The outgoing Ethiopian fiscal year has been a tumultuous period, marked by political instability, economic hardship, and humanitarian crises. Political unrest in Amhara and Oromia, along with the ongoing internal crisis in Tigray, have continued to destabilize the country. The economic situation has been strained, with multiple regional states failing to pay civil servant salaries. Foreign relations with neighboring countries such as Eritrea and Somalia have been tense. However, Arat kilo has been busy with the Addis Ababa ‘corridor project’, which has necessitated the demolition of neighborhoods and businesses.
The overall state of the political economy has been characterized by uncertainty, with government officials expressing optimism about the future while many citizens remain skeptical. The fiscal year also witnessed bold moves in some sectors. The finance sector is worth mentioning in this regard.
The National Bank of Ethiopia has taken bold steps to reform the financial sector. It’s 10th governor, Mamo Esmelalem Mihretu, rolled up his sleeves and has been actively implementing the bank’s three years (2023-2026) strategic plan. Some attribute these reforms to the direct influence of international financial institutions, while others view them more favorably. It is indisputable that the road ahead remains uncertain, and the country faces substantial challenges in rebuilding trust and fostering sustainable development.
The young Governor has ushered in a period of significant transformation within the country’s banking industry. His tenure has been marked by bold measures, many of which were outlined in the NBE’s 2023-2026 strategic plan. These initiatives, including the June 2023 monetary policy change and the recent currency float, have had a notable impact.
Anti-Inflationary Measures
As part of its plan to ‘ensure low and stable inflation’, the bank has taken steps such as limiting credit growth and government borrowing. While these measures have shown some success in lowering inflation, their long-term impact on the economy remains a topic of discussion.
Financial Inclusion
Despite the unsurprising revelation that Ethiopia’s banking sector primarily serves a select few, NBE’s financial sustainability report released in April 2024 revealed a shocking reality. The report disclosed that just ten borrowers account for nearly a quarter of all bank loans. To address this concentration risk, the Bank has implemented measures to limit individual and corporate borrowing from banks and restrict the number of lenders serving a single borrower. The ‘Large Exposures to Counterparty or Group of Connected Counterparties’ directive, issued during the fiscal year, establishes a 25 percent exposure limit, mitigating aggregate exposure and credit concentration. The directive mandates that the aggregate sum of all direct or indirect exposures a bank holds to a single counterparty or a group of connected counterparties must never exceed 25 percent of a bank’s capital. This directive stands out as one of the impactful ones issued by NBE during the fiscal year.
From Credit Ceiling Regime to an Interest Rate-based Monetary Policy
The other bold policy change implemented by the central bank was the transition from a credit ceiling regime to an interest rate-based monetary policy framework. This policy shift, announced near the end of the fiscal year, marked a substantial departure from previous practices. The initial interest rate was set at 15 percent.
Currency Swap Agreement with a BRICS+ Counterpart
During the same fiscal year, NBE signed a bilateral currency swap agreement with its United Arab Emirates (UAE) counterpart, valued at up to 3 billion dirhams ($816.79 million). This agreement was part of a broader effort by both countries to reduce their reliance on the U.S. dollar for international transactions. For Ethiopia whose foreign currency reserve was at critical level at the time the agreement was signed, the agreement seemed to be much needed.
As new members of BRICS+, Ethiopia and the UAE also signed preliminary agreements to establish a framework for using local currencies in cross-border settlements. The agreement aims to provide financial markets with liquidity in local currencies.
NBE’s Reestablishment Amendment
Another key move made during the fiscal year was amending the establishment proclamation of the 61-year-old NBE. While the proclamation had been revised several times in the past, the latest draft proposed groundbreaking changes that many viewed as the most substantial since the bank’s establishment in 1963, following the end of Italian occupation. Key amendments included a significant expansion of the central bank’s independence. The draft granted the bank more autonomy in its operations and enhanced its authority. Additionally, the proclamation increased the bank’s authorized capital to 20 billion Birr from the previous 500 million, a substantial boost reflecting its growing role.
Fully Embracing Creditors’ Policy Prescriptions
Finally, on July 29, the young governor announced one of the most discussed topics in the sector. Ethiopians woke up to a broadcast explanation from the young governor about the introduction of a new foreign currency management approach. He surprised Ethiopians by announcing that his office had decided to float the local currency, a huge move from the pegged to floating system. This announcement sparked a divided response among Ethiopia’s elite and the general public. Some viewed the reforms as destructive and painted a pessimistic outlook. Many lost the value of their money by at least 30 percent that very morning. Others, on the other hand, hailed the reforms as a long-awaited golden opportunity.
The media amplified these polarized views, often aligning with their political leanings. State media celebrated the reforms as a victory, while opposition-aligned outlets portrayed them as a total economic collapse. Rumors of hoarding by some merchants circulated, and many people adopted a wait-and-see approach, observing how the market would adapt to the changes. The banking sector responded swiftly, and the value of the Birr declined significantly within a week.
Facing mounting economic pressures and with limited options, Ethiopia has been compelled to implement the policies dictated by international financial institutions from whom it seeks financial assistance for its struggling economy. It has adopted a policy framework largely aligned with their dogmatic prescriptions. This decision has garnered praise from Western nations, with the U.S. and British embassies being the first to offer their ‘congratulations’ to the Ethiopian government. In exchange for this policy shift, Ethiopia has secured up to USD 27 billion (including debt restructuring) in funding from the IMF, World Bank and other creditors, marking a significant departure from its previous approach to currency management.
