By Samson Tsedeke| Business & Investment Analysis | September 30, 2025

The National Bank of Ethiopia (NBE) has chosen a cautious but firm path in its fourth Monetary Policy Committee (MPC) meeting of 2025. While inflation has eased from last year’s highs, the economy still battles structural weaknesses and global headwinds. The decision to maintain a tight policy rate but slightly expand credit ceilings reflects Ethiopia’s attempt to balance two competing imperatives: stability and growth.

Inflation Eases, But Remains Elevated

Ethiopia has made tangible progress in cooling inflation, with headline inflation falling to 13.6% in August 2025, compared to 18.8% a year earlier. The most significant relief came from food inflation, which dropped to 12.7%, supported by favorable harvests and government adjustments in administered prices. However, non-food inflation remains stubborn at 15.1%, reflecting the burden of imported inflation — especially fuel, industrial inputs, and construction materials — passed through from global prices and the weaker birr.

Implication: While consumers are beginning to feel some relief in food markets, urban households remain squeezed by persistently high costs of rent, fuel, and manufactured goods. For policymakers, this underscores the difficulty of breaking Ethiopia’s structural inflation cycle, where external shocks quickly feed into domestic prices. The country’s medium-term target of single-digit inflation remains out of reach without deeper reforms in logistics, agriculture, and import substitution.

Growth Momentum: Resilient but Uneven

Despite restrictive monetary conditions and high borrowing costs, Ethiopia’s economy is showing resilience. Agriculture continues to underpin the economy, while gold and coffee exports provide a lifeline to foreign exchange earnings. The services sector, led by air transport and tourism, has rebounded strongly, indicating renewed confidence after years of instability.

Yet the industrial sector tells a different story: imports of semi-finished goods and consumer products have slowed, suggesting stress in supply chains and constrained industrial activity.

Strong sectors: Agriculture, mining (especially gold), air transport, tourism. Weak spots: Import-dependent manufacturing, consumer goods, and semi-finished products.

Implication: Ethiopia’s growth model remains commodity-driven and vulnerable to shocks. Without structural acceleration of industrialization, the country risks entrenching a cycle where agriculture and resource exports finance consumption but fail to generate broad-based, high-productivity jobs.

Credit & Banking: Controlled Expansion

Monetary aggregates are expanding rapidly, with broad money up 23.1%, base money 70.7%, and domestic credit 14% year-on-year. Despite this, Ethiopia’s credit ceiling policy has successfully contained excessive liquidity growth, preventing overheating.

The banking sector remains sound, with low non-performing loans (NPLs), but liquidity is tight. High loan-to-deposit ratios limit banks’ ability to expand lending, forcing them into aggressive deposit mobilization. To ease pressure, the NBE has introduced a Standing Lending Facility and strengthened interbank money markets.

“The banks are safe, but not liquid. Credit remains rationed, and businesses will continue to feel the pinch.”

Implication: Ethiopian banks are financially stable but face liquidity stress, which translates into restricted access to loans for businesses. For SMEs in particular, credit remains prohibitively expensive or inaccessible. This controlled expansion benefits macro stability but risks strangling private investment — the very driver of future growth.

Fiscal & External Balance: A Bright Spot

The government has maintained fiscal discipline, notably refraining from borrowing from the central bank — a marked shift from past monetized deficits. On the external side, Ethiopia’s performance is encouraging:

Exports: Gold and coffee remain robust, anchoring foreign exchange earnings. Remittances: Significant inflows continue to support household consumption and FX reserves. Services: Transport and tourism are delivering net gains. Balance of Payments: A current account surplus has been maintained, reinforcing the birr and giving NBE room to defend reserves.

This external stability buys NBE some flexibility in monetary management. However, the heavy reliance on gold and coffee underscores Ethiopia’s vulnerability to commodity price swings and external shocks.

Implication: While the external surplus is a short-term strength, the lack of export diversification remains a structural weakness. Ethiopia must urgently expand into value-added exports — textiles, agro-processing, light manufacturing — to reduce its exposure to global commodity volatility.

MPC Decisions: A Tightrope Walk in the Ethiopian Context

The NBE’s latest decisions reflect Ethiopia’s attempt to shift from crisis management to a more measured, medium-term monetary framework. Each decision carries significant implications for the domestic economy.

