The Board of Directors of the National Bank of Ethiopia (NBE) imposes caps on fresh loan disbursement with some bold monetary decisions on the aim to curb inflation. The move however has raised eyebrows within the experts’ community who argue that the decision may not be as successful since the inflationary situation needs further corrections.
The decision that includes slashing direct advance (DA) targets to narrow inflation to below 20 percent at the end of the budget year.
During their regular meeting on Monday August 7, the NBE board chaired by Girma Birru (Amb), Advisor to the Prime Minister, Ahmed Shide, Minister of Finance, Teklewold Atenafu, Advisor to the PM, Eyob Tekalign, State Minister of Finance, Mamo E. Mihretu, Governor of NBE, and Fikadu Digafe, Vice Governor of NBE, passed several measures to control the inflationary pressure in the economy.
As Mamo highlights, inflation is hugely affecting the public, “To curb the trend and improve savings and investment; job creation and creation of conducive environments to eradicate poverty, is a must, of which, it is the right time to take new monetary policy measures.”
According to the Governor, supply side challenges, high production cost and the macroeconomic policies that particularly rely on monetary and fiscal policies are major points for inflationary behaviors in the economy.
As he depicted, besides the major measures, the central bank has taken other areas like; improving the food and nonfood commodities supply side, structural measures including accelerating the logistics sector, and improving the fiscal policy.
On its part, the central bank disclosed that it has imposed a cap on government overdraft and private sector loan disbursement.
Centered on matters DA, Mamo expressed that the board has passed a decision for the central government to rely on alternative fund sources rather than taking overdrafts from NBE.
“The board has reached consensus that the Ministry of Finance should consider the DA as a last resort when adequate funds are not mobilized from the Treasury Bill,” Mamo cited.
According to the decision in the budget year, the DA that the central government will take will not exceed one third of the amount that it received in the budget year closed in June.
In the 2022/23 budget year, the central government has accessed huge sums as overdraft from NBE to which experts claim the amount is incomparable from the preceding years.
According to MoF’s debt bulletin, in the first three quarters of the 2022/23 budget year, the central government received 140 billion birr as DA, which has an 84 percent increment compared with what it took the whole of the 2012/22 financial year.
Experts claimed that the DA is one of the major instruments which have caused inflation to gallop. In the 2022/23 budget year, the government budget deficit peaked at its highest position against the recommended rate.
To come up with improvements in the current budget year that started July 7, the government has disclosed its strong stand to manage its expenditure and narrow its budget gap against the GDP.
In his budget speech early June, the Finance Minister, Ahmed Shide, said that the budget deficit is largely filled by treasury bills and Treasury bonds that were introduced in the mid 2022/23 budget year.
The gross budget deficit for the 2023/24 budget year will be 2.48 percent of the GDP coming in at 281 billion birr. The budget deficit has shown reduction in terms of the share of GDP when compared to the 2022/23 budget year of 3.4 percent, while the recommended share remains less than three percent.
For the budget deficit, 242 billion birr will be covered from domestic source while the remaining 39 billion birr is expected to be covered by foreign loans.
According to Ahmed, 53.7 billion birr of the gross budget deficit will be allocated for local and foreign debt settlement.
Despite this, experts said that the new decision from the central bank may have some sort of relief in the economy.
Eshetu Fantaye, a financial industry guru, said that if there is strong control on monetization at the foreign currency and some other key areas the will be effective.
Regarding private sector borrowing, the central bank has also imposed a cap.
According to the decision, the year on year growth of loans will not exceed 14 percent as of June 2024.
The annual loan growth rate on some banks whether big or small remains very high as per the annual report of private banks, while some of the banks have medium growth rates.
According to the annual report of private banks for the financial year that closed June 2022, some of the banks have registered a loan annual growth rate of more than 50 percent, while some big banks have more than 40 percent annual increment on their loan portfolio while the smallest of the lot have more than 24 percent annual increment.
However, some experts opined that this has not been the case with the 2022/23 financial year.
As per directive ‘MFAD/TRBO/001/2022’ which became effective as of November 1, 2022 imposed banks to buy a 20 percent NBE bond for fresh loan disbursement. This move has now been attributed to the slowdown of the loan portfolio growth.
In terms of the cap on banks experts like Eshetu said that the cap on loans may not have significant impact on the inflation.
Eshetu said that in connection with the NBE bond, the banks’ capability to disburse loan has already dialed down.
“The engulfing factors for inflation are diversifying and as a result the cap on the loan will have very limited contribution,” he added.
“The illegal forex rate is almost taking the shape of the official rate and traders are calculating their business with the parallel market rate rather than the official rate,” he elaborated, adding, “It will have a positive impact in the short term but it will not have a big impact in the long run. Improving the supply side is crucial to curb the inflation.”
“Imposing a cap on loans may have significant impacts in regulating money-multipliers. Nevertheless, there are several issues that are aligned with macroeconomic and supply causes, export and customs regularity, foreign currency regime, and others that are not properly regulated with economic issues that should be corrected,” the economist told Capital while he underlined these references for government to keep watch of the matter.
As per the new measures, the NBE board also increased the interest rate for individual banks’ lending facility, in order to help commercial banks meet unexpected liquidity needs by borrowing from the NBE.
As per the decision, the interest rate is now increased to 18 percent from the current 16 percent that was effective for two years, while the years before that the rates went at 13 percent.
The other policy decision taken by the board is the revision of retention and utilization of export earnings and inward remittances.
About 20 months ago, NBE had imposed a directive which stated that exporters of goods and services and recipients of inward remittance should have the right to retain 20 percent of their export earnings in foreign currency indeterminately in a retention account after the deduction of 70 percent surrender requirement from the total earnings and the remaining percentage to their respective bank.
According to the NBE’s ‘foreign exchange surrender requirement of banks directives no. FXD/83/2023’ article 3.1 that was issued on August 11, a bank shall surrender 50 percent of its receipts from export of goods and services, 70 percent from private transfers and NGO’s transfer to the NBE.
As per article 4.2 of retention and utilization of export earnings and inward remittances directive no. FXD/84/2023 that was issued on August 11, exporters of goods and services shall have a right retain 40 percent of their export earnings. However, there are no changes on recipients of inward remittance from the preceding 20 percent.
Experts said that the 50/50 threshold may have a positive impact for the inflow of hard currency.
However they said that since there will not have correction on the black market scheme the impact on the inflation will be very limited.
In the past ten years, the inflation has shown an increment of 16 percent every year, while in the past two years the inflation has surpassed 30 percentage points.