Worku Lemma is a towering figure in Ethiopia’s financial and economic landscape, with more than two decades of leadership experience. Having risen through the banking sector from bank clerk to founding president of two commercial banks, his strategic acumen has helped shape the nation’s financial institutions. He currently serves as a board member of Hibret Bank S.C. and is also involved in national logistics-modernisation efforts within Ethiopia’s logistics sector.
In this interview with Capital, Worku shares his perspective on Ethiopia’s evolving macroeconomic policy framework, the National Bank of Ethiopia’s latest monetary tools and the realities of credit demand. He assesses the likely impact of higher policy rates, raises practical concerns about performance-based secondary reserve requirements, and discusses foreign-exchange dynamics, inflation control and the balance between market liberalisation and national survival priorities. Excerpts;
Capital: How do you view the current macroeconomic policy framework and the newly introduced tools by the National Bank?
Worku Lemma: Overall, I view the matter positively. Regardless of the country or policy framework, when these measures are assessed against Ethiopia’s current economic strengths and weaknesses, they represent a step that can improve stability and support macroeconomic development going forward.
In my view, lifting lending caps is consistent with the International Monetary Fund’s recommendations. Looking closely at those guidelines, they do not advocate lifting all restrictions at once. Rather, the idea is that restrictions should be phased out gradually as economic conditions evolve. Maintaining rigid caps can be harmful in many ways. If the economy is starved of money, credit is not easily accessible and, conversely, sectors crucial for national survival and industrial development—such as manufacturing—do not receive adequate and appropriate financing, economic growth can be severely undermined.
Capital: Given that the Monetary Policy Committee raised the policy rate to curb credit competition, how effective will this tool be, given the realities of the banking sector?
Worku: Raising the policy rate helps to a certain extent, but I do not believe it will solve the challenge entirely. One of the main limitations is that the policy rate is not directly linked to the commercial lending rates set by banks. We rarely see banks automatically adjusting their lending rates in response to changes in the policy rate.
In practice, even when the nominal lending rate hovered around 15 percent, the actual effective interest rate was much higher—often surpassing 20 percent and reaching 22 or 23 percent for many borrowers. Beyond that level, the situation remains ambiguous. While the interbank lending margin—ranging from minus 3 percent to plus 3 percent—may have some impact, I doubt it can control the broader money supply to the extent intended.
To be honest, our country’s economy and business community are credit-addicted. Whether the official rate rises or falls, the elasticity of credit demand is questionable. We have a business community that sometimes borrows at rates that border on usury.
If you look at the digital-lending and microfinance sector—small loans of 50,000, 75,000, 100,000 and up to 300,000 birr provided by banks and fintechs—the interest rates are shocking. Although structured over short terms of one to three months, the annualised rate often exceeds 30 to 40 percent. I genuinely worry about whether an entrepreneur can borrow at such a rate, build a viable enterprise and repay the loan. Furthermore, I have deep concerns about whether this high-interest credit sector helps control inflation at all.
Capital: What are your concerns regarding the practical implementation of the performance-based secondary reserve requirement linked to credit expansion?
Worku: My primary concern lies there. Instead of a traditional reserve requirement applied uniformly across all banks, this framework is formulated in a way that reserves could increase based on the lending behaviour of individual institutions. But under what exact conditions is that triggered? How is it monitored? Can it truly be practical?
Right now, a bank’s standard reserve requirement is around 10 percent. If a bank is suddenly told to deposit 13 or 15 percent based on its loan-to-deposit ratio, it creates extreme uncertainty because institutions cannot predict when or how severely they will be affected. Because excess reserves yield no profit, banks naturally focus on managing their cost of funds. If regulations become ambiguous or punitive based on loan-to-deposit ratios, banks may tend to retreat from lending altogether, preferring instead to park their capital safely in government securities such as Treasury bills.
