The Ministry of Finance is in the  process of establishing a new entity to absorb state-owned enterprises' residual debt owed both to the Commercial Bank of Ethiopia (CBE) and external lenders, guaranteed by the Ministry.

Dubbed the Asset & Liability Management Company, it will be established as a state-owned enterprise and will report to the Ministry. Formed by a forthcoming regulation that will be approved by the Council of Ministers, the company will partially absorb the debt of other state-owned enterprises that they request to be taken off their balance sheets.

Absorbing the debt of the enterprises, the new entity will manage the investment activities, assets and liabilities of the enterprises. It is expected to absorb a little over half a trillion Birr in residual debt, which the enterprises cannot currently service. Over half of these loans are from the CBE, while the remaining are from China and other lenders.

It will also work on clearing the balance sheet of the highly indebted enterprises in order to make them sound, which will enable them to secure soft loans from international financial institutions such as the IMF or World Bank.

The entity, which will have a board of directors, can engage in commercial activities to generate revenues by divesting the assets of the state-owned enterprises, such as renting and leasing out idle properties. It will also be responsible for either liquidating, leasing or streamlining the enterprises into productive assets in a way that it can generate income by involving the private sector.

The end goal of the company is to make itself a sovereign bond, a debt security issued by a government in a foreign currency.

To handle the distressed debts, the Ministry at this stage can not absorb the debt by law. First, it needs to receive that privilege through the establishment proclamation of public enterprises, which is in the making, according to a source knowledgeable about the issue.

The decision to establish the bad debt entity came onto the scene following the proposal of a committee that was formed in April with members from the Ministry of Finance, the National Bank of Ethiopia and the Public Enterprises Holding & Supervision Agency.

The team, which has been diagnosing the problem and debt stress of the companies to reinforce the country's financial stability using a holistic approach, came up with a solution of partially absorbing the debt through the new company. It tabled the proposal to the macroeconomic committee, which is chaired by Prime Minister Abiy Ahmed (PhD). The macroeconomic committee approved the proposal on July 30, 2020.

Ethiopian Electric Power (EEP), the Sugar Corporation, the Metals & Engineering Corporation (MetEC), the Ethiopian Railways Corporation (ERC) and the Chemical Industry Corporation are among the institutions that have huge unserviced debts with CBE. The companies have been borrowing with a guarantee from the Finance Ministry. CBE is owed 370 billion Br from EEP, 120 billion Br from ERC, 70 billion Br from the Sugar Corporation, and 74 billion Br from MetEC among others.