The recent decision by Monetary Policy Committee to eliminate the minimum deposit interest rate is, on its face, a technical adjustment. But to anyone who understands the quiet logic of financial systems, it is nothing short of a revolution. It is the formal end of an era of financial repression – a polite term for a policy that has, for decades, silently taxed the thrift of ordinary Ethiopians. My grandmother’s instinct to keep her savings in a piggy bank was, it turns out, a rational microeconomic response to a flawed macroeconomic regime. The state-anchored rate, often held below inflation, guaranteed savers a negative real return. Why entrust your surplus to a system that promises to erode it? The banks, enjoying a captive pool of cheap funding, had no need to compete for your deposits. The entire architecture disincentivized the very domestic capital formation our Homegrown Economic Reform Agenda desperately requires.
But a policy shift this profound does not occur in a vacuum. To grasp its full meaning and consequences, we must place it on the broader canvas the MPC itself has painted. The economy is sending complex, even conflicting, signals. On one hand, we see robust real GDP growth of 9.2%, driven notably by a surge in industrial activity and gold production. The external sector shows resilience, with a balance of payments surplus and growing reserves. Inflation is in a welcome downtrend, nearing single digits. This is the picture of an economy with undeniable momentum. On the other hand, the monetary aggregates tell a more concerning story. Broad money supply is growing at nearly 39% year-on-year, and credit to the economy is exploding at over 44%. These figures vastly outstrip nominal GDP growth, indicating a significant liquidity overhang through the banking system. This is the precarious context: growth and stabilizing prices on one side, and the latent threat of inflationary fuel on the other.
The committee’s other decisions – maintaining a tight policy rate, keeping a credit growth cap, and even raising the reserve requirement for banks – seem direct firewalls against this liquidity surge. They are necessary, blunt instruments for control. But the deregulation of the savings rate is different. It is not a blunt instrument. It is a precise surgical tool aimed at rewiring the system’s fundamental incentives. It is the critical move fromadministered controlto market-based discipline.
For decades, the minimum rate was not just a floor; it was the de facto price. With banks prohibited from competing on yield, their rivalry was relegated to building more branches or offering small gifts – a competition for distribution, not for the savings product itself. The saver’s capital was a cheap, homogenous input. By removing the floor, the most powerful lever in any market (price), is reintroduced. A bank that needs stable, long-term deposits to fund its growth can now court savers by offering a better return. This ignites true competition. We will see the emergence of highyield savings accounts and attractive fixed-term deposits as banks segment the market. Crucially, this competition rewards efficiency. A bank with lean operations and smart technology can afford to pay a higher deposit rate while maintaining its margins, forcing less efficient rivals to improve or lose their funding base. Most importantly for macroeconomic stability, it completes the circuit of monetary policy. When the NBE raises its policy rate to cool inflation, competitive pressure will now transmit that hike into higher deposit rates, then into higher lending rates, and finally into a moderation of credit demand and economic activity. The saver becomes an active participant in the price stability mechanism, not a bystander.
This recalibration of the financial system’s compass will, inevitably, create winners and losers – a redistribution of financial advantage that we must scrutinize with clear eyes. The most apparent winner is the saver. For the first time, individuals and institutions with savings have a seat at the table. Their deposit is no longer a taken-for-granted input but a commodity banks must bid for.
Over time, this should lead to positive real returns, preserving and growing the nation’s capital pool. This group also includes the entire informal savings ecosystem – theequbs, iddirs, and families holding wealth in tangible assets. The policy creates a viable, attractive alternative, offering a bridge to formalize this vast reservoir of social capital. Another set of winners will be well-managed, innovative banks. Those with strong governance, efficient operations, and creative product offerings can now differentiate themselves. They can attract a stable deposit base by offering better rates or superior service, funding a more sustainable loan book. This rewards competitive efficiency over bureaucratic capture.
Conversely, there will be institutions for whom this new world is challenging. The most immediate losers are the banks that have grown dependent on cheap, administratively guaranteed deposits. These are often banks with high loan-to-deposit ratios, already noted by the MPC as facing liquidity challenges. Their margins will be squeezed as their cost of funds rises. They face a stark choice – improve operational efficiency, innovate, and compete for deposits, or risk stagnation.
The reform forces a Darwinian improvement in the financial sector’s health. In the short term, some borrowers may also feel like losers, particularly those accustomed to artificially cheap credit.
As banks’ cost of funds rises, lending rates are likely to follow, making capital more expensive for businesses and individuals. This could dampen some investment appetites. However, this is the necessary corollary of ending repression. It ensures credit is allocated to the most productive uses, not just the most connected ones.
We are not venturing into uncharted territory. The experiences of other developing nations offer both a blueprint and a caution. In India, the deregulation of savings rates in 2011 led to immediate competition, particularly for bulk deposits, forcing banks to innovate with special retail schemes. More instructive is the case of Ghana, which liberalized interest rates in the late 1980s and early 1990s. The initial outcome was a sharp rise in both deposit and lending rates, as banks adjusted to a true cost of funds. While this was painful for borrowers initially, it ultimately led to a more efficient allocation of capital, stronger banks, and the development of a more distinct yield curve. The critical lesson from Ghana and others is that the transition requires vigilant supervision to prevent excessive risk-taking by banks desperate to maintain margins, and a parallel commitment to macroeconomic stability to anchor expectations. The MPC’s concurrent measures to tighten liquidity and cap credit growth appear designed to manage this exact transition, aiming to avoid the inflationary spiral that can occur if liberalization is pursued in an already overheated economy.
The most profound winner, however, is the Ethiopian state and its long-term developmental sovereignty. The policy is a strategic masterstroke for several reasons. First, it directly attacks the perverse cycle where savings fuel trade and inflation rather than productivity. By making saving attractive, it encourages capital accumulation. Second, it aligns with the monetary policy. The NBE can now use its policy rate more effectively, knowing that market rates can move. Third, and most importantly, it begins the hard work of building a genuine domestic savings base. This reduces reliance on volatile external finance and creates a deep pool of local capital for long-term, strategic investment in agriculture, manufacturing, and infrastructure. It fosters a nation of stakeholders with a direct financial interest in national stability.
The journey ahead is not without its bumps. The MPC itself acknowledged that the transmission mechanism is still weak and needs time to mature. The current excess liquidity means competitive pressure on deposit rates may not spike immediately, potentially delaying the saver’s benefit. This requires patience and vigilance. The state’s role now must pivot decisively from price-setter to system-architect and guarantor. It must foster the pluralistic savings ecosystem – leveraging postal networks, formalizing community cooperatives, incentivizing fintech, and partnering with trusted institutions like religious bodies. Above all, it must underpin everything with an ironclad guarantee of deposit safety and a massive financial literacy campaign.
This is more than a monetary policy adjustment. It is a profound renegotiation of the social contract of finance in Ethiopia. It replaces the silent tax of repression with the visible reward of competition.
It shifts the economy’s foundation from one of captured scarcity to one of mobilized abundance. The path to true homegrown economic resilience is indeed paved not by campaigns, but by the collective power of countless small sums, each now finally empowered to earn its keep. The piggy bank’s era is over. The time for a fair return on our shared faith in the future, it seems, has begun.
Befikadu Eba is Founder and Managing Director of Erudite Africa Investments, a former Banker with strong interests in Economics, Private Sector Development, Public Finance and Financial Inclusion. He is reachable at befikadu.eba@eruditeafrica.com.
