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Ethiopia: National Bank Vows to Reduce Inflation by 20% in the Current Fiscal Year

NBE LogoThe National Bank of Ethiopia (NBE) introduced reforms to its monetary policy in order to address the issue of inflation. The bank plans to reduce inflation to 20 percent by the end of the 2023/2024 fiscal year, and 10 percent by the end of the next fiscal year.

The measures, which were approved by the NBE Board of Directors on Monday, included limiting credit growth, sharply reducing direct advances to the government, increasing the interest rate on the NBE's emergency lending facility, and revisiting the foreign exchange surrender requirement for exporters.

Accordingly, the bank aims to limit credit growth to 14% for the fiscal year ending June 30, 2024. This means that all commercial banks will be instructed to limit the growth of their loan books to be consistent with this aggregate credit ceiling. Moreover, it aims to sharply reduce direct advances to the government. In the past year, the NBE has provided significant amounts of direct lending to the government. This has contributed to inflation, as it has increased the amount of money in circulation. The NBE stated that it was now limiting such lending to just one-third of the prior-year levels.

To achieve its plan, the bank will also increase the interest rate on the NBE's emergency lending facility from 16% to 18%. This is expected to make it more expensive for banks to borrow money from the NBE, which will then discourage them from taking on too much risk.

Reducing the foreign exchange surrender requirement for exporters is also one of the tools of the bank which will be used to reduce inflation. The bank is drafting a new directive which requires exporters of goods and services to surrender 50% of their foreign exchange proceeds to NBE, 10% to their bank, and retain 40% for their own account. This, according to a statement issued by the bank, is aimed at boosting exporter’s profitability and encouraging exports. Nevertheless, under the current Retention and Utilization of Export Earnings and Inward Remittances Directive No. 84/2023 of the National Bank, exporters of goods and services also have the right to retain 40% of their export earnings.

NBE promised to take additional measures if it found it necessary to reducing inflation. According to the International Monitory Fund (IMF), the country’s inflation rate for 2023 is registered to be 31.4%.

Source: National Bank of Ethiopia and the IMF