
Addis Ababa, Ethiopia — The Ethiopian central bank has announced a significant shift in its monetary policy framework, introducing an interest rate-based regime aimed at achieving “low and stable inflation.” This move is part of Ethiopia’s efforts to meet conditions set by the International Monetary Fund (IMF) to unlock much-needed funding.
The National Bank of Ethiopia (NBE) has set the new policy rate, known as the National Bank Rate (NBR), at 15%. This rate will serve as the main indicator of the central bank’s monetary policy stance, with adjustments to be made based on prevailing inflationary and monetary conditions.
The primary goal of this new framework is to maintain low and stable inflation. By setting the NBR at 15%, the NBE intends to signal its policy stance clearly and influence broader monetary and credit conditions. This shift is designed to align with the IMF’s requirements, which emphasize the importance of controlling inflation and stabilizing the economy.
While the new policy aims to stabilize the economy, several questions have emerged regarding its implementation and appropriateness for Ethiopia’s current economic situation. Critics have noted a lack of evidence-based justification for the policy. Traditionally, economic policies are formulated following thorough background studies by experts. However, the NBE has not released any such studies accompanying the latest policy announcement.
Inflation in Ethiopia has been a persistent issue, with multiple factors contributing to the problem. One major factor is the increase in the money supply, which has not been matched by corresponding credit expansion to the private sector. This has led to rampant unemployment, particularly among university graduates, and has not sufficiently stimulated job creation or production of goods and services.
Data from the NBE reveals that a significant portion of outstanding loans has been directed towards public enterprises and sectors that do not directly contribute to market supply, such as trade and distribution. In contrast, the agricultural sector, which is critical for Ethiopia’s economy, has received a meager 3% of total loans. This imbalance has exacerbated inflation by increasing demand without a corresponding increase in supply.
The high lending interest rate in Ethiopia has also been a barrier to credit access for many small and medium-sized enterprises (SMEs) and farmers. Larger businesses with market power can absorb high borrowing costs and pass them on to consumers, further driving up prices. However, SMEs and farmers, who lack market power, are effectively excluded from obtaining loans due to the prohibitive cost and lack of collateral, as land is state-owned in Ethiopia.
For the NBE to truly emerge as an independent and effective monetary authority, it must strengthen its evidence base and policy formulation process. Establishing a Monetary Policy Committee with experts in macroeconomics could provide the necessary rigor and expertise. Additionally, the NBE should consider lowering the base interest rate to a more appropriate level, such as 5%, to stimulate borrowing and investment in productive sectors.
By doing so, the central bank can enhance production, create jobs, and ultimately reduce inflation. A targeted lending approach prioritizing agriculture and manufacturing could also help address supply constraints and support economic growth.
The introduction of the new monetary policy framework marks a critical step in Ethiopia’s economic strategy to secure IMF funding and stabilize its economy. However, the success of this policy will depend on the NBE’s ability to adapt and respond to the unique economic realities of the country. Addressing the gaps in evidence-based policy formulation and ensuring targeted, effective use of interest rates will be key to achieving the desired economic outcomes.
You can access the full press release here
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