The uptake of commercial banks to buy government’s new debt instrument, treasury bonds, on a monthly basis proves beneficial as over 25 billion birr has been amassed thus far, the Finance Ministry reveals.
Whilst disclosing the third quarter performance of the 2022/23 budget year, Ahmed Shide, Minister of Finance (MoF) in his appearance at parliament disclosed that the government introduced the financial instrument to diversify its budgetary source to fill its expenditure.
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.
As the Finance Minister explained, despite relations with foreign partners now bouncing back owing to the peace agreement signed in Pretoria, South Africa between the government and TPLF, the external financial support is yet to improve. Ahmed further cited that the financial support and credit from the World Bank is taking the biggest portion, while there are several agreements and commitments with partners to provide financial access.
In his address, the Minister applauded the support of the World Bank and highlighted that due to dry flow from external finance, the government had reluctantly resorted to using local sources like direct advance (DA) and Treasury bill (T-bill).
Ahmed stated 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.”
As part of the new policy, the government through the National Bank of Ethiopia (NBE) introduced a 20 percent Treasury bond that became effective on November 1, 2022.
As per the new 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 of their loan portfolio in Treasury bonds, for their loans and advances.
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.
About three years ago, the government took a firm decision to do away with taking DA, which was one of the key elements engulfing inflation. Government planned to do by capitalizing on another instruments like T-bills to fill its budget gap. To attain the target, the T-bill market was revised to become market driven which then attracted significant players with huge amounts of finance that propelled the government to desist in using direct advance.
However, 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 past and current budget year.
At the same time, in the current budget year, the government has started using the Treasury bond as an additional alternative.
The Minister said that in the stated period, 194.6 billion birr was sourced from domestic financial instruments; DA, T-bill and treasury bond to cover the budget gap.
He said that the new instrument, Treasury bond, has now amassed 25.6 billion birr since becoming effective.
In the budget year, it was expected that USD 2.5 billion would be disbursed from development partners through loans and donations. However, only 70 percent or USD 1.8 billion was met with a breakdown of; USD 1.3 billion in loans and USD 426.3 million in grants.
“The main reason for this stems from the pressure of partners in connection with the northern Ethiopia conflict,” Ahmed said.
He added that in the budget year, about 7.7 billion birr in direct budget support was expected from development partners, but no actual flow has been registered thus far.
In the first nine months of the budget year, 29 billion birr has been paid as foreign debt to which the Minister disclosed that it covered the whole commitment that was expected to be paid. Similarly, in the stated period, the government had targeted to settle 59.4 billion birr for domestic debt, while the actual performance was 33.3 billion birr or 56 percent of the target, “The main reason for the reduction of the domestic debt payment is because some obligations were pushed to long term bonds.”
In the reporting period, the government introduced a fiscal deficit management to regulate domestic debt mainly for the conversion of T-bills to long term government bonds.
According to the Minister, in the budget year, public projects mainly roads that are projected to consume 18.2 billion birr have been transferred to the coming budget year on an aim to mitigate the public expenditure constrains.

Ministry of Finance strongly signals that there are no plans of forex exchange liberalization or devaluation at the moment.
“No considerations are being made to liberalize foreign exchange or devaluation at the moment,” underlined, Ahmed Shide, Minister of Finance, as the Nation engages with the International Monetary Fund (IMF) and World Bank to improve the exchange-rate system.
“Forex liberalization is important down the line,” said the Minister, mid this week speaking at Big 5 construct Ethiopia event adding, “There are diverse experiences around countries regarding forex exchange rate arrangement. There is no plan to immediately go to forex liberalization as we need to take diverse global experiences to tailor it to our own national context both politically and economically.”
It is well know by now that the foreign-currency shortages have plagued the country and led the authorities to restrict allocations to private industry. Foreign currency deficit has led to a thriving black market exchange, fuelling already-problematic illicit financial flows in the country. The black market limits the inflow and facilitates the outflow of legitimate foreign currency.
The IMF specialists, who paid visit to Ethiopia on April 7, 2023, avowed that they had decided to support Ethiopia’s second Homegrown Economic Reform (HGER 2.0) which stated that the exchange market would be gradually liberalized in the coming three years. Also there are rumors that the government is in a bid to fundamentally reform the exchange regime that leads to the unification of the official and parallel markets soon.
The country has an official exchange that’s currently at about 54 per dollar with little changes since the start of the year; contrast to the parallel rate that’s almost double.
“We need to reform the Forex exchange arrangement regime as part of the home grown economic plan (HGER),” sensitized the Minister.
Efforts are also ongoing from the government’s side to restore expected support to the economy and HGER II reform program which is expected to be introduced in the coming couple of months.
Last month, Ethiopian macroeconomic policy makers were engaged in a series of discussions with the IMF and World Bank.
“The Central Bank is working on reforming strategies as part of the HGER agenda and we’re also in discussion with international partners like IMF and World Bank and we will continue with our discussion, but there is no immediate consideration either to liberalize forex market or devaluation,” maintained the Minister with regards to strategies being deployed.
“To reflect critically down the line, the whole package of economic reform is more important and it is not only about forex but also the whole micro economy issues that need to be addressed and synchronized in a way that it will contribute significantly to coordinate to the balance including that of forex,” Ahmed elaborated.
“As part of sustaining the economy, the government is also opening the closed market,” said the minister indicating that the banking sector will be open within couple of months.
Ethiopia’s foreign currency shortage is exacerbated by ongoing instability. Massive government spending on the war resulted in a foreign exchange reserve outflow of US$307 million during the 2020/21 fiscal year. The conflict obstructed foreign currency inflow by limiting tourism and foreign direct investment. It also affected Ethiopia’s access to hard currencies by triggering economic sanctions and the suspension of aid and international loans.
