The central bank's treasury bill (T-bill) auctions continue to underperform as recent measures from the regulatory body jeopardise banks' liquidity positions.

Financial and non-financial institutions offered eight billion Birr at an auction held on September 22, 2021, a far cry from the 30 billion Br issued by the National Bank of Ethiopia (NBE). Another auction held almost three weeks ago produced results no different from last week, showing how much the administration's effort to deal with the budget deficit without borrowing from the central bank has been undermined.

T-bill market is used as a monetary instrument to raise funds in short-term debt obligations by central banks. Backed by a government guarantee, they have a shorter maturity period, although they may pay a higher interest rate if the maturity date gets longer.

The administration of Prime Minister Abiy Ahmed (PhD) uses T-bills to trim down direct lending from the central bank to address its budget deficit, which stood at 123 billion Br at the end of the last fiscal year. The deficit is projected to reach 139 billion Br this year, though it is likely to increase due to cuts in official grants from development partners. This week, the UK's Foreign, Commonwealth & Development Office announced a programme cut to Ethiopia to 107.5 million pounds sterling (147 million dollars) next year, down from 240 million pounds sterling this year.

Ethiopian authorities, who received a nod for 406 million dollars in the disbursement of the IMF`s Special Drawing Rights last month, had hoped to narrow the budget gap through an additional supply of T-bills. The central bank has floated more than 200 billion Br in T-bills this fiscal year, receiving offers for 122 billion Br. This was supply representing a 10-fold increase from auctions held during the same period last year.

The T-bill market has always been characterised by oversupply, says Patrick Heinisch, an economist and capital markets researcher.

Ethiopia`s economy is besieged by fiscal challenges resulting from the COVID-19 pandemic, civil wars and drying up of external sources of finance with a suspension of budget supports from major donors. However, the central bank`s policy measures restricting transfers, forex retention, loans and advances have created anxiety in the financial sector. Effective since the beginning of this month, banks were given until the end of November to double their reserves at the central bank to 10pc of deposits mobilised.

Banks and insurance firms are major clients for the T-bill market, competing against the pension fund. The big portion of the fund raised through auctions this year came before the central bank introduced regulations that further test the liquidity position of commercial banks.

Their focus is on meeting the reserve requirement, according to Dereje Zenebe, president of Zemen Bank.

Zemen Bank plans to invest in T-bills once achieving the minimum reserve the central bank requires of it.