Desperate times call for desperate measures

Gov’t goes hard in direct advances

The direct advance (DA) taken from the central bank, National Bank of Ethiopia (NBE), by government during the financial constricting times of the 3Quarter, rose by 84 percent in contrast to what it took the whole of the 2012/22 financial year, report reveals.
The government in the perilous funding challenge of the 2022/23 budget year received 140 billion birr in DA from NBE until the end of March to ease its cash demand.
The amount that it took saw the numbers climb by 84.2 percent when compared with the total amount that it grabbed in the whole of the 2021/22 budget year.
Since mid 2019, the government that came in to power in 2018 had taken strong measures to reduce the DA, which primarily is seen as a money print that has high contribution to the galloping inflation.
However, the unexpected northern Ethiopia conflict coupled by the pressure from western partners forced the government to seek financial resources from the central bank.
In its review of the 2021/22 budget year and the national debt, the Ministry of Finance (MoF) stated at the time that the DA that the government took in the year was very high.
In the 2021/22 budget year, the DA amount stood at 76 billion birr, which was very high, compared with the preceding years and the government strategy that was emplaced late 2019.
On the annual debt analysis report that was published in August 2022, MoF had stated that the net issuance of Treasury bills and DA during the year was relatively higher than in previous years.
In the 2020/21 budget year, which was also one of the challenging years for the government to secure funds from foreign partners because of the conflict, the government overdraft from central bank hit 52.5 billion birr.
While the amount that taken in first nine months of the budget year that ended July 7, 2023 saw newer staggering levels of 140 billion birr.
According to the latest report of MoF, in the third quarter of the budget year that closed March 30, 2023, the federal government received 40 billion birr DA, which is similar amount to the second quarter, while the amount for the first was 60 billion birr.
The MoF bulletin stated that as at October 7, 2022, the total outstanding DA was at 236.5 billion birr, including 60 billion birr that was taken in the first quarter of the 2022/23 budget year which was converted into a long term bond.
“And after the conversion, a new DA was issued which amounted to 80 billion birr,” the bulletin read.
In the year under review, the direct advance (DA), a government overdraft from the central bank, has also shot up.
It can be recalled that when the 2022/23 budget proposal was tabled to parliament, the government underlined that most of the budget sources should rely on local sources as opposed to external sources.
When the northern Ethiopia conflict began in November 2020, a ripple effect in the form of pressure from foreign development partners occurred which led to suspension of financial promises. The government then was derailed and ended up taking huge amounts of DA from the central bank, particularly in the preceding and past budget year.
At the same time, in the 2022/23 budget year, the government started using the Treasury bond as an additional alternative. The introduction of the Treasury bond has the primary focus of reducing the DA and the T-bond.
As part of the new policy, the government introduced a 20 percent Treasury bond that became effective on November 1, 2022.
As per the directive ‘MFAD/TRBO/001/2022’, all banks except the Development Bank of Ethiopia (DBE), a state owned policy bank, were set to invest 20 percent in Treasury bonds for their loans and advances.
Up until the end of March, the amount received from the T-bond has reached 25.6 billion birr.
In May, Ahmed Shide, Minister of MoF, said that in order to reduce the access to direct advance, a new reform instrument had been rolled out to mobilize resources from domestic sources, “This instrument is very promising and will aid in minimizing the use of DA from the central bank.”
It is well known that following the deterioration of budgetary support from external partners in the last couple of years, the central government had resorted to alternative policies like using domestic sources to bridge its budget gap.
The treasury bonds were issued to each bank on a monthly basis having a maturity period of five years with each bond having two percentage points higher than the minimum saving deposit rate which is currently at seven percent.
When the government took a direction to pause the DA, it had been stated that using alternative sources would not have any inflationary pressure. This was then a crucial step taken to revolutionize the treasury bills so as to make it market oriented. Now the absorbed funds from the market became effective. However, it was noted that the additional pressure that correlated with the conflict forced the government to sway back to the DA which in two years has shot up alarmingly.

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