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Mushe Semu warns that the new National Bank policy could harm consumers. (Full commentary available here)

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On July 6, 2018, the National Bank of Ethiopia announced in a press release following the Monetary Policy Committee No. 7 meeting that it had completely lifted the credit ceiling and increased the policy interest rate from 15 to 16 percent, while other issues remained unchanged. 

The National Bank’s previous policy of limiting the credit ceiling was used to limit the purchasing power and demand created through new loans and to limit the additional money created through loans, money circulation and velocity, and to combat inflation.

According to the policy issued by the National Bank today, when the credit ceiling was imposed, the movement was restricted and the large amount of money accumulated in commercial banks was exhausted and the opportunity was given to borrow at high interest rates and with close to zero risk.

This means that the National Bank, in accordance with the policy issued today, is using the almost zero risk of selling and borrowing through the Overnight Deposit Facility and Treasury Bills (T-Bills) as an advantage and by providing high interest rates, the private sector will accumulate the money that it already had to borrow, thereby using its competitive advantage to reduce the borrowing capacity of the private sector. (It is worth examining how the income can be generated since it requires additional income to pay the interest)

Instead of lending to the private sector at high risk, commercial banks should deposit most of their loans to the government in the form of Overnight Deposit Facility and Treasury Bills (T-Bills) at the National Bank and lend them at relatively high interest rates and close to zero risk. It is expected that after exhausting their entire lending capacity and lending to the National Bank, they will increase their remaining lending capacity to satisfy the credit hunger created in the private sector due to the ceiling that has been closed until now and lend to the private borrower at a new interest rate. 

Since the private sector is in a credit crunch and cannot operate without credit, instead of closing down the company, it is expected that it will accept the high interest rates charged by private banks and transfer the interest debt to the consumer, thereby taking the remaining loan in installments. 

As mentioned above, although the credit ceiling for private banks has been completely lifted through this policy, since the National Bank has increased the interest payment rate to 16%, the credit flow will flow to the National Bank, and the private sector will not be relieved of its credit crunch. 

In the short run, the consumer will be exposed to further inflation due to the forward shifting of costs in the private sector, and the cycle will continue to intensify. 

Another important issue that should be raised here is the question of what the National Bank will use the large amount of money that the banks have accumulated due to their failure to lend it out, by borrowing it from the private sector at a relatively high interest rate (16%)?! For non-value-added projects, for war, subsidies, salaries, etc., or for current expenses such as aid and loan payments to financial institutions... The result remains to be seen!!