Ethiopia’s FX Reserves Triple in One Year Amid Policy Overhaul

Ethiopia’s foreign exchange reserves have tripled over the past year, marking a remarkable turnaround fueled by aggressive monetary tightening, robust export performance, and a sweeping reform of the foreign exchange regime. The development underscores the growing resilience of the country’s external sector, even as the National Bank of Ethiopia (NBE) maintains its cautious stance on inflation and domestic liquidity.

The update follows the third Monetary Policy Committee (MPC) meeting of 2025, held on June 30. While inflationary pressures appear to be easing—headline inflation remained steady at 14.4 percent in April and May, with food inflation down to 12.1 percent from 25.6 percent a year earlier—the NBE made clear that the disinflation process is far from complete. The Committee reaffirmed its commitment to stability, opting to keep the benchmark interest rate unchanged at 15 percent and to extend the 18 percent credit growth ceiling through September.

A key factor behind the central bank’s cautious tone is the elevated cost of living resulting from years of cumulative inflation. Although monthly inflation rates were subdued at just 0.1 and 0.2 percent in the last two months, the MPC stressed the importance of anchoring expectations until single-digit inflation becomes entrenched.

Beneath the surface, however, Ethiopia’s economic indicators reveal signs of structural improvement. Export earnings have surged—led by coffee and gold—while the services sector has shown renewed vitality in tourism and air transport. At the same time, the reform of the exchange rate system introduced in mid-2024 has contributed to better currency price discovery, a slowdown in import growth, and renewed confidence among remitters and capital account investors.

The resulting improvement in the external balance is striking. Ethiopia’s current account deficit has narrowed significantly, while the balance of payments has shifted into a strong surplus. In parallel, the NBE has accumulated substantial foreign exchange reserves, helped in part by gold-related inflows, which are now nearly three times higher than the level recorded a year ago. This external buffer offers the country much-needed stability as it navigates fiscal and monetary transitions.

Domestically, the credit environment remains tightly controlled. Despite signs of growing demand for credit—reflected in broad money growth of 23.3 percent and commercial bank loan stock growth of 18.1 percent—the NBE continues to restrain lending in an effort to avoid reigniting inflationary pressures. Notably, reserve money has grown even faster, yet the cap on lending growth has helped prevent excessive liquidity expansion.

Short-term interest rates have also remained well-anchored. The inter-bank money market rate stood at 17.5 percent in May, comfortably within the NBE’s 15 percent ±3% corridor. Meanwhile, the 91-day Treasury bill yield rose to 17.7 percent—up from 16.1 percent in December 2024—indicating a positive real interest rate environment, critical for maintaining investor confidence and controlling inflation.

In a significant structural shift, the NBE has repealed a 2022 directive requiring commercial banks to purchase treasury bonds, a policy tool once used to support deficit financing. With improved fiscal performance and growing access to concessional and market-based finance, the government is no longer relying on direct central bank support. The MPC welcomed this development, noting it as a step toward more market-driven monetary management.

Looking ahead, the central bank may revise its credit growth controls in September, provided that disinflation trends continue. However, it has pledged to deploy its full range of policy instruments—including open market operations, forex interventions, and adjustments to reserve requirements—to maintain control over inflation and liquidity conditions.