Source: Ethiopian Monitor
The National Bank of Ethiopia (NBE) has increased the credit growth rate for commercial banks from 14 percent to 18 percent.
The NBE took a tightened monetary policy stance in August 2023 after significant credit expansion “undermined progress” in reducing inflation.
The move put the credit growth ceiling for all commercial banks at 14% while limiting Direct Advances to the Government to just one-third of the prior-year level.
The approach was adopted as a temporary arrangement until the NBE fully transitioned to an interest-rate-based monetary policy regime which was launched in July.
The new regime uses policy interest rate which, according to NBE, serves as the primary means of signaling its policy stance and influencing broader monetary and credit conditions.
The rate – named the National Bank Rate (NBR) – was initially set at 15% based on the inflationary and monetary conditions during the 2023/24 fiscal year.
On Tuesday, its newly formed Monetary Policy Committee (MPC) reviewed the current macroeconomic conditions and proposed monetary policies and actions aimed at maintaining price stability.
Inflation Declining But Still Elevated
NBE’s statement issued after the meeting indicates that year-on-year inflation has continued its downward trajectory and stood at a five-year low of 16.9% as of Nov 2024.
The deceleration, the MPC said, was “helped by the tightened stance of monetary policy”, the MPC noted in the statement.
Food inflation, though still elevated at 18.5%, has been on a broadly moderating trend for over a year while Non-food inflation showed a slight increase to 14.4% in Nov.
The November 2024 inflation outturn was marked by “a substantial decline” in month-on-month inflation to -0.8%, per NBE.
However, the inflation rate remains not only elevated but also above the central bank’s medium term target of reaching single-digit.
Economy Maintaining Growth Momentum
In the statement, the committee noted the economic activity has continued its strong growth momentum so far this year following real GDP growth of 8.1% in 2023/24FY.
It said: “A favorable rainy season in most parts of the country and multiple supply-side initiatives in agriculture suggest a record harvest is likely for the current crop season.”
Quarterly production data on electricity, iron and steel suggest strong year-on-year output growth in the industrial sector, while increases in air transport and tourism arrivals back service activity, per NBE.
“Overall, most activity indicators suggest a continued strong growth for the 2024-25 fiscal year,” the National Bank states.
Monetary Developments
The Committee noted that developments in key monetary aggregates were marked by a sharp slowdown in growth rates in 2023-24, which helped reduce inflationary pressures and expectations last year.
At the same time, “somewhat higher growth rates” have been observed for all key monetary aggregates since the start of the current fiscal year.
Per NBE, growth in broad money and base money stood at 20% and 17%, respectively, as of November 2024 while domestic credit rose by 19% on a year-on-year basis.
The Committee, however, indicated that there has been a sharp reduction in key monetary aggregates relative to the size of the economy. Growth rates of broad money, base money, and domestic credit are “all well below growth in nominal GDP.”
“A gradual reversal of this real decline would be welcome to support growth over the medium-term,” it said.
‘Financial Sector Safe and Sound’
The banking system was assessed to be safe and sound, with low NPLs, high provisions, and adequate capital.
MPC, however, noted “significant liquidity strains” in some segments of the banking system which was reflected in high loan-to-deposit ratios and a low ratio of excess reserves to deposits for the private banks.
“These liquidity challenges are being mitigated somewhat by the recent availability of both an inter-bank money market and a Standing Lending Facility at the NBE,” the committee observed.
‘Improving Fiscal and External Positions’
With regards to fiscal position, the MPC found the budgetary developments “broadly favorable given on-going fiscal consolidation.”
“This has allowed for zero monetary financing of the deficit so far in the fiscal year and thus been highly supportive of the central bank’s monetary policy stance,” its statement reads.
At the same time. it says the external position shows significant improvements including in strong growth in exports and remittances, modest import compression, and substantial capital inflows from private and official sources.
“These developments have generated a current account surplus in the first quarter of the fiscal year and also boosted FX reserves to record highs at both commercial banks and at the NBE,” the committee noted.
MPC Assessment and Decision
The Committee said that while recent inflation outturns have been encouraging and show a generally disinflationary direction, it nonetheless remains important to maintain a prudent monetary stance.
MPC’s call for caution considered two aspects of the macroeconomic outlook: the expected easing of fiscal conditions over the coming months – given the normal budgetary execution cycle as well as increases in salaries and social spending – and moderately expansionary impulse that will likely stem from increased net foreign exchange inflows.
“In balancing these considerations,” the Committee proposed, “the current prudent stance of monetary policy should be maintained, albeit with modest modifications.”
Accordingly, the statement says:
“First, the MPC decided to leave unchanged the current National Bank Policy Rate (NPR) of 15%, given the need to reduce the still elevated inflation rate and also the importance of anchoring exchange rate expectations.
“Second, as the move to an interest-based monetary policy regime remains in a transitional phase, the MPC recommended the continued use of a credit growth target but with a moderate adjustment in the targeted credit growth rate from 14% to 18%.
“Third, the Committee maintained unchanged the existing rates applicable for NBE’s Standing Deposit Facility, Standing Lending Facility, and reserve requirements on bank deposits.”
The National Bank’s Board of directors eventually approved the three proposed monetary policy actions.
The NBE Monetary Policy Committee will hold its next meeting on March 25, 2025.
