Fortune News | May 18,2024
The National Bank of Ethiopia (NBE) has enlisted private banks to shoulder a substantial portion of the foreign currency needs for fuel imports, a role previously tightly controlled by the state. Its Governor, Mamo Mihretu, instructed them to open letters of credit for fuel imports beginning next month, marking a shift toward a market-based foreign exchange system.
For years, the Central Bank absorbed up to 50pc of export proceeds and 70pc of remittance inflows from commercial banks to manage foreign currency allocations, ensuring ample reserves for importing strategic commodities such as fuel and fertiliser. With the phasing out of these surrender requirements under the macroeconomic reforms in motion, foreign exchange inflows are increasingly subject to market dynamics, placing private banks at the forefront of managing currency pressures.
"Given the end of surrender requirements and the broader transition to a market-driven FX regime, the settlement of fuel-related letters of credit will need to be broadened beyond the NBE to include multiple additional stakeholders," wrote Governor Mamo in a directive he issued on October 17.
Commercial banks will begin opening new fuel-related letters of credit monthly, with payments due 360 days from the issuance date. The Central Bank estimates that 3.2 billion dollars in letters of credit will be issued annually to meet fuel import needs, with private banks expected to contribute close to 1.6 billion dollars over the year.
According to individuals close to the case, the policy change is part of a broader strategy supported by the National Macroeconomic Committee chaired by the Prime Minister and presented by Governor Mamo to senior banking executives. Banks are also expected to contribute between 13pc and 17pc of their projected foreign exchange inflows for the current fiscal year toward settling arrears in fuel import liabilities. Payments will be made over the next nine months, based on each bank's forex selling rate on the transaction date.
"This is a lucrative business opportunity for private banks," said Vice Governor Fikadu Digafe. "The burden to import fuel will be shared until the regulator ensures the free-market system works without glitches for the Enterprise."
The Vice Governor refers to the Ethiopian Petroleum Supply Enterprise (EPSE), the state-owned entity responsible for fuel imports. Its executives are expected to negotiate a margin deposit with each bank opening a letter of credit, to be held for the duration of the credit, with the balance paid upon settlement. Banks are permitted to charge the Birr's selling rate against major currencies and collect applicable fees, with the Central Bank expecting all banks to provide their intended provision amount by the end of the month.
According to Abebayehu Dufera, director of foreign exchange monetary and reserve management at the NBE, the reform targets a more competitive and transparent foreign exchange market.
"Fuel imports will be treated like any other import," he told Fortune.
Since the forex market was liberalised three months ago, federal authorities have taken a series of policy measures to smooth it out. The Central Bank injected 175 million dollars earlier this month to avert a forex shortage that threatened fuel imports. Some banking executives consider the new policy a necessary requirement and an attractive opportunity.
"We've more than enough foreign currency reserves," said Dereje Zebene, president of Zemen Bank.
He echoed Governor Mamo's recent public pronouncement that the macroeconomic reform has led to a considerable increase in foreign currency reserves of up to 80pc.
"There is no forex liquidity problem in commercial banks," the Governor said.
Dereje disclosed that the Central Bank readily accepted the Bank's request that negotiations with the Enterprise be based on selling rates. However, he argued that the increase in foreign currency reserves had eased previous pressures, creating a slightly increasing pressure on the other side, with forex accumulating due to unopened letters of credit. He observed that banks can benefit by importing large-ticket items like fuel through service fees and commissions.
In the 2023/24 fiscal year, Zemen Bank netted 2.39 billion Br, a 32pc increase from the previous year. It mobilised 566 million dollars in forex — a 7.3pc increase from the previous year — while its liquidity ratio of 32pc is double the regulatory requirement.
Veteran banker Eshetu Fantaye raised a cautious tone.
"It's an opportunity for commercial banks if managed well," he said, urging the coordination of the efforts of the Ministry of Finance and the Central Bank with the Enterprise to craft a lasting and sustainable fuel import strategy.
Not all banks share the enthusiasm.
"We need to plan well for the demand," said Ermias Tefera, president of Berhan Bank.
He acknowledged the attractive opportunities but raised concerns about the impact on assets and liabilities, as the Bank has just recovered from a foreign currency burden. According to Ermias, it is important to ensure foreign currency inflows are consistent with bank liquidity to ensure adequate resource mobilisation and forex management.
