While the ratio increased, participants in the Open Market Operation (OMO), the primary money market auction, which was inaugurated in July, slowed down.

Several financial institutions were first drawn to the new money market instrument that the National Bank of Ethiopia (NBE) introduced as part of the macroeconomic reform.

Vice Governor and Chief Economist of NBE, Fikadu Digafe, admitted that fewer players are participating over time.

According to him, less is being sold to NBE as well.

“The number of participants and value is gradually decreasing, but banks that are liquid are still participating in the auction,” he told Capital.

Five banks participated in the most recent auction, which took place on Thursday, September 5, and was the fifth since the new instrument was established. A total of 15.4 billion birr was allotted.

In the second phase of the auction, which aimed to absorb market liquidity, 21 banks participated, taking in a total of about 37.5 billion birr. In both the number of participants and the sum given, it was the highest.

16 banks participated in the inaugural OMO auction, which took place on July 11 and featured a sale of about 20 billion birr with a fifteen-day maturity term.

However, 29.6 billion birr and 23.3 billion birr were granted in the third and fourth auctions, which took place on August 8 and 22 respectively, with the involvement of 12 and 9 financial institutions.

Experts noted that although just five banks participated in the most recent auction, each bank received the greatest average sum.

Even though banks did not offer the same amount at the auction, with an average share of around 3.1 billion birr each for the auction that was held on Thursday, it was the biggest amount since the previous sale on August 21, which had a share of 2.6 billion birr.

A few weeks earlier, Capital was notified by a few bank presidents, including some who had recently opened, that they had taken part in the auction to test the new system.

One leader of the new banks told Capital, “We offered less than 100 million birr on the initial auction to test the new market.”

According to experts, banks would be eager to buy and sell foreign exchange because the central bank opened the market to market forces.

As a result, “their liquidity would transfer to investments in foreign currency business,” which could be one of the reasons for the banks’ decreased participation in the OMO auction.

According to Fikadu, the NBE is eager for banks to devote their resources to the mobilization of hard money.

The new instrument, with a two-week maturity, is described as an additional tool to control inflation. According to NBE, its new monetary policy framework, which was unveiled at the start of the 2024/25 budget year, will involve biweekly auctions linked to monetary policy. During these auctions, the NBE will either withdraw or inject liquidity from the banking system based on its evaluation of the most recent conditions.

OMO is the principal tool employed in monetary policy to ensure that interest rates in the interbank market, which is the operating aim of monetary policy, stay relatively close to the National Bank Rate (NBR) that was instituted with the new policy.

When excess liquidity in the banking system leads to significant downward deviations in the interbank market rate from the NBR (which is set at 15 percent upon inception), the OMO auctions will be used to withdraw excess liquidity from the system.

Conversely, when the banking system faces a shortage of liquid funds resulting in significant upward deviations of the interbank market rate from the NBR, NBE will use OMO auctions to inject liquidity into the system.

Additionally, NBE is in the process of introducing an ‘Overnight Lending Facility’ and an ‘Overnight Deposit Facility’ for banks that may need to manage their liquidity positions over a one-day time horizon. These facilities, formally known as Standing Facilities, will be offered at the NBR rate plus or minus 3 percent.