Pexa: draft proposes cut in exchange reserve requirement of ~20%

The National Bank of Ethiopia (NBE) has proposed a significant reduction in the exchange reserve requirement, potentially by approximately 20%, as part of a broader effort to address liquidity challenges in the banking sector. The draft directive aims to enhance financial stability by introducing a lagged reserve system, consolidating reserve and payment accounts into a single payment and settlement account. This change is expected to improve interbank lending and provide greater flexibility for banks managing liquidity constraints.

Under the new framework, a minimum daily reserve of five percent will be automatically blocked, with excess funds available for use by banks. The NBE will continue to maintain an average reserve requirement of seven percent, but this will now be calculated based on monthly deposit averages rather than real-time balances, offering greater predictability for institutions.

The proposed changes come amid broader reforms, including a credit growth cap and inflation management measures. While regulators anticipate benefits for the sector, some observers have raised concerns that the minimum reserve requirement could place additional pressure on smaller banks already facing capital-raising challenges. The directive is currently open for industry feedback and is expected to be implemented soon.