Ethiopia has removed the limit on how much commercial banks can grow their lending each year, ending one of its most significant post reform banking controls while tightening other monetary measures to keep inflation in check.
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According to Birr Metrics, the National Bank of Ethiopia (NBE) announced on Monday that it had abolished the annual credit growth ceiling for commercial banks, saying the country had reached a stage where it could rely on interest rates and other market based tools, rather than direct lending restrictions, to steer the economy.
The decision followed the seventh regular meeting of the Monetary Policy Committee and was approved by the central bank’s Board of Directors.
The credit cap, introduced in 2024, restricted how quickly individual banks could expand their loan books. It was designed as a temporary measure to slow money supply growth and help curb inflation during a period of major economic reforms.
Eyob Tekalign, NBE Governor said the policy had achieved its purpose and that Ethiopia was now ready to shift fully to an interest rate based monetary policy framework.
“The cap was introduced in 2024 as a temporary measure to contain credit growth while this transition was under way. It has served that purpose, and its removal reflects the fact that the Bank now has a functioning interest rate based framework at its disposal.”
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He stressed that the move should not be interpreted as a softer policy stance.
“I want to be explicit on this point: this is a change in instrument, not a change in stance.”
To offset the greater lending freedom now given to banks, the central bank raised its benchmark policy interest rate from 15 percent to 16 percent, signalling that inflation remains its priority.
“Because removing the cap on its own would ease pressure on credit growth, the Committee judged that an offsetting measure was required to keep the overall policy stance tight,” Eyob said.
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“The rate increase and the removal of the cap should therefore be read together: one instrument is retired, and the other is strengthened, so that the net effect is a monetary stance that is, if anything, tighter than before.”
The central bank also introduced targeted reserve requirements that will vary from one bank to another. The new system will largely depend on each bank’s loan to deposit ratio, meaning lenders that expand credit more aggressively could be required to hold higher reserves.
According to the central bank, the approach gives regulators a more precise way to manage risks without imposing blanket restrictions across the entire banking sector.
“This gives the National Bank a precise instrument to act on individual banks, rather than the economy wide constraint the credit cap once provided, should credit expansion in any part of the system begin to threaten the inflation outlook,” Eyob said.
Alongside the monetary changes, NBE eased some foreign exchange rules aimed at improving liquidity in the banking system.
The central bank reduced the mandatory foreign exchange surrender requirement from 50 percent to 30 percent, allowing commercial banks to retain a larger share of the foreign currency they earn.
Eyob said the move would help deepen Ethiopia’s foreign exchange market.
“The reduction is intended to strengthen export competitiveness, deepen the foreign exchange market, and improve price discovery.”
The bank also lowered its commission on foreign exchange transactions from 2.5 percent to 1.5 percent, a step expected to reduce the cost of trade and limit the impact of imported inflation.
“The commission reduction will lower import related costs and contain the pass through of external prices into domestic inflation,” the governor said.
The package marks one of the biggest changes to Ethiopia’s monetary framework since the country launched broad economic and foreign exchange reforms.
Removing the lending ceiling is expected to give commercial banks greater flexibility to finance businesses and households. However, economists say faster credit growth could also increase inflationary pressures if lending expands too quickly without a corresponding rise in deposits.
The central bank said the Ethiopian economy remained resilient, supported by growth in agriculture, industry and services despite persistent inflation and uncertainty in the global economy.
Looking ahead, NBE said monetary policy will increasingly rely on interest rates, targeted reserve requirements and other market based tools to manage liquidity and keep inflation under control.
“Taken together, these five measures reflect one consistent judgment by the Committee: that Ethiopia’s monetary framework has matured to the point where it can rely on indirect, market based instruments,” Eyob said.
“This maturity must be matched by continued discipline, not by any easing of our resolve on inflation.”
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