The figures show that the National Bank’s Monetary Policy Committee noted that the current loan-to-deposit ratio is around 72 to 73 percent, while overall liquidity is about 30 percent—well above the 15 percent regulatory minimum. Compared with three years ago, when the loan-to-deposit ratio was stretched to 90 to 92 percent, banks are currently highly liquid.
However, if a bank has already deployed its liquidity into long-term loans and has exhausted its options, then is suddenly hit with a higher reserve requirement, where is it supposed to pull that cash from? Which market will it use to fill the gap? You cannot retroactively enforce compliance on money that has already been lent out. Doing this without prior warning and preparation could push otherwise stable banks into severe liquidity crises. A clear operational guideline must be in place before any punitive measures are taken.
Capital: Some analysts argue that tightening reserve requirements is a tactical strategy used by the government to pull bank liquidity into Treasury bills to cover its domestic borrowing needs and budget deficit. What is your view?
Worku: The notion that the government is doing this primarily to cover its budget deficit is secondary, in my view. Procedurally, we know that the government is restricted from taking direct bank loans to cover fiscal deficits. While it may finance part of its deficit through competitive bidding in the Treasury-bill market, the overriding priority must remain inflation control.
Inflation is a heavy and destructive force. Today, most ordinary citizens face severe daily challenges; many cannot even afford basic meals. Under conditions in which life has become a daily survival test for many people, strict monetary policy is imperative. Monetary policy alone cannot fight inflation, however. It must be paired with strict fiscal discipline and robust supply-side measures. Economic best practice requires a combination of policy instruments. Above all, while we view the overall monetary direction positively, the operational rules must be clear to avoid destabilising the banking sector.
Capital: How does the current framework compare with the aggressive controls—including unwritten credit caps and mandatory bonds—used by the National Bank since the early 2000s?
Worku: Today’s policy approaches are much closer to modernisation and international best practice than the heavy-handed interventions of the past. Looking back, we had mandatory National Bank bill purchases and Development Bank of Ethiopia 1 percent bond purchases, as well as strict caps on term loans, revolving credit, overdrafts and pre-shipment facilities. Those historical methods were blunt and restrictive instruments, with little market incentive or competitive dynamics. Implementing them was a nightmare for bank management, and the sector faced immense pressure.
Today’s regulatory philosophy is vastly superior. The current Monetary Policy Committee includes independent professionals and autonomous bodies that bring high-level technical rigour to the table. Despite modern complexities—particularly in adjusting targeted reserve requirements—the current approach is more constructive and market-aligned than the opaque, administratively imposed caps we faced years ago.
Capital: How do you evaluate current foreign-exchange dynamics and the 70–30 surrender-and-retention scheme amid continuing parallel-market activity?
Worku: First, we must accept a fundamental reality: there is a foreign-exchange shortage. I strongly reject the narrow argument that “the exporter’s dollar belongs entirely to the exporter.” Hard currency is a critical national resource. A developing country depends on sustainable foreign-exchange inflows to drive macroeconomic growth. Fortunately, we are currently observing positive trends in national foreign-exchange reserves.
Until the external sector fully normalises, proceeding gradually is prudent. While some advocate complete and immediate liberalisation—allowing exporters to retain and sell 100 percent of their earnings freely, a privilege previously granted selectively to the service sector—we must weigh this against our primary national priorities.
Our country still desperately needs fuel to keep the economy moving. Citizens still require life-saving medicines. Allowing exporters to speculate freely while ordinary people suffer from medicine and fuel shortages is neither economically nor socially responsible.
The current policy direction—requiring exporters to surrender 30 percent while allowing banks and exporters to retain 70 percent—is balanced and rational. However, execution determines everything. The system must be strictly monitored. I have heard criticism that mismanaged foreign-exchange allocations contribute significantly to the ongoing trade deficit, and that criticism is valid. Closing the trade gap will not happen overnight; even under favourable conditions, achieving a sustainable balance could easily take a decade.
