The National Bank of Ethiopia (NBE) released its second annual Financial Stability Report in November 2024, providing a comprehensive assessment of the country’s financial health up to June 2024, with additional updates through September 2024. This report builds on the findings of the April 2024 report, highlighting key developments in Ethiopia’s financial system amidst ongoing reforms and global challenges.
Global and Domestic Economic Context
The November report identifies multiple global challenges, including the war in Ukraine and conflicts in the Middle East, as significant external risks affecting Ethiopia’s economy. These external pressures were also noted in the April report, which primarily focused on the war in Ukraine and the impact of global monetary tightening to combat inflation.
Despite these global headwinds, Ethiopia’s economic growth projections have been revised upwards. The IMF’s October 2023 forecast of 6.2% GDP growth for 2024 was updated in October 2024 by the Ministry of Planning and Development, projecting an 8.4% growth rate for the 2024-2025 fiscal year. Contributing factors include the peace dividend, a rebound in tourism, and liberalization measures.
Inflation Trends and Contributing Factors
Inflation remains a critical concern for Ethiopia. The April report recorded an inflation rate of 33.8% in December 2022, with projections of 24.5% by the end of 2023 and 18.5% by the end of 2024. By June 2024, inflation had declined to 19.9%, further dropping to 17.5% in September 2024, as noted in the November report.
The November report attributes this downward trend to several factors, including the delayed effects of exchange rate adjustments and the influence of the parallel market exchange rate on consumer prices. The introduction of a market-determined exchange rate in July 2024 is expected to have short-term inflationary effects, but the report projects inflation to decrease to 12% by June 2026.
Banking Sector Performance and Reforms
The banking sector accounted for 96.5% of Ethiopia’s total financial assets in June 2023 and 96.1% in June 2024, as detailed in both reports. The November report emphasizes the sector’s stability, highlighting strong capitalization and profitability despite challenging conditions.
One notable development is the resolution of the Commercial Bank of Ethiopia (CBE), recognized as a systemically important institution. While the November report does not provide detailed information on the resolution, it underscores the sector’s resilience in adapting to changes.
The November report also anticipates the launch of the Ethiopian Securities Exchange by the end of 2024, marking a pivotal step in Ethiopia’s financial development and offering new opportunities for capital market expansion.
Policy and Regulatory Reforms
The November report outlines several key policy and regulatory reforms undertaken by the NBE:
- Market-Based Monetary Policy: The NBE has shifted its monetary policy framework to prioritize price stability, introducing the use of a policy interest rate as a signaling tool, bi-weekly monetary auctions, and overnight lending and deposit facilities.
- Foreign Exchange Reform: A market-determined exchange rate system was introduced in July 2024 to address balance of payments vulnerabilities and improve the exchange rate regime.
- New Directives: To address emerging risks, the NBE implemented directives focusing on large exposures, related-party transactions, liquidity risk management, and governance standards for bank directors and management.
Challenges and Emerging Risks
The November report identifies several risks to Ethiopia’s financial stability:
- Credit Risk: Both reports highlight credit risk as a concern. The November report notes potential increases due to internal conflicts and a deteriorating external sector. However, the role of state-owned enterprises in the loan portfolio mitigates this risk to some extent.
- Liquidity Risk: The November report describes moderate liquidity risks, with potential increases in the short and medium term. High deposit concentration, particularly from state-owned enterprises, is identified as a vulnerability.
- Market and Foreign Exchange Risk: Moderate but increasing market risks are associated with rising domestic interest rates and the depreciation of the birr following the exchange rate reform. Despite these challenges, the banking sector has demonstrated resilience.
The NBE’s Financial Stability Report provides a detailed account of Ethiopia’s financial system’s performance. The report highlights the impact of global challenges, ongoing reforms, and emerging risks while documenting significant achievements, including the decline in inflation and the introduction of key policy measures. The forthcoming launch of the Ethiopian Securities Exchange and continued regulatory changes signal the potential for further strengthening Ethiopia’s financial system in the coming years.
You can find the full report here: Financial Stability Report_NOV2024
