National Bank of Ethiopia (NBE)

NBE Imposes Credit Growth Ceilings, Reduces Forex Surrender Demand

ADDIS ABABA – The National Bank of Ethiopia (NBE) has put in place limits on credit growth for the current 2023/24 fiscal year to counter its inflationary impact.

“A significant credit expansion of the past year has undermined progress in reducing inflation,” the NBE said in a statement today.

The total loans the financial sector mobilization in last year’s first 9 months alone grew by 69.7% to 434 billion Birr. In the same period, private banks’ disbursement showed a 139% increase.

The central bank has now moved to put in place limits on credit growth both in credit to the government and the private sector, effective as of today.

In its statement today, the NBE says it has decided to “sharply reduce” Direct Advances to the Government this fiscal year, limiting such lending to just one-third of the prior-year levels.

The measures also target the credit mobilization of the banking sector that involves 31 commercial banks including 2 state-owned ones.

The NBE has capped the credit growth ceiling for all commercial banks at 14 percent.

In addition to limits in credit, the central bank has also readjusted its foreign exchange surrender requirement to promote a recovery in exports – particularly for the manufacturing sector.

The percentage of forex earnings banks surrender to the NBE reduced to 50% from the previous 70%, per the latest decision. Exporters retain 40% of their forex earnings in their account, up from the previous 20%. The remaining 10% goes to their banks.

NBE’s Board of Directors took the monetary policy decisions during its regular meeting on August 7, 2023, in a move that aimed “to help reduce inflation in a significant and sustained manner”.

High inflation is damaging from both a macroeconomic perspective and from its negative impacts on the livelihoods of millions of ordinary Ethiopians. The latest inflation outturn as of June 2023 shows a year-on-year headline inflation rate of 29.3%, which has brought inflation to below 30% for the first time in two years.

“While there has thus been some modest progress, this is clearly not enough,” the central bank said in its analysis of the current inflation Outturns.

A combined impact of supply-side factors, cost-push factors, and expansionary fiscal/monetary policy contributed to the surge in Ethiopia’s recent inflation.

The analysis says a long-term solution to Ethiopia’s inflation problem “must necessarily involve coordinated efforts in multiple areas” involving supply-side measures to improve production and productivity, and structural measures to improve transport networks, logistics systems, and trade competitiveness.

“Fiscal policy will also need to play a strongly supportive role alongside the supply-side and structural measures,” the Bank says.

The current global and domestic conditions present a mixed picture of the inflation outlook. 

“The near outlook is thus best viewed as an environment where inflation risks are still considerable and policy stance also needs to be appropriately cautious and restrained to ensure a significant and sustained drop in inflation,” the NBE said in its statement.

“A package of measures”

NBE’s Board and Management, on its part, has put together “a comprehensive package” of decisions aimed at reducing inflation “following extensive internal analysis, and recognizing the significant credit expansion of the past year”.

These decisions, according to its statement, are:

  • As an overall target, NBE will be working towards reducing inflation to below 20 percent by June 2024 and below 10 percent by June 2025.
  • For this fiscal year ending June 30, 2024, credit growth is to be limited to 14 percent, and all commercial banks will be instructed to limit the growth of their loan books to be consistent with this aggregate credit ceiling;
  • NBE is to sharply reduce Direct Advances to the Government this fiscal year and limit such lending to just one-third of the prior-year levels. Understandings are also to be reached with the Ministry of Finance to make use of this facility only as a last resort if sufficient Treasury Bills and Treasury Bonds cannot be raised in the market;
  • The interest rate at NBE’s Emergency Lending facility, which banks utilize when they face liquidity problems, will be increased from 16% to 18%.
  • In addition, the foreign exchange surrender requirement is also being reduced to promote a recovery in exports. Accordingly, a New Directive is being released whereby exporters of goods and services will surrender 50% of their Forex proceeds to the NBE, 10% to their bank, and retain 40% to their own account.

NBE’s explanations “for proper context” 

The NBE highlighted three aspects of the latest policy measures  for “proper context and significance.” These measures are for slowing down credit growth but not eliminating it, according to NBE’s statement.

Second, it says the decision to lower credit growth is “an important and necessary part of our ultimate collective objective” to reduce Ethiopia’s inflation rate in a sustained manner. Thirdly, the use of credit ceilings is a temporary arrangement, the statement reads.

The arrangement will be used until mid-2024 at which point the NBE expects “to move towards a more modern, interest-rate based monetary policy framework.”