Ethiopia’s central bank has once again resorted to an uneasy compromise. By raising the aggregate credit growth cap from 18 percent to 24 percent for fiscal year 2025/26, while postponing a full dismantling of the banking sector’s credit ceiling, the National Bank of Ethiopia (NBE) is signaling both caution and necessity. The move reflects a familiar dilemma for developing economies: how to expand liquidity to sustain investment without unleashing destabilizing imbalances.
The credit ceiling, introduced in 2023, was never a standard monetary instrument. It was a stopgap—an attempt to arrest systemic risks in a banking system whose credit flows had grown dangerously distorted. A handful of corporate borrowers had come to dominate lending, while banks, shielded by collateral-based practices, increasingly channeled funds into speculative ventures—real estate, arbitrage, and short-term trading—rather than productive investment. Small and medium-sized enterprises (SMEs), agribusinesses, and exporters were crowded out, leaving the economy with widening intermediation gaps and weakening its prospects for inclusive growth.
The NBE’s calibrated increase is therefore not simply a technical adjustment. It is a recognition that Ethiopia faces a binding liquidity constraint at a time of investment bottlenecks, fiscal tightening, and an external environment fraught with uncertainty. Raising the ceiling to 24 percent provides breathing space for banks and borrowers alike. But by keeping the ceiling in place, the central bank has retained a vital lever of supervisory discipline—an acknowledgement that in the absence of robust regulatory oversight, credit expansion could once again fuel speculative bubbles, exacerbate inflationary pressures, and deepen external vulnerabilities.
The underlying fragility of monetary transmission mechanisms in Ethiopia further complicates the policy picture. By leaving standing lending and deposit facility rates unchanged, the NBE is attempting to maintain short-term market stability. Yet this very stability risks entrenching inefficiency. Static corridor rates weaken the incentive for banks to shift away from low-risk, collateral-heavy lending. Households and firms seeking long-term, productivity-enhancing credit are left with few options, and deposit mobilization remains muted. The outcome is predictable: liquidity circulates within narrow channels, reinforcing concentration risk and leaving much of the economy underserved.
These dynamics unfold against a stubborn inflationary backdrop. Core inflation, particularly in non-tradable sectors and essential commodities, has proven resistant to headline moderation. In such an environment, unchecked credit liberalization would be reckless, stoking demand-side pressures and fueling renewed instability. Ethiopia’s precarious external position—characterized by low reserves and ongoing debt restructuring—adds another constraint. The country simply cannot afford a credit surge that translates into higher import demand and currency depreciation.
The challenge, then, is not merely to provide more credit, but to ensure that it is directed where it can have the greatest developmental impact. That requires more than a numerical ceiling. It demands rigorous enforcement of exposure limits, transparency in sectoral allocation, and mechanisms to ensure that loans are used productively rather than diverted into speculative cycles. Without such safeguards, additional liquidity will remain a nominal expansion on bank balance sheets, rather than a catalyst for structural transformation.
Forward guidance will also be essential. The NBE must define the conditions under which the ceiling will finally be removed: demonstrable improvements in non-performing loans, measurable diversification in credit allocation, and sustained moderation of core inflation. Absent such clarity, policy discretion risks becoming a source of uncertainty, undermining confidence in both the central bank and the broader financial system.
The deeper structural issue is Ethiopia’s continued reliance on its banks as the primary conduit for investment finance. With capital markets still nascent, commercial banks carry an outsized responsibility for driving economic modernization. That reality makes regulatory oversight not just a technocratic exercise, but a developmental imperative. Unless credit growth is aligned with the needs of SMEs, exporters, and sectors capable of generating jobs and foreign exchange, Ethiopia’s financial system will continue to serve the few at the expense of the many.
The NBE’s decision exposes a deeper reality: in economies like Ethiopia’s, the headline rate of credit growth is a poor measure of financial health. What matters is not how much credit expands, but where it flows, who captures it, and to what end. A 24 percent ceiling can contribute to reform only if it is embedded within a framework of strict supervision, genuine diversification of lending, and transparent forward guidance. Without these conditions, the adjustment will amount to little more than window dressing—another policy gesture that sustains concentration of finance among a narrow elite, fuels misallocation, and leaves the broader economy starved of the productive investment it urgently needs.
Mikiyas Mulugeta (PhD) is a Consultant and Director of Training and Development, Centre for African Leadership Studies (CALS) and XHub-Addis. He can be reached at mikiusc2017@gmail.com.