The National Bank of Ethiopia (NBE) has announced that it will suspend the two mandatory bond instruments that banks were required to buy, even though it anticipated that Treasury bonds (T-bonds) alone would bring in 50 billion birr during the current fiscal year.
Regarding the introduction of the economic reform program on July 29th, the administration has pledged to implement several changes throughout the economy, including the banking sector.
Following a deal negotiated with international partners, such as the International Monetary Fund (IMF), the central bank has committed to suspending T-bonds by the end of this year and Development Bank of Ethiopia (DBE) bonds by the end of 2025, respectively.
Experts, including bankers, have applauded the action, stating that it will help the finance sector have enough liquidity.
The goal of the agreement between Ethiopian authorities and the IMF is to build the market for longer-dated government securities by gradually eliminating the requirement for commercial banks to acquire 5-year T-bonds at sub-market interest rates by the end of June 2025.
According to the agreement, the government will gradually phase out the requirement for commercial banks to acquire 5-year T-bonds by the end of June 2025.
In addition, NBE states that banks will be expected to purchase 50 billion birr of 5-year T-bonds at a 9 percent interest rate in the 2024/25 fiscal year.
Authorities have stated that the government intends to develop the market for longer-dated government securities exclusively through market-based mechanisms.
Additionally, the agreement stipulates that the requirement for financial institutions to buy DBE bonds will be eliminated prior to the Fund program’s fifth review.
The fifth review, known as the performance criteria period, will take place in April 2025.
Future domestic funding requirements will be met by market-oriented tools, according to government plans.
“The government’s net domestic financing is projected to shift predominantly to T-bills with market-determined interest rates, while SOEs are assumed to issue medium- to long-term bonds,” the document shared by the authorities and foreign partners states.
As required by the ‘Investment on DBE Bonds Directive No. SBB/81/2021,’ which went into effect on September 1, 2021, a commercial bank must invest at least one percent of all outstanding loans and advances each year in DBE bonds.
This investment requirement will continue until the total amount of bonds held by the commercial bank equals 10% of all outstanding loans and advances. Interest on DBE bonds is paid yearly, and the bond has a three-year maturity period beginning on the issue date.
The bond will pay a rate that is at least two percentage points greater than the minimum interest rate provided on a savings account at the time of issuance.
With the exception of DBE, a state-owned policy bank, all banks are required under the T-bonds directive (MFAD/TRBO/001/2022) that will become effective on November 1, 2022, to spend twenty percent of their fresh loan and advance disbursement on T-bonds.
Monthly T-bonds with a five-year maturity length and an interest rate two percentage points greater than the current minimum savings deposit rate of seven percent will be distributed to each bank.
The stock value of T-bonds, a domestic debt instrument that is 22 months old, was 80.3 billion birr as of March 31, 2024.
Bankers and financial industry specialists, such as former bank president Eshetu Fantaye, believe that the suspension of bonds is essential for banks to increase their liquidity.
The financial sector guru claims that “banks are currently struggling with a shortage of liquidity” and that “even today they are in a shortage of hands to buy foreign currency from the market.” Eshetu told Capital, “Of course, the bond suspension will have a significant contribution for them.”
Source: NBE to suspend mandatory bond purchases for banks, aiming to boost liquidity
