Central Bank Claims Monetary Policy Overhaul as Forex Reforms Take Root

Jun 29 , 2025. By BEZAWIT HULUAGER ( FORTUNE STAFF WRITER )

Central Bank Governor Mamo Mihretu claimed a bold reconfiguration of monetary policy and foreign exchange management, marking a break from years of fiscal dominance, closed financial architecture, and constrained market signalling. He told federal legislators last week that the reforms reflect a systemic recalibration that anchors macroeconomic stability, enhances foreign exchange liquidity, and restores credibility to the central banking regime.

Over the first three quarters of the fiscal year, the National Bank of Ethiopia (NBE) absorbed 377.9 billion Br through 19 liquidity auctions, while the interbank market recorded 482.3 billion Br in transactions at an average interest rate of 16.8pc. Commercial banks absorbed 66.8 billion Br in treasury bonds, pushing total outstanding holdings to 161.3 billion Br, stressing the persistence of captive financing in the domestic debt market.

Governor Mamo recalled a policy rate hike to 15pc and a lending rate to 18pc, moves that not only signalled tightening to contain inflation but also heralded the end of direct monetisation of fiscal deficits. According to the Governor, the structural decoupling of central bank lending to the federal government is seen as a foundation in the central bank’s transition toward greater autonomy and inflation-targeting credibility.

Perhaps most striking was the tripling of foreign exchange reserves to cover 2.7 months of imports, a 235pc surge from the previous year, backed by strong external sector performance. The Governor projected a 2.6 billion dollar surplus in the overall balance of payments for 2024/25. Export revenues doubled to 5.3 billion dollars in Q3 alone, aided by solid returns from coffee, gold, electricity, and floriculture, while remittance inflows rose by 22pc to 5.1 billion dollars.

The capital account was buoyed by 3.8 billion dollars in receipts from foreign direct investment (FDI), public sector financing, and private loans. Official development assistance and external borrowing increased by 93pc and 77pc, respectively, partly reflecting renewed international support following policy reforms and debt restructuring agreements under the G20 Common Framework.

To counter mounting pressures from illicit capital outflows and speculative forex hoarding, the Central Bank revised its foreign exchange directive. These included caps on advance import payments, expanded allowances for travellers and businesses, and tighter margins for Forex Bureau commissions, now capped at four percent.

“We're curbing incentives for capital flight,” asserted Governor Mamo, who rejected concerns over the Bank’s profitability, arguing a 10 billion Br “unrealised loss” was due to currency depreciation, not operational mismanagement. “There is no such thing as loss. The Bank is not a profit-making institution. It pays high interest when absorbing money from the market.”

Despite booking 26 billion Br in profits, the Bank reported a net forex loss of 28.3 billion Br and raised its impairment provisions by five billion Birr, mostly for loans to state-owned enterprises according to the 2024 audit report.

Observers, such as London-based analyst Mekbib Tesfaye, have flagged the need for IFRS-compliant asset valuation and transparent reporting.

“Fair value mechanisms,” he argued, “can restore trust in central bank balance sheets.”

The Governor argued that NBE’s transformation was further reflected in structural reforms such as a revised banking proclamation that allowed foreign bank entry, the first mobile money license awarded to a foreign investor, and key institutions like the Deposit Insurance Fund and pension agencies reported digital and regulatory overhauls.

Yet, Parliament’s Budget & Finance Standing Committee, chaired by Desalegn Wedaje, raised red flags. Members of the committee criticised persistent forex crunch, the widening premium in the parallel market, unattractive deposit rates, liquidity mismatches, and operational inefficiencies in pension funds. MPs also flagged cybersecurity risks, farmers' exclusion from financial services, and pension fund inefficiencies, including low collection rates and a lack of investment planning, as critical bottlenecks.

Vice Governor Solomon Desta reiterated the NBE’s commitment to inclusive finance, citing the rollout of warehouse financing and green card services in northern regions. He disclosed that a Rural Financial Inclusion Council is also being formed.

Inflation, persistent at 14.4pc in May, with non-food prices climbing 17.8pc, fueled legislators' scepticism about Governor Mamo's bullish forecast of a decline to a single digit next year.

Economist Girum Ameha, while lauding reserve gains, warned that 2.7 months' coverage still falls short of the three-month prudential benchmark. He urged diversification beyond gold and coffee exports.

While the Bank’s position may reflect a conservative approach, it exposes a structural shortcoming. Equity investments in international financial markets offer not only diversification but also a hedge against currency depreciation. Targeted allocations in low-risk, liquid foreign assets could strengthen the Bank’s portfolio resilience.

"This is where Ethiopia can take a page from global peers," Mekbib told Fortune. "Central banks in comparable economies have leveraged equity exposure to bolster policy flexibility and manage reserve adequacy."

Experts also questioned the sustainability of foreign liabilities, such as Abu Dhabi’s deposits ballooning to 174 billion Br at a rate of four per cent interest. Projections reveal these could swell to 390 billion Br with further Birr depreciation, causing latent fiscal exposure.

Fuel subsidy removals stirred controversy, with veteran banker Ameha Tefera (PhD) labelling the decision “economic sabotage,” despite the government's push for cost-reflective pricing.

“Our dependence on imports is a huge loss," he told Fortune. "There’s a huge gap between what we import and export.”

To close this gap and boost official remittance flows, Girum recommended a combination of targeted incentives and reforming the commission structure that banks earn from facilitating remittances.

"Flat caps on commissions don’t work, banks should be rewarded for performance," he said.

Bureaucratic bottlenecks, he warned, are nudging users toward the informal market. He also weighed in on treasury bond policy, following the National Bank’s directive requiring banks to purchase government securities.

"If bonds are to fill the deficit gap, they must be priced to attract," Girum argued.

The existing bulk-purchase structure, he said, adds to investor hesitation. Still, with the advent of capital market trading, he remains optimistic.

"Wealthy investors will show up if the returns are worthwhile," he said.

Ethiopia expects to receive 750 million dollars in budgetary support from the IMF and the World Bank imminently, followed by one billion dollars next year. These inflows are tied to policy reforms, including foreign exchange liberalisation that now allows exporters and service providers to retain half of their foreign exchange earnings.

However, experts say vulnerabilities remain. Inflation control is elusive, the forex premium with the parallel market persists, and the Central Bank's 430 billion Br in sub-market loans to government agencies presents long-term fiscal risks. While the economy grew by 8.1pc this fiscal year and is projected to reach 8.4pc next year, exceeding the Sub-Saharan African average of 3.6pc, the growth masks underlying fragilities, chief among them, a shallow export base and the residual impact of monetary repression.

What emerges is a Central Bank in mid-transition. Governor Mamo is expected to strike a balance between policy orthodoxy and political economy constraints, capital account reforms and reserve management discipline, as well as monetary tightening and developmental mandates. These experts say that whether these reforms coalesce into a sustainable framework remains an open question. But for the first time in over a decade, the NBE appears to be charting its own course.

PUBLISHED ON Jun 29,2025 [ VOL 26 , NO 1313]