This is a presentation by Mr. Muluneh Ayalew, Director, Monetary and Financial Analysis Directorate, National Bank of Ethiopia, at the 3rd Annual East Africa Finance Summit

1. Presentation Prepared for the 3rd Annual East Africa
Finance Summit
18 December 2018

2. Outline
 Introduction
 National Bank of Ethiopia as a Monetary Authority
 Monetary Policy Regime in Ethiopia
 Monetary Indicators in Ethiopia and Neighboring
Countries
 Concluding Points

3. Introduction
 Monetary economics focuses on the
behavior of: prices, monetary aggregates,
nominal & real interest rates and exchange
rate, and output.
 Monetary policy: how central banks manage
liquidity.
 Liquidity is how much there is in the money
supply, that includes credit, cash, and checks

4. National Bank of Ethiopia as a
Monetary Authority
 In Ethiopia monetary policy management is
the responsibility of NBE.
 NBE’s purpose (as per Proclamation #
591/2008) is to:
 maintain stable rate of price and exchange
 foster a healthy financial system and
 undertake such other related activities as are
conducive to rapid economic development of
Ethiopia.

5. National Bank of Ethiopia as a
Monetary Authority
 NBE’s purpose (as per Proclamation #
83/1994) is to foster:
 monetary stability
 a sound financial system, and
 such other credit and exchange conditions
as are conducive to the balanced growth of the
economy.
 Regarding credit to government the
contemporary proclamation is discretionary.

6. Monetary Policy Regime in Ethiopia
 To attain its objectives, NBE currently
operates with the reserve money as
operating target and broad money as an
intermediate target.
 Before the start of any fiscal year, NBE
prepares a financial program and sets
annual targets for reserve money [and broad
money as well] consistent with real, fiscal
and external sector targets.

7. Monetary Policy Regime in Ethiopia
 The National Bank of Ethiopia uses both direct
and indirect monetary policy instruments
i) Direct Instruments of Monetary Policy
 1) Credit Ceiling
 Was a case during as recently as in 2017/18
 2) Interest Rate
 Still NBE controls the minimum interest rate on saving and
time deposits, which currently is 5 percent per annum.

8. Monetary Policy Regime in Ethiopia
ii) Indirect Instruments of Monetary Policy
 1) Reserve requirement
 The NBE changes the requirement based on
macroeconomic situation.
 Currently all commercial banks are required to maintain
a reserve requirement to the tune of 5 percent of their
deposit balance.
 The last time the requirement was changed is in 2013
when it was reduced from 10 percent because of within-
target performance of inflation.

9. Monetary Policy Regime in Ethiopia
2) Treasury bills
 In Ethiopia there are 4 types of T-bills:
 28-days, 91-days, 182-days and 364-days
 It is a government debt instrument used for both fiscal
and monetary policy purposes.
3) Intervention in the foreign exchange
market
 By selling or buying FX, NBE influences the
magnitude of money in the economy

10. Monetary Indicators in Ethiopia
and Neighboring Countries: M2
-
10.0
20.0
30.0
40.0
50.0
Kenya Uganda Rwanda Ethiopia

11. Monetary Indicators in Ethiopia
and Neighboring Countries:
Inflation
(5.0)
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Kenya Uganda Rwanda Ethiopia

12. Monetary Indicators in Ethiopia and
Neighboring Countries: Unemployment
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Kenya Uganda Rwanda Ethiopia

13. Monetary Indicators in Ethiopia
and Neighboring Countries: GDP
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Kenya Uganda Rwanda Ethiopia

14. Ethiopia: Correl. = 0.886
-
10.0
20.0
30.0
40.0
50.0
2010 2011 2012 2013 2014 2015 2016 2017
Inflation M2

15. Kenya: Correl. = 0.085
-
5.0
10.0
15.0
20.0
25.0
2010 2011 2012 2013 2014 2015 2016 2017
Inflation M2

16. Uganda: Correl. = -0.234
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2010 2011 2012 2013 2014 2015 2016 2017
Inflation M2

17. Rwanda: Correl. = -0.570
(5.0)
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2010 2011 2012 2013 2014 2015 2016 2017
Inflation M2

18. Concluding Points
 Money growth higher in Ethiopia
 Inflation in Ethiopia higher and had a higher
correlation with money supply.
 Unemployment rate as estimated by ILO
doesn’t indicate the monetary stance.
 GDP growth higher in Ethiopia
 Sustaining the higher GDP growth and
controlling monetary expansion needed.

19. Concluding Points
 To achieve this, NBE shall be strengthened
and a rule based monetary policy needed.
 A government (even in good faith) may want
to maximize the welfare of its citizens but it
ends up making everybody worse off
 A way out is the adoption of rules or
commitment

20. Concluding Points
 Two commitments regarding monetary
policy: central bank independence and
appointing a conservative central banker
 This is all the more true for those countries
where there is fiscal dominance: central
bank independence is a way to reduce access
to seigniorage and force fiscal adjustment