Eritrea’s early stages in monetary and banking development ARNALDO MAURI Working Paper n. 28.2003 - Ottobre Dipartimento di Economia Politica e Aziendale Università degli Studi di Milano via Conservatorio, 7 20122 Milano tel. ++39/02/50321501 fax ++39/02/50321450 E Mail: [email protected] Arnaldo Mauri ERITREA’S EARLY STAGES IN MONETARY AND BANKING DEVELOPMENT Abstract Eritrea is listed among those countries of Africa, whose independence has been lately achieved. Notwithstanding the monetary and banking history of Eritrea goes back to the Italian colonial settlement on the Red Sea shore of 19th century. The paper offers an overview of the early stages of the Colony’s monetary development up to mid-thirties and of the problems met in the substitution of Italian currency for the traditional money. A branch of the Bank of Italy was established in Asmara in 1914 and this event marked the first introduction of banking into the country. The Asmara branch was followed by branch offices of the Italian central bank in the four main centres of the Colony. The Bank of Italy was involved also in commercial banking and fulfilled the functions of banker and fiscal agent for the colonial government as well. Furthermore it worked to promote the creation of local banks and the take-off of the Eritrean banking system. Due attention is given to attempts of the colonial government to develop a suitable agricultural credit system in Eritrea and to the critical issues involved. Keywords: Eritrea, Financial Development, African Banking JEL classification: E 42, G 21, N 27. 1 1.Introduction Eritrea has achieved independence in the spring of 1993, following a referendum sponsored by United Nations, and is therefore one of the newest African nations. This country is located in the Horn of Africa and occupies a strategic position along the Red Sea western coast being bordered, on the landside, to the north and west by Sudan, to the south by Ethiopia and to the south-east by Djibouti. Coast line by the Red Sea is 1,151 km. and together with Dahlack Archipelago is 2,234 km. Total land area is 121,143 km sq (a little more than Northern Italy) and the population is estimated approximately 3.5 million. The region, through the centuries, has been settled and controlled by various immigrants and invaders, but the most significant contribution to the rise of the nation as a distinct society and territory was made by the Italian colonization. “Eritrea” is, in fact, the name first given to this country by Italians after the Mare Erythraeum (Red Sea) of the Romans. Eritrean identity and national consciousness, in fact, gradually matured during this era. The main events, which may be adopted as dividing Eritrean monetary and banking history into periods, are six. The first event was the Italian preliminary settling on the coastline at Assab in 1869. The second event was the establishment, in 1914, of a branch of the Bank of Italy in Asmara, marking the advent of banking in Eritrea, at that time the whole country being under Italian colonial rule. The third event was, in 1936, the Italian war against Ethiopia, when Eritrea was elected the main base for launching the invasion into the neighbour country. After the conquest of Ethiopia, a broad colonial banking network, extended to encompass all Italian possessions in the Horn of Africa (Eritrea, Ethiopia and Somalia) and closely linked with the metropolitan financial system, was created (Mauri 1967). By the end of the thirties Eritrea, at that time one of the six provinces of Italian East Africa (Africa Orientale Italiana), was referred among the most industrialised African areas south of Sahara (Infante 1948). The fourth event was the collapse of the Italian colonial power during World War II in 1941, when Eritrea came under British military administration and was ruled as “occupied enemy territory”. The East African shilling was enforced as sole legal-tender money and the Barclays Bank settled in the country with two branch offices (Asmara, June 1941 and Massawa, April 1942). British temporary administration lasted, however, for more than eleven years. The fifth event was, in 1952, the federation of Eritrea, as an autonomous state, with Ethiopia 2 under the sovereignty of Ethiopian crown, following a recommendation by the United Nations (Zewde 1991). British bankers left, their business was transferred to the State Bank of Ethiopia and Eritrea was fully included into the Ethiopian monetary and banking system (Caselli and Mauri 1986). After a decade Ethiopia, by unilateral decision, annexed Eritrea as a simple province and that infelicitous move started the thirty- year liberation struggle of the whole Eritrean people. Finally, the sixth event was the achievement of independence by Eritrea in 1993, followed by the birth of an independent Eritrean monetary and banking