Policy Rate Maintained at 15% Keeping the policy rate at 15% is restrictive by design. For Ethiopian borrowers, this means loans remain costly, whether for businesses seeking working capital or households financing durable goods. Unlike in developed economies, where credit markets are deep and diverse, Ethiopia’s financial sector is bank-dominated, making this rate a central anchor. By holding the line, NBE signals its determination to anchor inflation expectations. Implication: Businesses that rely on bank financing — such as manufacturing firms, importers, and property developers — will continue to face high financing costs. While this dampens speculative borrowing and import-driven inflation, it also constrains private investment at a time when job creation is urgently needed. Credit Growth Ceiling Lifted from 18% to 24% This adjustment reflects a cautious opening of credit space. Ethiopian banks have faced strict caps on loan expansion, limiting their ability to fund private enterprises. Raising the ceiling provides breathing room for priority sectors, such as agriculture, manufacturing, and export-oriented industries, without fully removing safeguards. Implication: For banks, this allows selective growth in their loan books, but they must balance deposit mobilization with liquidity constraints. For businesses, particularly SMEs, the impact will be uneven: larger firms with established banking relationships will benefit first, while smaller firms may still find access restricted. For the broader economy, this move acknowledges the urgent need to stimulate investment without fueling runaway inflation. Market-Based Tools Expanded By signaling broader use of open market operations, FX interventions, and reserve requirement adjustments, NBE is edging toward modern central banking practice. Historically, Ethiopia relied heavily on direct controls — credit ceilings, administered interest rates, and selective lending quotas. This shift toward indirect, market-based instruments suggests the central bank is preparing to operate with more sophistication as the financial sector deepens. Implication: Investors, both local and foreign, will see this as a step toward credibility and transparency. However, successful implementation will require stronger interbank markets, more developed financial infrastructure, and consistent communication to avoid destabilizing shocks.

Global Context: Fragile Tailwinds for Ethiopia

Ethiopia’s economy does not operate in isolation. Global dynamics present both risks and opportunities:

Risks: A strong U.S. dollar raises the cost of servicing Ethiopia’s external debt and inflates the local price of imports, from fuel to pharmaceuticals. U.S. tariffs and global trade frictions threaten Ethiopia’s nascent industrial exports under initiatives such as the African Continental Free Trade Area (AfCFTA) and AGOA (if restored). Volatile oil prices, combined with Ethiopia’s dependence on imported fuel, can quickly transmit into local inflation and foreign exchange pressures. Opportunities: Falling global food and energy prices may help ease domestic inflation, particularly in urban areas where non-food inflation has been stubbornly high. Improved financial flows to emerging markets, should global rates stabilize, may offer Ethiopia room to attract concessional borrowing or foreign investment.

Business Implications in Ethiopia

For Businesses: Access to credit will improve slightly but remain expensive. Import-dependent sectors — from construction to retail — must factor in foreign exchange volatility and rising global costs when planning. Local producers with export potential stand to benefit most. For Banks: The modest credit expansion offers growth, but competition for deposits will intensify as liquidity remains thin. Innovation in deposit products and digital financial services will become crucial. For Investors: Ethiopia’s gradual embrace of market-based monetary operations improves credibility. Yet, the unpredictable birr exchange rate and inflationary risks will keep many foreign investors cautious. For Households: While food inflation is easing, household budgets remain strained. Non-food inflation — rent, transport, fuel, manufactured goods — continues to erode real incomes.

Strategic Outlook for Ethiopia

Ethiopia’s monetary policy is credible in its intent but vulnerable in its execution. The country faces a classic trade-off: restrain inflation to protect stability, or loosen credit to spur growth and job creation. Success will depend on three key pillars:

Driving Inflation into Single Digits by 2026 This requires not only tight monetary policy but also improvements in agricultural productivity, logistics, and import substitution to reduce food and import-driven price pressures. Easing Banking Liquidity Without Destabilization The high loan-to-deposit ratios in Ethiopian banks reveal a structural funding challenge. Addressing this requires not just central bank liquidity facilities but broader reforms to deepen savings mobilization and expand financial intermediation. Sustaining FX Reserves Ethiopia must diversify exports beyond gold and coffee, attract more FDI, and manage remittance channels effectively. Maintaining a current account surplus is critical to keep the birr stable and support monetary policy credibility.

Conclusion: A Rare Balancing Opportunity

If Ethiopia maintains discipline, it could achieve what few African economies manage: simultaneous price stability and moderate growth. But the margin for error is thin. A premature policy loosening, unresolved banking liquidity issues, or an external shock could easily derail progress.

For businesses, banks, and investors, the message is clear: Ethiopia remains a high-risk, high-potential market where policy discipline and external stability will dictate opportunities in the next 18–24 months.