The government is going to collect an estimated 11 billion birr from private banks at the end of this fiscal year after the central bank ordered private banks to buy bonds worth 27 percent of their loans with an interest rate of 3 percent according to a new report released on Friday April 8, by Access Capital research team.
“Within a period of a year, there will be a very significant diversion of funds—approximately 11 billion birr—from the private sector to the government. This figure amounts to 2.4 percent of GDP and is large enough to cover nearly all of the government’s budget deficit this year” the report states.

The National Bank of Ethiopia (NBE) removed the two year long credit ceiling imposed on commercial banks of the country on April 1, 2011 with banks ordered to buy 27 percent of their annual loan disbursement in bonds.

The report further suggests that credit to the private sector, which is already low in the country, will be held back in the coming years as banks allocate funds towards NBE bills. NBE bills will not have repayments for five years, while upcoming repayments from private loans are shared with government when they are lent out again, the share of loans going to government will rise steadily over time the report further stressed. The report predicts that the government share of new loans could rise from 27 percent to 41 percent of total loans within just the next year as the loans returned will be loaned again.

The new directive also applies to gross new disbursements per month; covers all “loans and advances”; designates “National Bank of Ethiopia Bills” having five-year maturities as the sole eligible government financial instrument that private banks must purchase; applies retroactively to all private bank loans given since July 1, 2010, and excludes the Commercial Bank of Ethiopia and the Development Bank of Ethiopia.

The report also suggested that interest rates on loans offered by private banks could rise by up to 2 percentage points (from the current average of 10.3 percent to a level of 12.3 percent) unless banks choose to fully absorb the impact of the new policy themselves. “In the latter case, the burden of the new directive will be borne by the shareholders of private banks who will face an estimated 15 percent drop in profits and a 4 percentage points cut (from 27 to 23 percent) in their return on equity” the report added.

The report further criticized the move saying that contrary to the signals given in recent IMF staff reports, the expectation that the central bank would increasingly use market-based methods to regulate economic activity—such as the use of interest rates that is now the standard in most developed and emerging economies—does not appear to be under consideration any more.

The new directive indicates that funds collected from “NBE Bills” shall be used for priority sector government projects. The report noted that the bills will not be performing a sterilization function of withdrawing funds from the banking system to control the growth in money supply. Rather, the collected funds are simply being re-allocated from what would have been spending by the private sector to what will now be spending by the government, with the central bank serving as an intermediary.

‘It is clear that—even after this new directive—the central bank remains without any effective sterilization instruments of its own that could be used on a short-term basis to withdraw funds from the banking system as needed for monetary control purposes’ the report further added.

CapitalEthiopia