Officials of the National Bank of Ethiopia (NBE) have loosened the restrictions on the banking industry, allowing importers and edible oil producers access to asset-based collateral loans.

It is in reverse to a decision they made three weeks ago, freezing the type of loans they blame for the fleeting Birr against major currencies exchanged in the parallel market. However, central bank authorities conceded that the freeze would worsen inflationary pressure, driving prices for imported items up.

Effective last week, the measure by the central bank enables commercial banks to provide loans to producers of edible oil and importers borrowing for the settlement of letters of credit once approved.

"If approved LCs are held up, and people can't import, it'll worsen the inflation," said Dereje Zenebe, president of Zemen Bank, welcoming the change.

According to the central bank, those with approved or in the process of applications for letters of credit can apply for loans.

Last year, over 14 billion dollars worth of goods were imported, of which capital goods account 33pc. Consumer and semi-finished goods shared 29pc and 20pc, respectively.

International trade took up the largest portion of the 68.2 billion Br in fresh loans disbursed by commercial banks at the end of the third quarter of the previous fiscal year, accounting for 21.9pc, followed by domestic trade, agriculture, and industry.

Biotech Plc, a pharmaceuticals importer, is among those on the receiving end of the challenges presented by the loan freeze. According to Fitsum Alemayehu (MD), the general manager, the company has been facing a transient shortage of cash held in its letters of credit account. Such were problems addressed by taking out loans or overdrafts. Biotech's application for a letter of credit with the Commercial Bank of Ethiopia (CBE) was approved after two years of a wait when the decision by the central bank freezing asset-based loans came into effect.

The government may know what challenge outweighs another, but a blanket ban hurts businesses in legitimate activities, according to Fitsum.

“Allowing loans for letters of credit purposes is very helpful,” said Fitsum.

Though the authorities at the central bank have reviewed the freeze and opened up some wiggle room, the changes do not amount to much. The Documents Authentication & Registration Agency is not providing services to review the status of assets borrowers provide for collateral purposes. The Agency suspended services more than a month ago to undergo a system upgrade, but the Addis Abeba city cabinet instructed it to extend the suspension of services for land lease and asset transfers for an indefinite period.

"We're awaiting further instruction from the Addis Abeba Land Management Bureau to restart operations," said Muluken Amare, director of the Agency. It is unclear when that will be.

Although the central bank's decision did not specify whether loans provided by microfinance institutions were to be exempted, services were interrupted all the same as the Addis Abeba City Administration Driver & Vehicle Licensing & Control Authority ceased some of its services. The Authority places a freeze on transfers of vehicle registrations when individuals take loans from microfinance institutions until the borrower repays the loan.

"We requested clarification from the microfinance supervision division at the central bank," said Mamo Deddefo, general manager of Sheger Microfinance, which was established three years ago with a capital of 35 million Br. Sheger provides up to 430 million Br in loans annually.

The central bank responded that microfinance institutions are not subjected to restrictions. However, Sheger was unable to process loans, for the Authority remains inactive. Officials of the central bank issued a letter last week to the Agency and the Authority, informing them of the exemptions. The Authority announced services have resumed as of August 30.

The freeze remains in place, affecting all sectors, and banks have not been able to provide loans that had already been approved, impacting ongoing projects run by different businesses. There are also issues arising from the ambiguity of the central bank's order to freeze loans last month. Communicated through text messaging, the order did not specify whether guarantee bonds were also part of the ban.

"It was not explicitly stated that providing guarantees were banned," said Ermias Andarge, CEO of Enat Bank.

The federal authorities have different readings of what transpires in the business sector. They believe the recent decision by the central bank has little adverse impact considering 125pc growth in loans provision reported in July, three times higher than the annual average growth, according to Eyob Tekalign (PhD), a state minister for Finance.

Eyob was pleased with the purpose of closing the gap in exchange rates for the dollar between the official and the parallel markets by 30pc.

"It may have a cost, but the trade-off is still acceptable," said Eyob, during a press briefing held inside the Prime Minister Office, on September 2.

Kassahun Ayalew is a former executive of Zemen Bank and now one of the promoters of Afro Bank, under formation. He believes the government will eventually lift off the restrictions imposed on loans after taking a series of policy measures such as the adjustment made on reserve ratio.

"If it lasts long, it'll have a big impact on economic activities," Kassahun told Fortune. "It's a temporary measure."

State Minister Eyob amplified this hope last week.

"It'll be lifted soon," said Eyob.


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