Banks are on edge about a central bank directive in the making demanding them to invest in treasury bonds with long-term maturities.

Regulators at the National Bank of Ethiopia (NBE) have drafted a directive that obliges banks to buy treasury bonds with a maturity date of five years. The draft, expected to come into effect in a few months, was distributed to all commercial banks to give feedback.

Industry insiders say that the new T-bond is similar to a directive issued over a decade ago forcing the banks to put aside 27pc of their loans and advances to buy bonds from the state policy bank, the Development Bank of Ethiopia (DBE). The bond had a maturity period of five years and a three percent interest rate, adjusted to five percent after seven years. The unpopular directive was repelled three years ago after the administration of Prime Minister Abiy Ahmed (PhD) came to power.

Designed to serve a different purpose, the directive makes a comeback, redirecting deposits banks mobilise to channel to the federal government through T-bond. Treasury bonds are long-term debt obligations governments enter into financing budget deficits, more than a year  maturity periods. The federal budget runs a budget deficit of four percent of the GDP, the highest in decades.

"The T-bond is necessary to bridge the gap in the budget deficit," concedes Fikadue Degafe, deputy central bank governor and chief economist.

The budget deficit has reached 125.6 billion Br. The central bank plans to finance 57 billion Br from foreign finances, excluding loans and grants. Federal officials plan to cover 61pc of the government budget from tax collections.

"Local sources like T-bond will cover the rest," Fikadu told Fortune.

The total outstanding T-bills sold to banks amounted to 116.6 billion Br at the end of the last fiscal year, about 391pc higher than the previous years. The participation of commercial banks in the T-bill auction market has shown a significant jump in recent years. They accounted for 52 billion Br, 44pc of the total outstanding T-bills, whereas other buyers, such as pension funds, bought 64.5 billion Br.

The authorities do not seem to budge. The directive regulators write demands banks to invest 20pc of their new loans and advances in buying T-bills yielding an interest rate two percentage points higher than what the banks pay depositors.

However, industry players fear the new directive to fuel the liquidity crunch they are struggling with. Last year, the central bank instructed commercial banks to invest one percent of their loans and advances in buying bonds issued by the DBE, which collected 10.5 billion Br.