Government’s domestic burden still ‘a thorn in the flesh’

The newly rolled out Treasury bond purchased by commercial banks contributes to over seven billion birr in investment under a short window.
Despite the external debt showing reduction, government’s domestic burden continues to surge.
Following deterioration of budgetary support from external partners in the last two years, the central government has resorted to alternative policies like using domestic source to bridge its budget gap.
As part of the new policy, the government through the National Bank of Ethiopia (NBE) introduced 20 percent Treasury bond that became effective on November 1, 2022.
As per the new directive ‘MFAD/TRBO/001/2022’, all banks except Development Bank of Ethiopia (DBE), a state owned policy bank, are set to invest 20 percent of their loan portfolio treasury bond for their loans and advances.
The treasury bonds that shall be issued to each bank on a monthly basis have a maturity period of five years and each bond has two percentage points higher than the minimum saving deposit rate that is now seven percent.
The latest debt analysis that Ministry of Finance (MoF) published indicated that in the first two months since the Treasury bond directive became effective, banks have purchased about 7.1 billion birr worth of bonds from the government. However experts said that it is not clear if it is inclusive of the November and December purchase amount, while MoF’s document stated that the new instrument was introduced in December, 2022.
According to the MoF bulletin that covered the first half of the budget year, which ended on December 31, 2022 banks purchased USD 133 million under the new scheme.
Experts recalled that the directive became effective in the fifth month of the budget year so the investment covers the last two months of the half year. However they said that the amount mentioned was small.
“The amount is not big. The period accounted came at a time when banks new loan disbursement was very minimal due to that the investment on the new bond was less,” they explained signaling their expectation that the amount shall mushroom when banks’ liquidity capacity stands on better grounds leading to loan disbursement increment.
“When the new disbursement increases, investment on bonds will skyrocket,” they elaborated.
A bank president said that so far the banks had purchased four round bonds since the directive was issued in November last year.
“I don’t know whether the MoF document included the bond purchase for December 2022 or not. We purchased the first bond that is for November in December and for December in January 2023. So it may not be clear what they include on their report for the purchase done in January,” he said.
The treasury bond, which is also called a medium term government bond is the second by its nature according to experts who compared the latest government move with the ‘MFA/ NBEBILLS/001/2011’ directive introduced in April 2011 which forced private banks to buy 27 percent of NBE bills of their individual loans and advance disbursements at a maturity of two percent lesser saving deposit interest rate. The NBE bills directive was effective for eight years and seven months up until its scuffing in November 2019.
For the 2022/23 budget year that started on July 7, 2022, parliament approved 786.6 billion birr and of that 308.8 billion birr or 39.3 percent was a deficit.
On the budget document, the government stated that from the total 308.8 billion birr budget deficit 266.1 billion birr or 86 percent is projected to be covered by domestic debt.
The budget deficit is now 3.4 percent of the GDP, which is higher from the recommended about three percent of the GDP.
In the reported period, the direct advance (DA), a government overdraft from the central bank, has also shot up.
The MoF bulletin stated that as at October 7, 2022 the total outstanding of DA which was 236.5 billion birr was converted into long term bond, “And after the conversion, a new DA was issued which amounted to 40 billion birr.”
However in the first quarter of the 2022/23 budget year, the government has taken 60 billion birr as DA from NBE.
Following the decision to convert the DA to long term bond interest bearing government bond has climbed by 123 percent to stand at 428.8 billion birr from 192.2 billion birr in June 2022.
Due to that the interest bearing government bond took 25.5 percent share of the total domestic debt that was 12.6 percent six months ago.
The overall external debt of the public sector was USD 27.8 billion as of December 31, 2022, down from USD 27.9 billion as of June 30, 2022.
The fluctuation in the value of the US dollar relative to other currencies is one of the main causes of the decline; a stronger dollar reduces the stock of external debt in terms of USD, and a relatively higher principal payment during the period compared to disbursement is another reason for the decline.
A total of 69.3% of the country’s external debt is owed by the central government, while 21.2 and 9.5 percent, respectively, are owed by state owned public enterprises (SOEs) that have received government guarantees and non-guarantees.
According to the MoF document external public sector debt disbursements totaled USD 543.02 million from July 1, 2022, to December 31, 2022. This financing benefited mainly central government projects. The total amount of external finance disbursed over the last year and a half was lower than the previous three years same period.
“One of the factors contributing to the decrease in total external debt disbursement is the fact that SOEs, with the expiation of EAL, have not obtained out a new loan in the last four years, and they are disbursing for their older projects less and less as they near completion while the amount of money disbursed to them declines,” it added.
Between July 1 and December 31, 2022, USD 974.05 million in principal, interest, and fees related to servicing the external public sector debt were paid.
The net external debt resource flows from July 1, 2022 to December 31, 2022 (Disbursement-Principal payments) are negative (USD -198.35 million), indicating that the total amount of disbursement from creditors of external sources is less than the total amount of principal payments made to creditors of external sources.
However, the external debt burden is reducing with several challenges including hard currency shortage and low inflow as the domestic debt is contributing to spike the government debt to surge.
The total domestic debt as of December 31, 2022 was 1.68 trillion birr, a 10 percent increase from 1.53 trillion birr as of June 30, 2022. In terms of birr, it increased by close to 150 billion birr from the end of last budget year.
In the reported period, SOEs hold 41 percent of total public domestic debt, with the Central government holding the remaining 59 percent.
Currently, the central government share is increasing against SOEs.