"Though reserves are growing slowly, thorough macroeconomic analysis and proper forex management and structural organisation are required," he told Fortune.
Berhan Bank registered a forex reserve decline of 4.9pc in the fiscal year 2023/24, reaching 139.8 million dollars. Remittances contributed 93pc and exports 5.6pc, while profits still grew by 103.4pc to 1.18 billion Br.
The arrangement provides a degree of assurance for the Petroleum Enterprise but also raises concerns among its executives, who are worried about liquidity constraints.
"We're facing a fiscal squeeze," said Tegenu Aklilu, director of Enterprise's finance department, citing a liquidity crunch brought on by the Birr's loss of value against the dollars since it was floated in July 2024.
A notable 17pc surge in trade and other receivables to 133.20 billion Br uncovered at extended credit terms or delays in customer payments. Cash and cash equivalents dipped slightly to 60.35 billion Br from 62.2 billion Br, disclosing tighter liquidity or substantial cash outflows. Trade and other payables climbed 3.8pc to 215.88 billion Br, likely due to higher purchase volumes or deferred supplier payments. However, taxes on petroleum products declined to 3.09 billion Br from 5.32 billion Br.
The Enterprise reported moderate growth in its 2022/23 fiscal year operations, but underlying figures revealed potential issues. Its total assets rose by a mere 2.66pc to 225.75 billion Br, a mark of steady but slow expansion. Non-current assets increased 5.8pc to 2.84 billion BR, unveiling continued investments in property, plant, and equipment. Its current assets, making up a hefty 98.7pc of total assets, edged up 2.6pc to 222.91 billion Br.
Its total liabilities grew by 2.7pc to 221.85 billion Br, while its current liabilities, constituting approximately 98.1pc of total liabilities, also rose by 2.7pc to 221.46 billion Br. Equity remained stagnant at 3.89 billion Br, representing a mere 1.7pc of total assets. This low equity-to-assets ratio showed a heavy reliance on liabilities for financing, potentially heightening financial vulnerability in volatile markets.
The company's working capital revealed a tight current ratio of approximately 1.01, which is enough assets to meet immediate liabilities but expose it to liquidity risks. Profitability faced headwinds, with net profit declining to 236.79 million Br from 82.78 million in 2021/22, despite revenues of 271.08 billion Br. A thin margin between revenue and cost of sales, coupled with a low return on assets, could attest to issues in operational efficiency.
Liabilities taken before July have also resulted in a massive financial burden, as loan repayments have more than doubled for the Enterprise. Tegenu disclosed that federal authorities have yet to follow up on their pledge to provide subsidies, while they continue to contend with increased volatility and the growing devaluation of the local currency.
Officials at the Ministry of Trade & Regional Integration (MoTRI) disclosed that subsidies for fuel price adjustment will cost the public more than 250 billion Br. The Ministry of Finance has also injected an additional 551 billion Br earmarked to subsidise essential commodities and soothe economic pressures, particularly in the fuel, fertilizer, and pharmaceutical sectors. However, officials note that the injection is yet to happen, as no specified allocation has taken place for fuel.
According to Eshetu, the banker, the subsidy is necessary to strengthen the Enterprise's position when negotiating with banks. He expects that the subsidy allocated to the fuel supplier will be sufficient to address the impact of volatile market conditions and fluctuating forex rates.
He foresees the potential for banks, currently facing a liquidity crunch due to fiscal and monetary policy issues, to benefit from this opportunity. However, he warned that large gaps in commercial banks' selling rates could lead to price distortions in fuel imports. He also stated the importance of banks pooling resources for letters of credit. Recognising the foreign currency requirements, Eshetu pressed the authorities to define the coverage to ensure accurate financial planning.
"Coordinated their effort is crucial," he told Fortune.
The Central Bank's decision to involve private banks more directly comes at a time of mounting foreign exchange shortages that have strained the economy. According to close observers, by shifting the burden, Governor Mamo made his intention clear to shore up NBE's reserves while testing the resilience of the banks in a more market-driven environment.
"The directive places commercial banks in a dual role," said an executive at a leading private bank, who requested anonymity. "We're now both brokers of future foreign exchange needs for fuel imports and financiers of past dues, a responsibility traditionally managed by the central bank."
PUBLISHED ON
Oct 27,2024 [ VOL
25 , NO
1278]
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