Ethiopia’s Central Bank Hikes Credit Growth to 18%

In a move that has raised both expectations and concerns, Ethiopia’s Central Bank (NBE) has approved a significant increase in the credit growth target to 18%, up from the previous 14%. This decision, made during the Monetary Policy Committee’s (MPC) meeting on December 31, 2024, aims to bolster economic growth amid challenging liquidity conditions faced by banks.

While the NBE’s approval aims to support continued economic momentum, particularly in light of strong growth indicators across sectors like agriculture, industry, and services, there are rising concerns about the implications for the banking system’s liquidity. The move comes as many banks continue to face strains, with high loan-to-deposit ratios and low reserve ratios threatening their ability to effectively manage funds.

The MPC’s recommendation to raise the credit growth target was made after reviewing the country’s macroeconomic conditions. Key findings from the report included a promising decline in inflation, now at a five-year low of 16.9%, supported by a tight monetary stance implemented in August 2023. However, the report also noted that while inflation is moderating, it remains significantly above the NBE’s target, highlighting the need for continued caution in monetary policy.

Additionally, the committee observed a robust growth in key economic sectors, such as a likely record harvest in agriculture and strong industrial output in sectors like electricity and steel production. The services sector is also showing positive momentum, with growth in air transport and tourism.

However, the report emphasized that monetary aggregates, such as broad money and domestic credit, had seen growth rates below nominal GDP growth, signaling a need for gradual adjustments to sustain long-term economic growth. In response, the committee proposed a careful balance—pushing credit growth higher while closely monitoring inflation and liquidity challenges.

Despite the concerns, the NBE’s decision to keep the National Bank Policy Rate (NPR) at 15% and to maintain the existing rates for deposit facilities and reserve requirements reflects a cautious approach. The central bank is aware of the liquidity constraints but aims to drive sustainable growth without exacerbating inflation or liquidity challenges.