The uptake of commercial banks to buy government’s new debt instrument, treasury bonds, on a monthly basis proves beneficial as over 25 billion birr has been amassed thus far, the Finance Ministry reveals.
Whilst disclosing the third quarter performance of the 2022/23 budget year, Ahmed Shide, Minister of Finance (MoF) in his appearance at parliament disclosed that the government introduced the financial instrument to diversify its budgetary source to fill its expenditure.
It is well known that following the deterioration of budgetary support from external partners in the last couple of years, the central government had resorted to alternative policies like using domestic sources to bridge its budget gap.
As the Finance Minister explained, despite relations with foreign partners now bouncing back owing to the peace agreement signed in Pretoria, South Africa between the government and TPLF, the external financial support is yet to improve. Ahmed further cited that the financial support and credit from the World Bank is taking the biggest portion, while there are several agreements and commitments with partners to provide financial access.
In his address, the Minister applauded the support of the World Bank and highlighted that due to dry flow from external finance, the government had reluctantly resorted to using local sources like direct advance (DA) and Treasury bill (T-bill).
Ahmed stated that in order to reduce the access to direct advance, a new reform instrument had been rolled out to mobilize resources from domestic sources, “This instrument is very promising and will aid in minimizing the use of DA from the Central Bank.”
As part of the new policy, the government through the National Bank of Ethiopia (NBE) introduced a 20 percent Treasury bond that became effective on November 1, 2022.
As per the new directive ‘MFAD/TRBO/001/2022’, all banks except the Development Bank of Ethiopia (DBE), a state owned policy bank, were set to invest 20 percent of their loan portfolio in Treasury bonds, for their loans and advances.
The treasury bonds were issued to each bank on a monthly basis having a maturity period of five years with each bond having two percentage points higher than the minimum saving deposit rate which is currently at seven percent.
About three years ago, the government took a firm decision to do away with taking DA, which was one of the key elements engulfing inflation. Government planned to do by capitalizing on another instruments like T-bills to fill its budget gap. To attain the target, the T-bill market was revised to become market driven which then attracted significant players with huge amounts of finance that propelled the government to desist in using direct advance.
However, when the northern Ethiopia conflict began in November 2020, a ripple effect in the form of pressure from foreign development partners occurred which led to suspension of financial promises. The government then was derailed and ended up taking huge amounts of DA from the central bank, particularly in the past and current budget year.
At the same time, in the current budget year, the government has started using the Treasury bond as an additional alternative.
The Minister said that in the stated period, 194.6 billion birr was sourced from domestic financial instruments; DA, T-bill and treasury bond to cover the budget gap.
He said that the new instrument, Treasury bond, has now amassed 25.6 billion birr since becoming effective.
In the budget year, it was expected that USD 2.5 billion would be disbursed from development partners through loans and donations. However, only 70 percent or USD 1.8 billion was met with a breakdown of; USD 1.3 billion in loans and USD 426.3 million in grants.
“The main reason for this stems from the pressure of partners in connection with the northern Ethiopia conflict,” Ahmed said.
He added that in the budget year, about 7.7 billion birr in direct budget support was expected from development partners, but no actual flow has been registered thus far.
In the first nine months of the budget year, 29 billion birr has been paid as foreign debt to which the Minister disclosed that it covered the whole commitment that was expected to be paid. Similarly, in the stated period, the government had targeted to settle 59.4 billion birr for domestic debt, while the actual performance was 33.3 billion birr or 56 percent of the target, “The main reason for the reduction of the domestic debt payment is because some obligations were pushed to long term bonds.”
In the reporting period, the government introduced a fiscal deficit management to regulate domestic debt mainly for the conversion of T-bills to long term government bonds.
According to the Minister, in the budget year, public projects mainly roads that are projected to consume 18.2 billion birr have been transferred to the coming budget year on an aim to mitigate the public expenditure constrains.