In an unusual decision, the Ethiopian government opted not to accept the full amount of funds offered by bidders in the recent Treasury bill (T-bill) auction, despite receiving significantly higher bids than expected. The results, announced two days after the auction, also indicated a decline in yields.
The National Bank of Ethiopia (NBE), which conducts these auctions on behalf of the Ministry of Finance (MoF), released the results on Friday, July 25.
The data revealed strong demand for short-term maturities, specifically the 28-day and 91-day T-bills, which far exceeded the government’s initial offerings. Bidders proposed 10.4 billion birr for the 28-day T-bills and 15.9 billion birr for the 91-day bills, compared to the government’s original offers of 221.7 million birr and 3.2 billion birr, respectively.
In contrast, demand for longer-term maturities, such as the 182-day and 364-day bills, fell short of expectations. The government sought 4.5 billion birr for the six-month bills and 3.1 billion birr for the one-year bills, but received only 3.2 billion birr and 1.8 billion birr in bids.
Overall, the MoF aimed to raise 11 billion birr but received bids totaling 31.3 billion birr, which is 184% above the target. However, the government accepted only 8.4 billion birr, fulfilling 76% of its goal.
While strong demand for short-term T-bills is typical, this is the first instance since the introduction of market-oriented T-bills that the government has declined to accept the full amount offered. Market observers suggest this may indicate a policy shift in response to concerns over high borrowing costs.
Additionally, the latest auction saw a decrease in yields, with the average annual interest rate dropping to 15.36%, down from 17.57% two weeks earlier. This contrasts with the upward trend observed over the past year since the initiation of Ethiopia’s macroeconomic reforms.
The current yield remains above the central bank’s 15% policy rate and the 13.9% inflation rate. International partners have consistently urged Ethiopia to maintain positive real interest rates, a stance the government has embraced since February.
Finance Minister Ahmed Shide recently cautioned that domestic borrowing has become prohibitively expensive, prompting the government to cut extraordinary budget allocations. Officials have indicated that the high yields seen in recent T-bill auctions are unsustainable.
“The yields the government has been accepting are extremely high, and this trend cannot continue,” a senior official told Capital.
The latest auction results suggest a strategic effort to reduce borrowing costs while managing liquidity, as Ethiopia navigates fiscal reforms and inflationary pressures.
Quarterly Plan
In the first quarter of the new budget year, the Ethiopian government plans to raise 171 billion birr through biweekly Treasury auctions. This initiative marks a shift from financing fiscal deficits with direct advances from the central bank to seeking funds from domestic and international markets to address the budget shortfall.
At the beginning of the fiscal year, the allocation for Treasury bills (T-bills) was 75% higher than the actual offers, indicating a strategic move towards greater reliance on market mechanisms.
Ahmed recently reiterated this strategy, stating, “We will fill the budget deficit from the market and international sources.”
The head of the Ministry of Finance (MoF) informed Capital that tax revenue and treasury bills will be the primary means of financing the deficit, explicitly ruling out direct central bank advances.
This change has already yielded positive results, with Ahmed noting that avoiding direct advances has helped slow the growth of base money.
The National Bank of Ethiopia (NBE) reports that reserve money growth decreased from 24.8% in July 2024 to 17.3% by November, while broad money growth fell from 24.8% to 19% during the same period.
The Ministry of Finance has also released its first quarterly T-bill auction calendar, outlining plans to sell 117.7 billion birr across five auctions starting July 23.
When combined with the 53 billion birr raised in the July 9 auction—representing a 76% increase over the initial 30 billion birr offer—the total approaches the targeted 171 billion birr for the quarter.
These biweekly auctions have attracted significant interest due to rising yields, consistently exceeding the policy rate and inflation since February.
This trend has been supported by the NBE’s decision to lift the mandatory 20% Treasury bond purchase requirement for banks, alleviating pressure on financial institutions.
Experts explained, “Banks now have more liquidity since the T-bond mandate was removed, allowing them to participate more freely in auctions with market-driven rates.”
The approved budget for 2025/26 stands at 1.93 trillion birr, with a 22% deficit amounting to 417 billion birr.
Of this, 67% (277.5 billion birr) will be financed domestically through T-bills and other sources, while 33% will come from international budget support.
The government anticipates raising 1.5 trillion birr from domestic revenue and grants, with 1.2 trillion birr (81%) sourced locally and 235 billion birr from foreign grants. Tax revenue is projected to grow by over one-third, reaching 1.1 trillion birr.
A significant portion of the budget is allocated for debt servicing, which constitutes 29% (463 billion birr) of the total. This includes 300 billion birr owed to the Commercial Bank of Ethiopia for previous bailouts of public enterprises.
Ethiopia’s shift toward market-based deficit financing represents a substantial change in fiscal policy. With robust demand for T-bills, reduced reliance on monetary financing, and ambitious tax revenue targets, the government aims to stabilize the economy while managing its considerable debt burden. However, the success of this strategy will depend on sustained investor confidence and effective revenue collection.
