The International Monetary Fund (IMF) is calling for closer monitoring of banks’ net open positions (NOP) as Ethiopia advances its economic reforms.
In its latest statement, the IMF advised Ethiopian authorities to carefully oversee banks’ NOP, a regulatory requirement that all banks were expected to satisfy by the end of the previous financial year.
The IMF’s recent assessment highlighted the need for the National Bank of Ethiopia (NBE) to shift towards using the policy rate as its primary monetary policy tool. This move would replace traditional quantitative credit controls and enhance the management of inflation. This recommendation arose from the IMF’s Article IV consultation—the first in six years and the third review under Ethiopia’s Extended Credit Facility (ECF) arrangement.
The IMF’s Executive Board approved a USD 262 million disbursement, the fourth tranche of the USD 3.4 billion ECF program, recognizing Ethiopia’s progress in macroeconomic reforms over the past year.
Nigel Clarke, IMF Deputy Managing Director and Board Chair, commended Ethiopia’s strong reform efforts, noting resilient growth and a decline in inflation.
“Measures to modernize monetary policy, increase domestic revenue, strengthen social safety nets, reform state-owned enterprises, and ensure financial stability are yielding positive results,” Clarke said. “However, security challenges and declining donor support remain ongoing risks.”
He welcomed the NBE’s initiative to deepen the foreign exchange (FX) market and reduce distortions but urged caution, recommending additional measures if FX supply weakens or parallel market spreads widen.
“Maintaining tight monetary and financial conditions is crucial for controlling inflation,” Clarke added. “Next steps should include decisively shifting to a policy rate-based framework and enhancing the central bank’s communication and analytical capacity.”
The NBE has indicated its commitment to a tighter monetary stance, planning to utilize policy rates and other instruments to maintain control while preparing to lift credit caps in September.
The IMF emphasized the necessity for continued revenue mobilization to address fiscal gaps, alongside prudent spending and the development of the domestic bond market.
“Reducing financial repression and strengthening oversight will enhance financial stability and support private sector-led growth,” Clarke stated, underscoring the importance of monitoring credit risks and banks’ NOP compliance.
Earlier this year, the NBE instructed banks that did not meet NOP thresholds to achieve full compliance by June 2025, with the state-owned Commercial Bank of Ethiopia potentially receiving an additional one-year extension. The central bank also plans to refine NOP measurement, update prudential regulations, and improve data collection on banks’ FX positions.
Ethiopia’s chronic hard currency shortage has begun to ease since reforms were initiated in mid-2024, a development that the IMF has praised.
Authorities report progress in enforcing NOP rules, mitigating financial stability risks, and improving FX market transparency through measures such as regular forex auctions for banks.
The IMF urged further efforts to sustain gains in the FX market, enhance reserve coverage, and phase out remaining FX restrictions. It also called for finalizing the NBE’s legal reforms, including the appointment of qualified board members to strengthen institutional autonomy.
“Continued reforms will be crucial for locking in progress, maintaining competitiveness, and ensuring long-term stability,” the IMF concluded.
