Ethiopia's Central Bank Ends Mandatory T-Bond Purchases

Ethiopia’s central bank has removed the mandatory Treasury bond purchase requirement from commercial banks, indicating a marked policy shift operational for the past three years. Commercial banks were previously mandated to allocate 20% of their monthly disbursements to purchasing these T-bonds, a requirement they consistently argued constrained their liquidity and credit allocation capabilities.

The National Bank of Ethiopia (NBE) announced the change today, following the third meeting of its Monetary Policy Committee (MPC). The MPC, established as part of ongoing reforms to the central bank's operations, cited enhanced federal government revenue collection, concessional external loans, and domestic debt instruments as its preferred methods to finance the national budget deficit.

Despite this easing, the Committee noted a recent uptick in inflation over the past few months. Consequently, it decided to maintain the existing 18% credit cap on commercial banks to limit the money supply. However, the MPC's announcement did signal the possibility of a complete removal of this credit cap by September.

The central bank is set to maintain its tight monetary stance as it aims to bring down inflation rates, currently around 14%, to single digits. The NBE will also keep its policy interest rate at 15%, alongside existing rates on its standing lending and deposit facilities.