Bankers in harmony over government’s directive to keep economy at bay

Bankers express that they are optimistic over the new cards dealt to them in the form of a recently imposed directive of purchasing a 20 percent treasury bond of the National Bank of Ethiopia (NBE) for fresh disbursement of loans and advances. Consensus across the board from the financial experts is that the new directive will not have long life.
Unlike the infamous NBE bill which was repealed in November 2019, a majority of the financial institution leaders welcomed the latest government move citing they concur with the decision in light of the bigger picture of protecting the nation from uncertainties that occur from external and internal factors.
The central bank a couple of weeks back issued a directive ‘MFAD/TRBO/001/2022’ which became effective as of November 1, 2022.
As per the new directive, all banks except Development Bank of Ethiopia (DBE), a state owned policy bank, are now set to purchase a treasury bond for their loans and advances.
The treasury bonds that shall be issued to each bank on a monthly basis have a maturity period of five years and each bond has two percentage points higher than the minimum saving deposit rate that is now seven percent.
The directive said that the government shall pay the interest accrued on the bonds on an annual basis.
This is the second by its nature according to experts who compared the latest government move with the ‘MFA/ NBEBILLS/001/2011’ directive introduced in April 2011 which forced private banks to buy 27 percent of NBE bills of their individual loans and advance disbursements at a maturity of two percent lesser saving deposit interest rate. The NBE bills directive was effective for eight years and seven months up until its scuffing in November 2019.
However bankers were adamant that the current directive would not have the lifespan of the former directive.
Bankers who demand anonymity recalled that when the central bank introduced the new directive to financial institutions the general opinion given by financial sector leaders was that banks were compounded by difficulty following the move at the time.
This is however not the case with the current directive, underline financial gurus such as the likes of Eshetu Fantaye, President of Ahadu Bank, and Asfaw Alemu, President of Dashen Bank, amongst other leaders who feel that now the priority is primarily the nation.
“It is clear that it may have pressure with regards to financing customers in the long haul but it is however not as hotly contested as the 27 percent NBE bills,” Eshetu, who served different public and private banks in senior positions, commented.
Some commentators, who closely follow the financial sector, argued that the current NBE decision was different when compared to the reformist government’s agenda. They said that the government is highly keen on boosting the private sector and has even expressed interest for the public bank’s loan portfolio to be balanced for the private sector.
However, Eshetu stressed that its crystal clear that the government is hard pressed by external partners like the International Monetary Fund (IMF) and the World Bank who are pressuring the government, in addition to challenges that the country is facing. “When the challenges that the country is facing are contrasted with NBE’s decision, the burden seems light and the move will not be implemented for long in my view,” expressed Eshetu.
In congruence, the other financial guru, Asfaw of Dashen, agreed with the above comment stating, “Financial institutions are public assets that directly or indirectly working for the country, so they are responsible in supporting the nation. Financial firms only generate better profit margins when the country is at peace, thus we have to look at the bigger picture.”
With regards to the life span of the directive, Asfaw said, “I my view, the directive will be short lived.”
Asfaw also cited that such moves have financial supply implications stating, “Nonetheless we will abide by the new directive as we did the other directive, but the new one will not last in effect as its predecessor.”
“It may have a linkage with the government macroeconomic issues but when it became effective, the relevant body has to also now engage on the needed responsibility to correct economic errors,” Asfaw explained his expectation from policy makers.
Eshetu said that it is clear that the new directive will not have long life compared with the 27 percent NBE bills, “When the NBE bill was imposed, the financial firms had huge liquidity which did not have an effect on them up until 2014. After that however, the implementation of the directive extended banks’ loan to deposit ration climbed to 110 percent compared with the sum up of bond and loans which hampered the various banks’ day to day activity.”
On similar opinions, the President of Ahadu bank said that the government has to work strongly to stabilize the economy including managing the foreign currency generation properly, stating, “In my view, the economy is highly dollarized. The government is not adequately regulating the foreign currency, which is a major challenge for the economy, generation.”
He added that the government should have strong commitment to impose tight controls on the foreign currency regulation and fiscal policy.
“I think when the government imposes such kinds of directives it has to have follow up homework to make an adjustment at the macro level,” Dashen Bank’s president and deputy president of Ethiopian Bankers Association stated.
Eshetu reminded that one of the first demands of international partners like IMF when the Home Grown Economic Reform became effective was for the government to ease the NBE bills.
He said that as per the improving situations catalyzed by the peace deal, the pressure imposed by international partners will be eased and accessing external finance will flourish and as a result the government will cut the tail short on the new directive.
“By the way, the bond by itself is expensive and not conducive for the government, and preference will be given to other alternatives like financial sources from external partners, in due time,” he expressed his views on the matter.
Unlike the NBE bills, the interest rate for Treasury bond is two percent higher than the saving deposit rate, while the prior directive had the interest rate of two percent lower than the saving deposit rate.
Experts shared similar views across the board citing that the move was necessary to provide additional funds to keep the country’s economy from going downhill.
Asfaw highlighted that the fund secured from banks may flow to some sectors that need finance, stating, “The money will not be left idle and government will device appropriate measures to manage it for a positive impact to the economy.”
Regarding the directive lifespan some pundits are not confident that the new bond would end short.
Eshetu argued that when the government starts getting additional funds from external partners the relevance of the bond will not be feasible, “20 percent has a huge impact on banks besides other existing instruments like reserve requirement, one percent portfolio investment on DBE bond and liquidity requirement.”
“It will affect the economy and the private sector, if the government demands to continue with the new directive,” he added.
He appreciated that unlike the previous directive the latest one is considering the Treasury bond to be included under liquidity requirement, which is 15 percent.
According to the investment on DBE bonds directive which became effective on September 1, 2021, a commercial bank shall annually invest a minimum of one percent of its outstanding loan and advance in DBE bonds until the aggregated bond holding equals 10 percent of its total outstanding loans and advances.
Regarding stable liquidity, Asfaw said that if it is measured in terms of the NBE rules, banks including Dashen are in good condition.
“But if we are talking about liquidity in connection to loans and advances, I think banks are not in a good position,” he elaborates adding that sometimes there are funds like a resource aligned with treasury bills that makes the bank liquid but in actual terms it may not be available for advances or loans.

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