As experts reflect, the Ethiopian government is expected to come up with further commitments particularly in political issues so as to get support from the international organizations, which are dominated by western allies.
As reserves dwindled over the course of 2022, the government has been applying administrative measures to control foreign exchange flows by foreign exchange rationing, which has became even more acute in 2022.
On its latest sub-Saharan Africa Regional economic outlook, IMF emphasized depreciation of sub-Saharan African currencies including Ethiopia against the US dollar, pushing up public debt stock, and aggravating inflation. IMF said weaker currencies make the fight to curb inflation harder given sub-Saharan Africa’s dependence on imports. According to the report countries in the region have recorded an average of 8 percent depreciation of their currencies in 2022 exacerbating the financing crisis by increasing the external debt service burden.
On the implications, the IMF said when currencies weaken against the US dollar, local prices rise, as much of what people buy, including essential items like food, and imports.
The financial institution said more than two-thirds of imports are priced in US dollars for most countries in the region.
Policymakers can take several steps to mitigate possible adverse impacts on the economy as a result of the necessary currency adjustments. In countries where inflation is aggravated by the exchange rate pass through, tighter monetary policy are said to help alleviate the pressure by keeping inflation expectations in check and stem capital outflows while attracting inflows. Where fiscal imbalances are key drivers of exchange rate pressures, fiscal consolidation are said to help to rein in external imbalances and contain the increase in debt related to currency depreciation.

The board of directors of the National Bank of Ethiopia (NBE) aligns strategies in the form of convertibility guarantees and proclamation amendments to anchor the public private partnership (PPP) initiative which is yet to take a foothold in the country’s vital mega projects landscape.
Currently, two energy projects are under negotiation to embark on the PPP.
After undertaking massive studies and legal document developments through the Ministry of Finance (MoF), the government in 2018 enacted the PPP proclamation 1076/2018 which formalized private sector involvement through public projects for both parties mutual benefit.
Unfortunately, to date not a single project has come to fruition despite few projects coming close in the past few years.
One of the challenges to adopting the initiative has notably been with the foreign currency risk that the country faced in addition to a bad rep with the western partners, who sided against the government in connection to the northern Ethiopia conflict that erupted late 2020.
Companies, which had reached agreements with the government to engage in the energy development under the PPP framework pushed for convertibility guarantees at the pinnacle of the conflict which have since dialed down following a peace deal in November last year in South Africa.
The government cognizant of this gave some vital but selected projects to be supported by a convertibility guarantee. According to Ahmed Shide, Minister of Finance (MoF), the NBE board in whom he serves as member, has approved the currency convertibility guarantee for companies which invest on the PPP arrangement.
Experts in PPP Directorate General, which is under the MoF, disclosed that the decision was passed to give a guarantee for projects that have big values for the country.
“The decision taken by the NBE board is a big step for PPP and has boosted the confidence of interested parties who want to invest on PPP arrangement,” they said.
In the budget year, four PPP projects were targeted to be floated and so far on a special condition through the government to government (G2G) approach, two energy projects are under negotiations.
According to Ahmed, AMEA Power of Dubai, UAE is under discussions with the government to make moves on a significant energy project.
The negotiation is focused on the Aysha Wind Farm I project in Somali region to generate 300MW, and as Ahmed describes, “The one to one negotiations have been completed to about 90 percent and the only pending issues to be put to bed are tariffs which will soon be finalized.”
Similarly on another G2G approach with MASDAR, an Abu Dhabi based state company, discussions are underway to generate 500MW of solar energy in projects situated in Somali and Afar regions.
The Minister said that on the implantation of PPP, companies are demanding some sort of arrangements in issues like foreign accounts in related to the project, “They are demanding freedom on financial transactions, particularly for their projects.”
Demands in connection with the foreign currency issues have been one of the concerns that were raised by PPP developers.
Based on that, the NBE board has given a decision to provide support for the PPP investments and strategic investments on the guarantee of repatriating their profits.
As per the decision to give convertibility and transferability guarantee, minor preconditions like debt equity ratio will be demanded for provision of the guarantee for companies who demand investment in PPP.
“We hope that it will accelerate the PPP,” the Minister said, adding, “In the future, we believe that the foreign currency issue will not be a concern but in the short term, we have decided to give the guarantee.”
“It will attract investments on energy particularly geothermal, solar and wind that will go a long way to help our energy mix,” Ahmed underscored.
In the budget year, parliament has also amended the PPP proclamation on the aim to award projects through a direct negotiation manner besides the open bidding process. As experts in the PPP Directorate General express, the move has also increased the interest of potential investors.
In the beginning of the budget year, the government had issued an expression of interest (EOI) for the development of integrated diagnostic center (IDC) through PPP, while it has since been annulled due to lack of competitive participants from those who expressed their interests.
The information that Capital obtained from the PPP regulatory body signaled that the major intention of the EOI was to invest on the health sector with the private sector particularly with local investors, while it was canceled due to lack of competitive participants of which most were local participants.
The bid will be refloated in the near future with minor revisions on the document.
Within the past two years, 23 projects have been identified under PPP from over 100 proposals, while from the selected project some will not be executed under PPP as per the recommendation that came from detailed studies. Roads, energy, housing, and health are included on the selected projects.
On the aim to expand the development path through different instruments and on the objective to expand public service activities, to reduce project delays and cost overrun and to increase the utilization of resources from the private sector on public services; the government issued the first PPP policy in August 2017 which was followed by the proclamation.