system. This paper is designate to present a synthesis of the basic problems and developments of the monetary and credit system of Eritrea during the two first periods of Eritrean banking history. The terminal date of the study is October 1935, when the Italian army started the invasion of Ethiopia. The remainder of the paper is organised as follows. Section 2 deals with the establishment of the Colony of Eritrea by the Italians. Section 3 gives an overview of the monetary setting in Eritrea and the problems involved. Sections 4 and 5 focus on landing of the Bank of Italy in the Colony and on coming into use of banknotes. Sections 6 and 7 describe the emergence and the structures of various types of banks and the following banking crisis. Section 8 concentrates on issues related to agricultural credit such as land tenure, legislation, financial institutions, demand and supply of funds, operations of specialized agricultural lenders. The paper ends with a summary of the findings and some concluding remarks in Section 9. 2. The Colony of Eritrea In 1890 the Italians grouped together various territories along the Red Sea western coast under their possession into the Colony of Eritrea. Through the centuries Arabs, Portuguese, Turks and Egyptians had ruled this coast, but all attempts to penetrate inland had been unsuccessful because of the harsh nature of the territory and the warlike spirit of the inhabitants. The Italian settling in this area had begun 1869 with the purchase of a piece of coastline in the Danakil country from a local sultan by the Rubattino steamship company at a price of 6,000 Maria Theresa thalers. This acquisition had been transferred in 1882 by the Compagnia Generale di Navigazione Italiana, set up by a merger of the Rubattino 3 with the Florio Company, to the Italian state in order to obtain military protection. Italian troops were landed on the Red Sea shore and, with British consent, in 1885 also took possession of the port of Massawa, following the agreed withdrawal of the Egyptian garrison and the recruitment of the indigenous irregular soldiers previously in the pay of the Khedive. In the following years the Italians penetrated up to the highland plateau densely populated with the excuse of protecting their possession from the periodic raids. As a third step, the occupation of the north- western territories had been carried out after a series of clashes with the Mahadist forces. Eventually the advance of the Italians towards the South was halted in 1896 at Adwa by Menelek’s Ethiopian army, resulting in the bloodiest battle even fought in all the African colonial wars (Zewde 1991). Italy, even after the opening of Suez Canal, did not have any real relevant strategic interest to safeguard in this remote African region as, instead, it did later with Libya. Also economic interest in exploiting these territories and in giving a destination to a large flow of emigrants, appeared to be doubtful even in a long term outlook (Rochat 1974). Apparently Italy was drawn into this first unlucky venture, a naïve move in the dramatic scene of the “scramble for Africa”, by the inexperience and the unreasonable ambitions of its political leaders at the time when national unity was still an uneasy target to achieve (Riosa 1998). The Italian settlement in Eritrea was also, to some extent, the result of a subtle two-edged British strategy aiming, on the one hand, to quelling the Mahdi’s Sudan rebellion and, on the other, at containing French expansion towards the upper reaches of the Nile (Labanca 2002). 3. The Monetary Setting The Italian Administration found the monetary situation in Eritrea to be not unlike that reigning in the neighbouring territories. The Maria Theresa thaler, a silver coin (0.8333 fine) minted in Austria, was widely used for domestic trade as well as for trade with Ethiopia and the opposite side of the Red Sea, even though introduction of this commodity money into territories under Ottoman rule was unlawful. The Maria Theresa thaler was a general purpose full-bodied money, used as means for trade as well as for unilateral payments: tributes, compensations for killing and injury, as pointed out by Grierson (1977), 4 and gifts (Drake 1980). According to Pankhurst (1965) and other authors the Austrian coin besides its use as money, i.e. means of payment, standard of value and store of value, also preformed important non-monetary functions: in fact it served as jewel, as a certified source of silver for melting down and even as a measure of weight (28.0668 grams). Inland the colony, exchanges were carried on also by barter or by the use of commodity money. Alongside Maria Theresa thalers various types of primitive money served for payments (Einzig 1966) such as salt bars (amolie), cloth, cattle, cartridges, brass bracelets and glass beads (Alamanni 1891).