NBE puts forth new threshold in reserve requirements

The financial sector’s regulatory body, National Bank of Ethiopia (NBE), revises bank’s reserve requirements by introducing a new rate amidst the skyrocketing inflation.
The regulatory body in its 8th amendment of reserve requirement directive no. SBB/84/2022 that became effective on June 9, states that the reserve requirements of banks to be reduced to 7 percent, which is a new rate when compared to the preceding experience.
The new rate replaces the former amount that was effective from September 1, 2021, which doubled the long established five percent rate to 10 percent.
However, the 7th amendment of SBB/80/ 2021 reserve requirement stayed on for a few weeks since the banks were allowed to get a transition period of 3 months to meet the 10% reserve requirement starting from September 1, 2021, and then in December 2021 the central bank gave a waver for banks to utilize two percent of their reserve to finance the coffee sector. The waiver was given for seven months which comes to an end this month.
As a result the reserve requirement was technically 8 percent for the past several months.
When the NBE Board of Directors chaired by Girma Birru (Amb) decided to review the reserve requirements on August 27, 2021 with some additional monetary policy reviews, it was disclosed that the outstanding credit to the private sector grew to 40.8 percent (year on year/yoy) in July, 2021, and disbursement during the month grew at about 125 percent, compared to the same period of last year.
The 6th amendment of reserve requirement issued under directive no. SBB/55/2013 had been in effect for almost eight years.
“Such a rapid growth of credit poses significant risks to price and financial stability, in the context of a rising inflation which reached 26.4 percent (yoy) in July. Consequently, the Board has decided to raise the reserve requirement in birr and foreign currency deposit liabilities held by commercial banks to 10 percent, from the current level of 5 percent, effective on September 1, 2021,” the Board of Directors said on their statement late August last year.
The decision of the board indicated that the major reason to revise the directive and increase the rate was the growing trend of the inflation, while the latest move is seen on the verge the increment behavior of the inflation that skyrocketed to 36.6 percent as per April’s monthly inflation figure.
On his budget speech about two weeks ago Ahmed Shide, Minister of Finance (MoF) and one of the five members of NBE’s Board of Directors, told parliament that the government will work to reduce the inflation growth rate to 11.9 percent in the coming budget year.
The country first introduced the reserve requirement through Directive No. SBB/14/96 which came to effect on January 1, 1996 with a 10 percent requirement. The highest reserve requirement was 15 percent under the 4th amendment of directive no. SBB/45/2008, which was effective on April 7, 2008 and lasted till January 1, 2012 to reduce to 10 percent. It is to be recalled, that 2008 and the following years were the period that the country saw the highest inflation ever.
It was recorded that in the first quarter of 2008, the general inflation peaked at 60 percent, while the food inflation was at a staggering 81 percent.