Parliament Green Lights 900 Billion Birr Debt Security Issuance for CBE Reform

A bill that paves the way for the issuance of 900-billion-birr worth of government debt securities to settle the state-owned Commercial Bank of Ethiopia’s (CBE) non-performing loans and recapitalize it, was ratified by parliament this morning. Most of the amount (845 billion birr) will go towards settling CBE’s debt while the remainder is directed towards raising the Bank’s capital.

CBE’s non-performing loans are primarily comprised of obligations accrued from a host of state-owned-enterprises throughout the years. More than 90 percent of this debt is owed by three troubled SOEs that have not regularly serviced their loans, which are publicly guaranteed. These loans have been systematically renewed and guarantees have not been made effective.

Eyob Tekalign (PhD), State Minister for Finance, underscored the importance of preventing a major financial crisis by settling the Bank’s debts as it handles nearly 60% of the country’s banking operations. He explained that a three-year grace period would be followed by a decade long payback window to settle the amount.

“Of course this will bring fiscal pressure on the government,” Eyob noted.

The state minister emphasized that no external credit would flow in to settle the amount with the government relying on domestic mobilization of financial resources.

However, the financial strengthening project backed by the World Bank entails 650-million-dollar (currently in the pipeline) proceeds towards reforming, recapitalizing and restructuring CBE.

Despite the establishment of the Liability Asset Management Corporation (LAMC) with nearly half a trillion-birr capital three years ago to manage the residual SOE debt, the Corporation has not been able to mobilize adequate resources. 

Nevertheless, the recapitalization of CBE is not an isolated phenomenon extricated from the massive reforms the country has undertaken since reaching an agreement with the International Monetary Fund (IMF) in July.

The Program bolstered by a 3.4-billion-dollar Extended Credit Facility is set to usher a thorough overhaul of the country’s biggest bank in line with comprehensive financial sector reforms. It includes plans to raise CBE’s capital adequacy ratio to 12.5%, commitments to ensure length dealings with the public sector on commercial terms; appointing directors independent of the government for at least one third of positions on the board of directors; ensuring a robust risk governance framework; and enforcing through the NBE as independent supervisor, strict adherence to prudential regulations and directives

The recapitalization bonds are tradable securities that can be used as collateral for transactions in the interbank market and with NBE according to the Program.