Bloomberg News

Ethiopian Central Bank Loosens Monetary Policy to Boost Lending

January 09, 2012

Jan. 6 (Bloomberg) -- Ethiopia’s central bank loosened its monetary policy in a move economists said is aimed at increasing the amount of cash that banks have available for lending.

The National Bank of Ethiopia cut the minimum ratio of deposits to be held in reserve to 10 percent from 15 percent with effect from Jan. 2, according to a directive issued by the Addis Ababa-based central bank and obtained by Bloomberg. The document was confirmed by Alemayehu Kebede, director of the bank’s communication directorate. The amount of “liquid assets” to be held as a proportion of deposits was also reduced to 20 percent from 25 percent, it said.

Lending to exporters and other businesses declined after the central bank issued a directive in April ordering banks to each month buy government securities equivalent to 27 percent of their total loans to help fund infrastructure projects, said Eyob Tesfaye, an independent economist who previously worked for the Ethiopian government. A slowdown in deposits also curbed banks’ ability to lend, he said in a phone interview today.

The central bank’s directive is “the right decision,” Eyob said. “You cannot strangle your export sector”.

Ethiopia is Africa’s second-biggest coffee exporter, according to data from the International Coffee Organization, and ships other commodities including gold, oil seeds and qhat, a narcotic leaf.

The International Monetary Fund and the World Bank said in August that restrictions on lending to private industry may constrain growth in Africa’s second-most populous nation. The government is targeting annual economic growth of 11.2 percent to 14.9 percent through mid-2015, while the IMF and World Bank say the country’s growth potential is as much as 8 percent.

The looser monetary policy will “definitely increase” money supply in Ethiopia and may result in higher inflation, Eyob said. Annual consumer inflation stood at 39.2 percent in November, according to data released by the Central Statistical Agency last month. The government has blamed the surge in consumer prices last year on high global commodity prices and increased money supply.

--Editors: Paul Richardson, Alastair Reed.

To contact the reporter on this story: William Davison in Addis Ababa via Nairobi at pmrichardson@bloomberg.net.

To contact the editor responsible for this story: Paul Richardson in Nairobi at pmrichardson@bloomberg.net.


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