A bill before Parliament proposes a dramatic increase in the Central Bank’s capital to 20 billion Br, nearly 40 times its existing amount. If passed, the bill mandates that the federal government ensures half of this capital remains consistently paid. The bill also caps the National Bank of Ethiopia’s (NBE) monetary liability at five percent of its reserve fund.

The move comes alongside a policy shift that places a greater emphasis on interest costs, reflecting the Central Bank's anticipated active role in open market operations and its leaders' preference for interest rates as the pillar of monetary policy.

Vice Governor Fikadu Digafe stated the importance of increased capital to ensure price stability, noting that reliance on open market operations introduces new expenditures.

"There needs to be safeguards in case of losses," Fikadu told Fortune. "A capital increase is timely."

According to the Vice Governor, the bill complements changes in banking law and cites historical modalities to limit government lending that existed in previous proclamations, which capped direct lending until the last proclamation passed in 2012.

Established in 1963 with a capital of 10 million Br, the NBE has seen its capital increase substantially, nearly 50 years later, fivefold. Now, experts believe the proposed capital enhancement is necessary due to the increased costs associated with the Bank's new policy direction. A pair of draft proclamations before Parliament grants the Central Bank enhanced powers to protect depositors and creditors from the fallout of collapsing financial institutions, signalling an ambition to become the chief authority on monetary policy issues.

Governor Mamo Mihretu, the ninth chief of the Central Bank in six decades, has been a vocal advocate for enhancing the NBE’s autonomy through new legislation to separate several of its functions from the executive branch. The proposed changes introduce regulatory sandboxes, establish staff independence from conflicts of interest, and assert control over foreign exchange directives away from the executive branch.

These measures also aspire to prioritise the NBE's lending activities on price stability targets over federal government fiscal priorities. The new rules stipulate that the Central Bank will extend an overdraft facility to the government limited to a year and capped at 15pc of the average annual domestic revenues of the previous three years.It will add further advances only in extreme emergencies, such as natural disasters or public health crises. The facility will be a noteworthy departure established in the existing proclamation Parliament ratified 16 years ago. It allowed a lot of latitude for the federal government to borrow in terms to be determined through consultations.

In August last year, Governor Mamo announced sweeping reforms to target inflation to around 20pc by year-end and achieve price stability. These reforms included credit caps on commercial banks, cutting direct government lending by two-thirds, and raising emergency lending interest rates for commercial banks. A few months later, the Central Bank released a three-year strategic plan with 21 action plans aligned with the proposed draft proclamation.

Abdulmenan Mohammed (PhD), a London-based financial analyst, applauded the limitation on direct lending to the federal government, viewing it as the primary driver of inflation. While he hopes to see parliamentarians eventually impose government borrowing limits, as seen in neighbouring Kenya, he recognised the proposed shift as significant.