The National Bank of Ethiopia (NBE) has reaffirmed its commitment to employing various monetary policy tools to maintain a tight monetary stance, despite plans to phase out some previous instruments. The Monetary Policy Committee (MPC) is scheduled to meet before the end of June to discuss a range of economic issues.
As part of its agreement with international partners, including the International Monetary Fund (IMF), the Ethiopian government will lift the Treasury bond directive, which took effect on November 1, 2022, by the end of this month. Additionally, the government aims to remove the cap on private sector credit growth by September 2025.
The credit growth restriction, initially imposed in August 2023, had limited credit expansion to 14% before being adjusted to 18% in January 2025. A key measure, the NBE’s Treasury bond requirement, mandated that banks allocate 20% of their new loan disbursements to government bonds. These two measures have been effective in curbing inflation, which had risen above 30% but has since decreased to around 14%.
While the IMF supports the gradual removal of these measures, it has advised Ethiopia to maintain a tight monetary policy to ensure price stability.
Experts attribute much of the inflationary pressure to direct advances the government previously obtained from the NBE. However, in a significant shift, the government has ceased such borrowing this fiscal year, marking a first in recent history.
In its latest assessment, the IMF praised Ethiopia’s macroeconomic performance, highlighting improvements in inflation control, export growth, and international reserves.
Alvaro Piris, head of the IMF delegation monitoring Ethiopia’s reform program under the Extended Credit Facility, stressed the importance of sustained reforms and tight monetary conditions to stabilize inflation and exchange rate expectations.
Fikadu Digafe, Vice Governor and Chief Economist of the NBE, confirmed the planned removal of the two policy instruments to stimulate market activity.
However, he clarified that their elimination does not signify an end to tight monetary policy. “We will introduce new monetary tools to further reduce inflation,” he stated, although he did not specify what these instruments would be.
Finance Minister Ahmed Shide also emphasized that the government would rely on market-based financing instead of direct advances from the NBE to cover budget deficits.
“We will mobilize funds through taxes and other market sources,” he told Capital last week following his recent budget speech.
Currently, the government is using Treasury bills (T-bills) as its primary financing tool, with plans to expand money market instruments through the newly established Ethiopian Securities Exchange.
The IMF has recommended enhancing the attractiveness of T-bills by allowing broader participation in the bidding process.
Notably, T-bill interest rates have risen to 17%, exceeding both the inflation rate (14%) and the NBE’s policy rate (15%).
Fikadu indicated that the central bank’s policy rate might be reviewed during the upcoming MPC meeting in late June.
As Ethiopia navigates these monetary adjustments, maintaining the momentum of reform will be essential for sustaining economic stability and promoting long-term growth.
