The monetary policy action introduced by the National Bank of Ethiopia (NBE) early this fiscal year surges banks’ reserve by a fifth as of the end of last year.
It is to be recalled that after reviewing the economic and financial sector developments in late August 2021, the Board of Directors of NBE passed several decisions.
Atop of the decisions made was the revision and increase of the reserve requirement of financial institutions by double from the long-established five percent. At the time, the board gave a transition period of three months starting from September 1 2021 in order to meet the new reserve requirement on birr and foreign currency deposit liabilities.
Under the 7th amendment of setting the reserve requirement Directive No.SBB/80/2021 that was issued late August reversing the SBB/55/2013 Directive that was issued on March 1, 2013, NBE ordered banks to double their reserves.
On its latest quarterly report for the 2021/22 second quarter, NBE stated that the monetary policy action that was taken by the regulatory body led to a surge in the deposit liability of central bank. In the stated period, NBE’s deposit liabilities shot up by 25.3 percent annually and 25.8 percent compared with the first quarter of the same fiscal year.
The deposit liabilities have capped to highs of 190 billion birr up from 151.7 billion birr of the same quarter of last fiscal year.
From the stated amount, 145.2 billion birr was taken up by financial institutions that are mainly banks. According to the quarterly report, NBE’s liability for banks has also increased by almost 21 percent standing at 145.1 billion birr from 129 billion birr a year ago.
The decision of the NBE board to double the reserve requirements was mainly to curb the growing inflation.
The country first introduced the reserve requirement through Directive No. SBB/14/96 which became effective on January 1, 1996 with a 10 percent requirement.
The highest reserve requirement was 15 percent under the 4th amendment of Directive No. SBB/45/2008, which was effective on April 7, 2008 and lasted until January 1, 2012 which then reduce to 10 percent.
The 2008 and the years that followed are notoriously remembered as the years that the country recorded its highest inflation ever. It was recorded that in the first quarter of 2008 the general inflation stood at 60 percent, while the food inflation was at 81 percent.
In related development, NBE on its second quarter economic review showed that the current account receipts increased by over ten percent meanwhile public transfers declined sharply.
It said that current account receipts stood at USD 4.6 billion and showed a 10.3 percent annual increase due to higher merchandise export (26.9 percent), service proceeds (27.4 percent) and private transfers (14.6 percent) despite sharp decline in public transfers (53.1 percent).
Similarly, total current payments increased 27.5 percent to USD 6.0 billion on account of strong growth in merchandise import (31.0 percent), services payment (17.5 percent) and public transfers (139.1 percent), in contrast with a 20.6 percent slowdown in private transfers.
As a result, current account deficit (including official transfers) widened to USD 1.4 billion from USD 544 million deficit a year earlier.