Ethiopia Doubles Reserve Ratio to Rein In Surging Inflation

Ethiopia Doubles Banks’ Reserve Requirement to 10%

Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Ethiopia doubled the statutory reserve requirement for commercial lenders and increased the amount of foreign currency they must remit to the central bank, in an effort to rein in inflation.

From Sept. 1, the reserve requirement will increase to 10%, according to Fikadu Digafe, the National Bank of Ethiopia’s vice governor in charge of monetary policy and its chief economist. Banks will also be required to transfer 50% of their foreign-exchange holdings to the central bank, compared with 30% previously, he said. 

The central bank is adjusting its policies to slow inflation that accelerated to 26.4% in July, the fastest pace in almost a decade. Africa’s second-most populous nation has for long had to contend with a shortage of foreign currency, which has made it harder to import goods and service the nation’s external debt.

“The new measures are aimed at reducing the money circulating in the economy,” Fikadu said by phone on Tuesday. “We needed to tighten the monetary policy due to the higher inflation pressure in the country.” 

Ethiopia Doubles Reserve Ratio to Rein In Surging Inflation

The central bank plans to give lenders a local-currency equivalent of the amount of foreign money they remit, according to the directive. Banks were also requested to allocate 1% of their loan portfolios to buying debt issued by the government-owned Development Bank of Ethiopia.

“The new measures should slow loan growth and help to cool inflation over time,” Mark Bohlund, a senior credit research analyst at REDD Intelligence, said in emailed responses to questions. “However, loan demand is likely to remain strong as bank clients attempt to monetize assets to protect themselves against asset seizures and value erosion.”

The directives come as Ethiopia seeks to restructure some of its foreign debt amid the economic fallout from the coronavirus pandemic and domestic political crises. Prime Minister Abiy Ahmed, whose party won the elections held in June, is battling a rebellion in the northern Tigray region that’s displaced millions of people and left more than 5 million in need of food aid.

The central bank directives may “slow down on economic growth but the effect will be marginal compared to the wider damage from civil conflict,” Bohlund said.

The Ethiopian Bankers Association didn’t immediately respond to calls for comment.

©2021 Bloomberg L.P.