The National Bank of Ethiopia reduced the minimum ratio of deposits Ethiopian banks need to hold in reserve from 15% to 10%. The change, took effect as of January 2 as per a directive issued by the central bank of Ethiopia.
The National Bank changed its monetary policy to increase the amount of cash banks have available for lending according to economists.
The amount of ‘liquid assets’ to be held as a proportion of deposits was also decreased from 25% to 20% confirmed Alemayheu Kebede Director of the Communications Directorate of the Central Bank.
Bank loans to various sectors of business in Ethiopia including exports declined following a central directive in April which instructed banks to buy government bonds, to finance infrastructural projects, equivalent to 27% of their total loans every month according to Eyob Tsefaye, an independent economist.The banks’ ability to lend was also affected by a slowdown in deposits said to Eyob.
The National Bank made the appropriate decision in loosening its monetary policy to prevent the export sector from being affected he said.
The new monetary policy will increase the money supply in Ethiopia which could result in higher inflation noted Eyob.
It is to be remembered that the World Bank and the International Monetary Fund expressed concern that the restrictions put on loans to the private industry could adversely affect the economic growth of Ethiopia.
Source: Bloomberg
