allAfrica.com: Ethiopia: Monetary Developments During the Last Quarter of 2006/07 (Page 1 of 2)

During the fourth quarter of 2006/07, inflation continued to be the major challenge for monetary policy, largely associated with structural factors. In order to curb the inflationary pressure, the National Bank of Ethiopia (NBE) has continued to limit its lending to the central government and mop-up excess liquidity of commercial banks through sale of T-bills.

The latest report of NBE shows that broad money supply (M2) reached 56.7 billion birr at the end of the fourth quarter of 2006/07, indicating a quarterly and annual growth rate of 6.3 percent and 22.2 percent, respectively. This was driven by both domestic credit expansions and buildup in net foreign assets. On an annual basis, domestic credit expanded by 25.5 percent, mainly due to 31.1 percent increase in credit to the non-government sector, which was in line with the policy of the government to encourage private investment activities.

On the liability side, the fourth quarter of 2006/07 witnessed increases in all component of broad money. Narrow money, which comprises both currencies in circulation and net demand deposits, grew by 24.4 percent. Quasi-money, that includes both savings and time deposits, also showed an annual growth rate 19.8 percent. Significant growth was registered in time deposits (59.6 percent) followed by demand deposits (28.4 percent), presumably reflecting the higher interest rates paid by banks on time deposits as compared to saving deposits and the surge in transactions demand for money. Average time deposit rate was one percentage point higher than that of savings deposit by end 2006/07.

Reserve money reached 27.4 billion birr at the end of the fourth quarter of 2006/07, expanding by 11.1 percent on quarterly basis and 29.4 percent annually. The expansion in reserve money was largely related to increases in commercial banks' deposits at the NBE by 15.6 percent over the previous quarter and by 41.8 percent annually. Currency in circulation also grew but at a relatively moderate rate of 7.7 percent and 20.8 percent, on a quarterly and annual basis, respectively.

Excess reserve of commercial banks stood at 9.1 billion birr at the end of the review quarter, up by 19.1 and 44.4 percent vis-à-vis the preceding quarter and the same period of last year mainly due to higher collection of loans (over 40 percent increase) and the decline in treasury bills (T-bills) outstanding of commercial banks. During the review quarter, the composition of broad money remained stable except for a marginal change compared with the same period last year. Accordingly, ratio of narrow money to broad money rose from 51.3 percent in the same period of last year to 52.4 percent in the review quarter. Mirroring this development, the ratio of quasi-money to broad money declined to 47.6 percent from 48.7 percent last year. Reflecting the surge in excess reserves of commercial banks and currency in circulation, money multiplier tended to decline in the review quarter. Narrow money multiplier declined to 1.08 from 1.13 in the previous quarter. Similarly, broad money multiplier slowed down to 2.07 from 2.16 in the previous month.

The review quarter witnessed no significant changes in the interest rate structure of commercial banks. Average savings deposit rate remained at 3.08 percent, which was close to the minimum deposit rate of 3.0 percent. Meanwhile, weighted demand deposit rate and weighted time deposit rate slightly increased from 0.05 and 4.05 percent in the preceding quarter to 0.06 percent and 4.08 percent in the review quarter, respectively. Average lending rate of commercial banks also remained unchanged at 10.5 percent, as the maximum and minimum lending rates stood at 14 and 7 percent, respectively. Compared with annual core (non-food) inflation of 15.2 percent at the end of the review quarter, all interest rates, including weighted average yields on T-bills, government bond yields and average real cost of borrowing (real lending rate) remained negative in real terms.

The financial sector in Ethiopia mainly consists of the banking system, insurance companies and micro-finance institutions. There are eleven banks operating in the country, of which eight are private commercial banks. A total of seventeen additional bank branches have been opened during the fourth quarter of 2006/07, raising the total number of bank branches throughout the country to 487. Consequently, the ratio of bank branches to total population reached 158,372 which still shows that Ethiopia is one of the under-banked countries in sub-Saharan Africa. The distribution of bank branches indicates that 38 percent are located in Addis Ababa. Out of the total number of bank branches, the share of private banks was 47.6 percent compared to 43.9 percent a year earlier.

At the end of the fourth quarter of 2006/07, the total capital of the banking system reached 9.3 billion birr, indicating a quarterly growth of 30.2 percent. The share of private banks went down to 31.5 percent compared with 35.2 percent a year ago, largely reflecting the substantial rise in the paid-up capital of the Commercial Bank of Ethiopia. In the meantime, the number of insurance companies remained at the previous quarter level of nine, while the number of their branches increased by 3 to 146 by the end of the fourth quarter of 2006/07. This means that in Ethiopia one insurance branch serves over 520,000 people. Of the total, 48.6 percent of the insurance branches were located in Addis Ababa. Private insurance companies accounted for 75.3 percent of the total branches.

The total capital of the insurance industry grew by 3.5 percent over the previous year to 522 million birr. The share of private insurance companies in total capital remained at 59.4 percent in the review period, almost similar to their share a year ago. With the establishment of a new micro-finance institution (MFI), Lefayeda and Saving Institution, the number of MFIs in the country reached 28, out of which 11 (or 39.3 percent) were located in Addis Ababa. MFIs mobilized total deposits of 1.04 billion birr, which was 12.9 percent higher than the amount mobilized in the previous quarter. Similarly, the outstanding loans of the MFIs grew by 17.3 percent on a quarterly basis and reached 2.74 billion birr at the end of the fourth quarter.

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