National Bank of Ethiopia faces dilemma with liquidity injections and new monetary strategy
via The Reporter Ethiopia8 min read
The National Bank of Ethiopia NBE recently lifted a three-year lending cap and increased its policy interest rate to 16 percent, aiming for indirect monetary policy. This move occurred as inflation resurged, partly due to conflict in the Middle East. Concurrently, the NBE's Gold Purchase and Reserve GFR scheme, designed to build foreign exchange reserves by buying gold from artisanal miners at a premium, has injected substantial liquidity into the banking system, particularly at the Commercial Bank of Ethiopia. Neutralizing this excess liquidity cost the NBE 3.33 billion Birr in 2024/25, with projections for a significant increase in 2025/26. This liquidity, combined with the lingering effects of the former lending cap, has led to oversubscribed foreign exchange and Treasury bill auctions, and downward pressure on interest rates. The NBE now faces the challenge of controlling inflation through its policy rate while managing exchange rate stabilization via the GFR scheme. The continuous liquidity injections from the GFR scheme enable commercial banks to lower lending rates and expand credit, posing inflationary risks. The NBE will need to scale up open market operations to absorb this liquidity, but banks may prioritize lending to private borrowers. Furthermore, the NBE has limited experience with market-based policy tools, and the GFR scheme introduces unpredictable liquidity. Historically, the monetization of budget deficits made monetary control difficult. The GFR scheme is
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