IMF data casts doubt on Ethiopia’s credit cap as private lending surged

Private sector lending in Ethiopia was already growing at twice the official credit limit before the central bank scrapped its lending cap this week, raising fresh questions about how effective the policy had become.

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A new review by the International Monetary Fund (IMF) shows that credit to the private sector expanded by 50 percent year on year by the end of March 2026, even though commercial banks were operating under an annual credit growth ceiling of 24 percent introduced to curb inflation and excessive money supply growth.

The findings offer fresh insight into why the National Bank of Ethiopia (NBE) moved this week to abolish the cap and replace it with interest rates and bank specific reserve requirements as its main monetary policy tools.

While private lending surged, overall credit growth remained more contained because lending to the government barely increased and credit to state owned enterprises fell.

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According to the IMF, total credit expanded by about 25 percent year on year by the end of March, driven largely by strong private sector borrowing. Credit to government grew by just 0.3 percent, while lending to state owned enterprises declined by 10 percent.
The figures suggest the blanket lending cap was becoming less effective as a tool for controlling credit conditions across the banking system.

The IMF noted that Ethiopia had already committed under its reform programme to remove the credit ceiling by the end of December 2026. This week’s decision by the central bank therefore delivers that reform more than five months ahead of schedule.

The Fund said Ethiopia’s financial sector should continue moving away from direct administrative controls and rely more on market based monetary tools.
“Fostering a competitive, market oriented financial sector, including through removing direct monetary instruments and quantitative limits, is important to strengthen monetary transmission,” the IMF said.

Even so, the Fund warned that the pace of private sector lending deserved closer regulatory attention.

Although non performing loans remain low and private credit still accounts for a relatively small share of the economy, the IMF said rapid lending growth, particularly in specific sectors, could create financial risks if left unchecked.

The report highlighted the Commercial Bank of Ethiopia as an institution requiring close supervision. It said private lending at the state owned bank had accelerated as it shifted away from its traditional reliance on government assets following its recapitalisation.

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To reduce future risks, the IMF called for stronger oversight across the banking sector, including tighter monitoring of credit approval processes, collateral management, borrower assessments and internal governance.

The report provides important context for the sweeping monetary policy changes announced by the National Bank of Ethiopia this week.

On Monday, the central bank removed the annual credit growth ceiling, increased its benchmark policy interest rate from 15 percent to 16 percent and introduced targeted reserve requirements that can be applied to individual banks whose lending is judged to pose risks to inflation and financial stability.

Under the new system, banks with unusually rapid credit growth or high loan to deposit ratios could be required to hold additional reserves, giving regulators a more targeted way to manage risks instead of imposing one rule across the entire banking sector.

According to Birr Metrics, Eyob Tekalign, NBE Governor said the policy shift reflected the country’s progress towards a modern monetary policy framework rather than any easing of its fight against inflation.
“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.”

He also stressed that tighter interest rates would offset the removal of the lending restriction.
“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.”

Together, the IMF’s latest assessment and the central bank’s policy changes point to a broader shift in Ethiopia’s financial reforms, one that places greater emphasis on interest rates, liquidity management and bank specific supervision rather than economy wide lending controls.