National Bank of Ethiopia Lifts Mandatory Bond Purchase Requirement for Commercial Banks

Addis Ababa – In a significant shift in monetary policy, the Monetary Policy Committee (MPC) of the National Bank of Ethiopia (NBE) has decided to lift the directive that required all commercial banks to purchase long-term government bonds. The decision was announced following the MPC’s third meeting of the fiscal year on June 23, 2017 (Ethiopian Calendar).

The directive in question, labeled MFAD/TRBO/001/2022, was introduced in January 2022 as part of the government’s strategy to finance its budget deficit through domestic borrowing. Under this regulation, commercial banks were compelled to allocate 5 percent of their annual loan disbursements to the purchase of five-year treasury bonds. According to the Ministry of Finance’s public debt records, banks have collectively invested 94 billion birr in these bonds between the directive’s inception and June 30, 2024.

The National Bank’s official statement explained that the committee’s decision to rescind this mandatory purchase requirement reflects evolving fiscal conditions in the country. Specifically, it cited a substantial improvement in the government’s revenue collection capacity and increased reliance on both external financing and market-based domestic borrowing mechanisms. The committee argued these developments reduce the need for enforced bank participation in funding the budget deficit through long-term bond purchases.

“The committee believes that it is appropriate to lift this mandatory directive imposed on banks now, given the significant improvement in the government’s revenue collection capacity, and the government’s use of external and market-based domestic borrowing options to finance its budget deficit,” the NBE statement read.

While the committee has finalized its recommendation to remove the directive, the move is pending final approval by the National Bank’s Board of Directors.

Background and Implications

The mandatory bond purchase requirement was originally introduced as an emergency measure to help the government secure predictable, low-cost domestic financing in the context of budget pressures and limited external borrowing options. Critics in the banking sector had warned that the measure reduced liquidity available for private-sector lending, potentially dampening economic activity. By lifting the requirement, policymakers hope to ease such constraints and enable banks to allocate more resources toward credit for businesses and households.

Analysts suggest that the decision may signal a broader shift in government strategy, aiming to deepen the domestic capital market and diversify financing sources rather than relying heavily on captive bank funding. However, some caution that the removal of the requirement could lead to a greater reliance on external debt or short-term market borrowing, with implications for debt sustainability and interest rates.

Continued Credit Growth Ceiling

In the same meeting, the MPC also addressed the question of credit growth in the banking system. Despite inflationary pressures in the economy, the committee chose to maintain the existing ceiling of 18 percent on banks’ annual credit growth at least until September 2018 (Ethiopian Calendar).

The central bank has enforced this credit growth limit in an effort to curb inflation and maintain macroeconomic stability. Inflation has been a persistent challenge for Ethiopia, eroding purchasing power and complicating efforts to stabilize the economy. The MPC’s decision to retain the cap reflects a cautious approach to balancing the need for economic growth with the imperative to contain price rises.