Radar | Feb 01,2020
Directors of the the Commercial Bank of Ethiopia (CBE) have asked the Ministry of Finance to provide over 90 billion Br to address its credit demand, which has not been quenched by mobilised deposits.
The board of directors of the state-owned Bank, which holds a large sum of state-owned enterprise (SOE) debt, has made the request as a liquidity buffer to cover operational costs and disburse new loans. So far, the Bank has received 33 billion Br in two tranches in response to its application from the central bank and the Ministry of Finance.
However, the remaining amount of funding will not be attended to in this fiscal year, since it is not in a desperate situation, according to a senior executive from the Bank.
"We expect the remaining cash to be in next year's budget," the senior official told Fortune.
Out of the cash it received to date, 16 billion Br was provided as a liquidity pool from the central bank in the form of a bond with a maturity period of three years at an eight percent interest rate. In the last few months, the Bank's balance sheet has deteriorated due to poor asset quality as a result of considerable SOE debt exposure and the liquidity crunch.
The Bank hit rock bottom in its liquidity position in April 2019, at 9.3pc, followed by October and November of last year, with 10pc and 10.7pc, respectively. Its highest stance, at 16pc, was registered in October 2017. The average loan-to-deposit ratio the Bank has maintained over the past year is above 100pc.
With the fallout from the Novel Coronavirus (COVID-19) shaking the economy like never before, this injection will answer the increasing calls from borrowers to reschedule loan payments and balance weakening asset quality and intense liquidity pressure going forward, according to CBE executives.
The second liquidity injection of 17 billion Br came from the Ministry of Finance three weeks ago as a means of paying back a portion of SOE debt guaranteed by the Ministry. CBE has used seven billion Birr of the total value to clear out unpaid debts it owes other companies, while the rest was kept as a deposit for future commitments.
In redirecting the second liquidity injection to CBE, the Ministry of Finance borrowed the cash from the central bank, which is considered the lender of last resort in offering loans to institutions that are experiencing financial difficulties. The central bank raised the money through the sale of treasury bills.
CBE, which has outstanding loans from SOEs that equate to the last two years of the country's federal budget, is owed 400 billion Br by Ethiopian Electric Power, 120 billion Br by Ethiopian Railways Corporation, 70 billion Br by the Sugar Corporation, and an additional 70 billion Br by the Metals & Engineering Corporation (MetEC).
Its lending went to the construction of the Great Ethiopian Renaissance Dam (GERD), 10 sugar factories, Yayu Multi-Complex Industries and building the railways, among other projects.
A committee that was formed by the macroeconomic committee to map out scenarios of handling the accumulated debts of state-owned enterprises is also expected to table the second version of the recommendation in the middle of the week. Over the past two months, the committee has been devising strategies to reinforce the financial stability of Commercial Bank and other SOEs.
The committee, which is composed of members from the Ministry of Finance, the NBE and the Public Enterprises Holding & Administration Agency, is tabling a recommendation that primarily requires the government to absorb a portion of the debt. At the same time, the remaining debt will be settled based on negotiations between the SoEs and the Bank.
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