Open market operations (OMO), the first modern primary market, took place this week after the new monetary policy framework was announced early on. The central bank has unveiled a number of policy frameworks that it called historic. However, analysts noted that these new initiatives are part of the government’s efforts to modernize the industry in accordance with international standards, to be in line with lenders and other international partners, and to facilitate the World Trade Organization (WTO) accession process.
It was noted that the National Bank of Ethiopia (NBE), the regulatory body for the financial sector, issued an ‘open market operations and standing facilities directive’ in 2021, allowing NBE to trade with banks.
The directive states that banks shall trade marketable security instruments with one another as collateral.
The NBE has also been working to develop modern infrastructure, such as the Central Security Depository (CSD), which allows securities to be electronically registered on a central platform.
In addition to being an electronic platform for traders, CSD will serve as the infrastructure for the soon-to-be secondary market.
According to the statement of the central bank issued on July 11, NBE’s first-ever OMO auction was successfully held. This auction, which was a liquidity absorbing exercise, attracted 16 bidders at the offered National Bank Rate (NBR) of 15 percent and collected cumulative bids of 19.97 billion birr.
According to banking sector guru Eshetu Fantaye, the most recent auction suggests that funds are present in commercial banks’ payment and settlement accounts.
As part of its main objective to ensure low and steady inflation, the NBE has been working towards modernizing Ethiopia’s monetary policy framework over the last year, according to a statement made by Mamo Esmelealem Mihretu, the governor of the organization, on Tuesday, July 9.
He said in line with the NBE Medium-term Strategy Plan, to establish a supportive legal, institutional, and technical basis for meeting the objective, the NBE has taken several preparatory measures and introduced a new monetary policy framework, including introducing an interest-rate-based monetary policy regime.
Under the new policy framework, the NBE will use its policy interest rate to be known as the NBR as the primary means of signaling its policy stance and influencing broader monetary and credit conditions. “The NBR will be raised or lowered depending on prevailing inflationary and monetary conditions and currently stands at 15 percent.”
The governor stated, “The policy rate takes into account current macroeconomic conditions, which are characterized by low base money growth, a marked slowdown of bank credit growth over the past year, and gradually declining (but still elevated) inflation.”The policy rate is slightly lower than commercial bank lending rates, which typically range from 16 to 20 percent for the majority of loan categories. It is similar to the rate at which banks already lend to one another.
Regarding its new monetary policy, the NBE revealed that it will begin holding auctions connected to monetary policy, or OMO, every two weeks.
“The key tool for monetary policy will be the OMO in order to maintain the operating goal of monetary policy, that is, interest rates in the interbank market, close to the NBR,” the regulatory body said.
The governor stated in his statement that “the OMO auctions will be used to withdraw excess liquidity from the banking system and vice versa when excess liquidity in the banking system leads to significant downward deviations in the interbank market rate from the NBR.”
OMO transactions include the buying and selling of repo or reverse repo assets, credit operations using eligible assets as collateral, the purchase or sale of eligible assets outright, the issuing of NBE certificates, and deposit-taking activities.
As part of the new scheme, the NBE is also introducing an ‘Overnight Lending Facility’ and an ‘Overnight Deposit Facility’ for banks that might need to manage their liquidity positions over just a one-day time horizon. “These facilities, known formally as Standing Facilities, will be offered at the NBR rate plus or minus three percent,” the NBE stated.
The NBE has also stated that it is soon introducing an electronic platform that will make it easier for banks to lend to and borrow from each other, thereby facilitating an active and functional ‘interbank money market.’
In the most recent trade, which took place on Thursday, bidders used email to make their offers.
The money market, once fully operationalized via a web-based online platform, will allow liquidity-surplus banks to provide funds to liquidity-short banks on a continuous basis. This will address shortage or surplus conditions at specific banks within the banking system without the need for central bank intervention.
“It is expected that interest rates in the interbank market will align with the NBR, but if this is not the case, the NBE will intervene using OMO auctions to ensure that the interbank interest rate converges to the NBR,” the central bank said.
“The money market platform and other important initiatives in the very near future will support NBE in fulfilling its vital responsibilities, especially ensuring price stability as entrusted to it by its own strategy plan and NBE establishment proclamation,” it added.
Eshetu recalled that the most recent step was part of a strategy plan that the NBE board had approved almost six months prior. “It has been revealed that some current practices, like bank lending rates and deposit interest rates, will persist, even though the market is intended to determine interest rates,” he states “Depending on global experience, other interest rates, like the bank prime rate, may be higher or lower than the policy rate.”
As analysts indicated, the new step would not have a catalytic change as part of the interest rate will still exist.
“As they regularly declare, the government’s and the central bank’s primary goal is to stabilize prices, particularly inflation. This includes the most recent policy implementation,” Eshetu said.
The government is projected to reduce inflation to eight percent by 2026.
He said the money that was pumped into the market might be impacted by the most recent policy implementation, “Although the governor is making an effort, the central bank cannot control certain external factors that contribute to inflation.”
According to experts, addressing the price increase sustainably depends on the supply side. “The central bank will contribute in this regard by facilitating funding access for the advancement of agriculture and raising the productivity of the industrial sector.”
Eshetu explained his perspective, stating that the government requires foreign currency to enhance the supply of essential import items, primarily inputs, which are crucial to accelerate the economy through agriculture and manufacturing activity impacted by the shortage of hard currency.
“In general, the measures that the government is taking are targeting the support criteria from the IMF, World Bank, and World Trade Organization accession,” he said.
“As per my understanding, the governor’s approach is to lead the monetary policy according to internationally accepted standards agreed upon with international partners and financiers to access international funds, in addition to reducing direct advances,” Eshetu clarified.
Experts in the field said that developing the money market is crucial to the feasibility of a capital market. This will also support the growth of the securities exchange that the primary market corroborates.
A competitive treasury bills (T bills) on a market basis has been introduced under the Home Grown Economic Reform Agenda I.
NBE hired a Dutch consulting firm to develop the interbank money market, which focuses on building capacity for banks, the legal framework for secure financial transactions, exchange infrastructure like CSD, and trading platforms, among other things.
