Financial Regulation and Government Revenue: Theeffects of a Policy Change in Ethiopia

31 Pages Posted: 19 Jul 2016

Multiple version iconThere are 2 versions of this paper

Date Written: June 28, 2016

Abstract

Financial regulation affects government revenue whenever it imposes both the mandatory quantity and price of government bonds. This paper studies a banking regulation adopted by the National Bank of Ethiopia in April 2011, which forces all private banks to purchase a fixed negative-yield government bond in proportion to private sector lending. Having access to monthly bank balance sheets, a survey of branch costs and public finances documentation, the effect of the policy on government revenue can be tracked. This is compared to three plausible revenue-generating alternatives: raising funds at competitive rates on international markets; distorting the private lending of the state-owned bank; and raising new deposits through additional branches of the state-owned bank. Three main results emerge: the government revenue gain is moderate (1.5-2.6 percent of the tax revenue); banks comply with the policy and amass more safe assets; banks' profit growth slows without turning negative (from 10 percent to 2 percent).

Keywords: Banks & Banking Reform, Public Sector Economics, Public Finance Decentralization and Poverty Reduction, Tax Administration, Tax Law, Revenue Administration

Suggested Citation

Limodio, Nicola and Strobbe, Francesco, Financial Regulation and Government Revenue: Theeffects of a Policy Change in Ethiopia (June 28, 2016). World Bank Policy Research Working Paper No. 7733. Available at SSRN: https://ssrn.com/abstract=2811381

Nicola Limodio (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Francesco Strobbe

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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