The federal government’s stranglehold on commercial banks via its obligatory treasury bond policy has reached new heights, with the latest debt bulletin from the Ministry of Finance revealing the debt instrument’s stock is nearing the 50 billion birr mark.
In November 2022, the National Bank of Ethiopia (NBE) introduced a policy forcing commercial banks to buy treasury bonds valued at 20 percent of their respective loan and advance disbursements. Maturing in five years, the bond offers an interest rate two percentage points higher than the minimum savings rate.
The treasury bonds are a domestic debt workaround that allow the federal government to finance its budget deficit without direct borrowing from the central bank.
The federal budget deficit sat at around 309 billion birr when the law came into effect, with a federal budget of 786 billion birr for the 2022/23 fiscal year. Bonds valued at more than 38 billion birr were auctioned off between November 2022 and July 2023.
The federal budget for this fiscal year is 802 billion birr, with the deficit standing at 281 billion birr. The federal government hopes to finance a significant portion of this deficit using the obligatory investments from commercial banks, drawing criticism from the banking industry and analysts.
Abdulmenan Mohammed (PhD) is a financial analyst based in London who keeps a close watch on the Ethiopian financial sector.
He says the obligatory treasury bond directive is a clear indication of unwarranted government intervention in the financial sector, which he believes showcases the government’s unwillingness to “play by market rules.”
“When the government needs finances, it sets the quantity and the price, and then forces the banks to supply. This makes banks very uneasy,” Abdulmenan observed. “One of the distortions it creates is that banks increase lending rates on other borrowers to compensate for the interest they lose.”
Obligatory treasury bond purchases are not new to the Ethiopian banking industry. Commercial banks were forced to shell out 27 percent of their loans and advances on treasury bonds before Prime Minister Abiy Ahmed (PhD) took the helm in 2018.
The new administration introduced several reforms to the financial sector, including the repeal of rules deemed to be stifling bank growth.
However, the relief did not last long. A few years into the reforms, the NBE re-introduced a directive on the Establishment and Operation of Treasury Bonds to help the federal government finance its chronic budget deficit.
Abdulmenan observes the first year of obligatory treasury auctions may not have severe consequences for banks, noting that commercial banks shifted huge amounts of finance placed in treasury bills into the five-year treasury bonds.
“After the first year, the investment in five-year bonds will affect their lending activities, liquidity, and interest income,” warned the analyst.
Other recent NBE restrictions limiting the growth of credit disbursed by banks to 14 percent annually will also likely reduce the amount they are required to spend on the five-year bonds.
Abdulmenan argues officials need to find other ways to finance the budget deficit.
“The experience with treasury bills is that the government repays them in time by raising funds through issue of new treasury bills,” he said.
The Finance Ministry’s debt bulletin reveals the state-owned Commercial Bank of Ethiopia (CBE) covers 26 percent of the 48.3 billion birr in treasury bonds held by the banking industry.