% annual growth rate:
Sources: M2 from National Bank of Ethiopia and nominal GDP from IMF database, as at February 2022
The medium-term relationship between money and nominal GDP growth in Ethiopia, 1963-2018
Five-year moving averages of annual % changes, with 1961 being the start of the first five-year period
Comment on monetary trends in Ethiopia
Banking began in Ethiopia in 1905 with the inauguration of the Bank of Abyssinia, which was totally managed by the British-owned Egyptian National Bank. Ethiopia had no independent banks until 1931 when the Bank of Ethiopia began operations, the first indigenous bank in Africa. It was not a central bank but did have the authority to issue notes and coins. The late 1930s were a turbulent time for the country, following its invasion by Italy, which allowed its banks to open branches in the country. After liberation, the State Bank of Ethiopia came into being in 1943, the country's first central bank. It also functioned as a commercial bank and not until some 20 years later was central banking separated from commercial banking, with the establishment of the Commercial Bank of Ethiopia and a new central bank, the National Bank of Ethiopia. Other commercial banks also came into being during this decade.
In the 1970s, the country entered a period of severe political turbulence following the deposition of the Emperor Haile Selassie in a military coup. Most of the country's businesses and infrastructure were nationalised. GDP growth did pick up in the late 1970s but the whole country was severely affected by a famine in 1984-5 which killed over 1 million people. Many others died during the 1970s and 1980s either in government purges or as a result of a war with Somalia.
The collapse of the Soviet Union in 1991 saw Ethiopia gradually abandon hard-lime Marxism and launch a programme of privatisations. The country is still plagued by inter-ethnic conflicts, but the economy has picked up, with substantial foreign direct investment in recent years. Until recently, the economy was dominated by subsistence farming but there is now a growing services sector as well as a textile industry.
The transition to a market economy has unfortunately been accompanied by periods of severe inflation, which rose to over 60% in 2008-9 on the back of broad money growth rising to over 44%. Broad money growth hit 25% in 2020 and inflation predictably rose in its wake, reaching 35% in late 2021. The Central Bank's principal target is exchange rate stability, while at the same time supporting sustainable economic growth. It certainly faces some tough challenges as the country seeks to recover from the effects of the coronavirus pandemic, which hit the country's economy badly, especially the important flower exporting sector.