In a significant policy shift, the Ethiopian government plans to eliminate the cap on private sector credit growth by the end of September 2025. This initiative is part of broader reforms designed to create a more market-oriented financial system, including the introduction of market-driven Treasury bonds at the start of the upcoming budget year.
The National Bank of Ethiopia (NBE) imposed a 14% annual credit growth cap in August 2023 to address high inflation driven by excessive loan expansion. Earlier this year, the cap was increased to 18% due to declining inflation, tight monetary conditions, and improved supply-side factors. Prior to the cap, annual credit growth in the banking sector averaged over 25%, with some major banks exceeding 30%.
The International Monetary Fund (IMF) has advised the government to carefully sequence the removal of the credit cap alongside adjustments to the National Bank Rate (NBR) and other monetary policy tools. In its latest review under the Extended Credit Facility (ECF), the IMF noted that while monetary and financial conditions remain tight, the effectiveness of the new monetary policy framework is still weak.
“With inflation expected to rise into 2025, ensuring that exchange rate pass-through and gradual fuel price increases do not trigger persistent second-round effects is a key priority,” the IMF stated. It also cautioned that relying on quantitative measures like the credit cap, while effective for short-term inflation control, risks distorting credit allocation and weakening monetary transmission.
The IMF document indicated that the phased removal of the credit cap on private sector growth is anticipated by the end of September 2025.
It emphasized the importance of clear communication and a well-planned phase-out to effectively signal the monetary policy stance. Additionally, it stressed the need to achieve a positive real policy rate by March 2025 to enhance the credibility of the new monetary framework and align market expectations regarding inflation and exchange rates.
Liquidity constraints in Ethiopia’s financial sector, exacerbated by the cap on private sector credit growth, have emerged as a significant challenge for businesses and importers.
The IMF highlighted that, together with the credit cap, seasonal demand for credit and bank dividend payments have further tightened liquidity, creating obstacles for private sector participants.
Despite the banking system’s liquid assets, including government bonds, exceeding the prudential limit of 15%, overall liquidity remains strained. The ratio of excess reserves to deposits stands at only 0.8%, reflecting these tight conditions.
According to the IMF, broad money growth at the end of September matched inflation at 19% year-on-year (y/y), but credit growth—excluding the impact of the Commercial Bank of Ethiopia’s recapitalization—was subdued at 12.9%. Net claims on the government grew by 16% y/y, while private sector credit growth remained flat in real terms at 18% y/y.
The IMF also noted increasing reports of firms and importers scaling back operations due to tight credit conditions and challenges in transferring payments between banks.
These difficulties are further compounded by the credit cap, which, while intended to control inflation, has limited access to financing for businesses.
The IMF’s findings underscore the necessity for a balanced approach to monetary policy, ensuring that liquidity constraints do not hinder economic activity. As the government prepares to phase out the credit cap by September 2025, experts are advocating for measures to alleviate liquidity pressures and support private sector growth.
Treasury Bond Reforms
As part of the reforms, the government will introduce market-oriented Treasury bonds to replace the current system, which requires banks to purchase bonds at a fixed interest rate of 9%. This directive, implemented in November 2022, will be repealed by June 2025. Additionally, the Ministry of Finance is working to enhance issuance planning, with a regular issuance calendar anticipated by July 2025.
The IMF has observed that Treasury bill rates have already increased, now averaging 14%, up from 10%, while the current policy rate stands at 15%. However, tight liquidity conditions have resulted in undersubscribed auctions, underscoring the need to broaden participation and strengthen the financial sector’s capacity.
