetary objective; (2) the Bank shall be independent from and not be subject to instructions by the Government in performing its functions, determining its budget, and setting its procedures.”
Article 31 provides that “the total amount of securities with maturity exceeding two years, other than securities held by the Bank as collateral or held as a result of open market operations of the Bank…may not at any time exceed 10 percent of the estimated annual budget revenues of the Government for the current fiscal year.”
The BE has proposed a minimum term of office of five years for the members of the Board. It has also suggested limiting government representation to one member from the Ministry of Finance, while increasing representation from the private sector.
Simultaneously, the BE issued Directive No. 2/2002, which prescribes liquid asset requirements of 10 percent to be maintained by banks, including in the form of unencumbered government securities.
See in particular Part III on licensing, Part IV on prudential requirements, Part VI on prudential regulations, Part VII on prudential exposure limits, and Part XII on liquidation of institutions.
Actual government revenues are used as a proxy for estimated government revenues.
In June 2001, the government assumed the debt of the CBE to the Commercial Bank of Ethiopia. The CBE made a corresponding payment to the government by drawing down its reserves at the BE.
In the proposed amendments to the Proclamation, the BE envisages introducing a provision to the effect that the Proclamation will prevail when provisions in any other laws are inconsistent with its provisions.
However, to the extent that the purchases of treasury bills are financed by drawing down excess reserves that are not remunerated at all, they will increase bank profitability.
It could be argued, of course, that the excess liquidity in the system should not remain idle. However, this argument would carry more weight if its use would be only for investment purposes, and not for consumption of government.
For a fuller evaluation of the exchange rate regime of Eritrea, see the companion selected issues paper “Exchange Rate Policy and Management.”