The Commercial Bank of Ethiopia (CBE) has introduced value-added tax (VAT) on various financial services as part of its efforts to comply with the government’s new tax laws and raise revenue. The VAT increase, effective from October 1, 2024, is linked to broader economic reforms impacting Ethiopia’s financial sector.
This move comes at a critical time for CBE, which is facing growing financial challenges due to the recent floating of the Ethiopian birr and its exposure to non-performing loans from state-owned enterprises (SOEs). The introduction of VAT on banking services is one of several measures the bank is adopting to strengthen its financial position and absorb the impact of currency fluctuations.
World Bank’s USD 700 Million Bailout
Central to CBE’s stabilization efforts is a USD 700 million support package from the World Bank, provided under the Financial Sector Strengthening Project (FSSP). This funding is part of a broader recapitalization and restructuring plan for the bank. The aim is to reform CBE, making it a commercially viable entity that can operate independently from government influence and compete in a more open financial market.
“The USD 700 million from the World Bank under the FSSP will be used for recapitalization and continued support of the reform and restructuring of CBE. This includes a focus on governance and risk management, ensuring CBE can operate as a sound, viable, and commercially oriented bank at arm’s length from the government,” states an IMF document published this week.
The introduction of VAT on CBE’s services will help raise revenue to support these reforms and address legacy issues, including the bank’s exposure to bad loans from underperforming SOEs.
Currency Float and Its Impact on CBE
The floating of the Ethiopian birr has significantly impacted CBE’s financial situation. The exchange rate surged from around 56 birr to over 80 birr per US dollar, leading to a sharp increase in the bank’s foreign exchange-denominated liabilities. As a result, CBE has had to adjust its services and pricing to cope with these rising costs. The introduction of VAT is one such adjustment, intended to bolster revenue and mitigate the impact of the currency devaluation.
Prime Minister Abiy Ahmed (PhD) addressed the importance of reforming CBE as part of Ethiopia’s broader economic reform efforts. The Prime Minister pointed out that CBE has been burdened with billions of birr in loans provided to government projects, many of which were delayed or never completed. Without recovering these loans, CBE faces financial risks that could jeopardize its future.
“In all negotiations with the IMF and World Bank, one of the bones of contention was CBE. CBE has provided billions in loans for government projects that could not be finalized on time. It is in a precarious position. Unless it collects the loans, CBE will close down. When we talk about Ethiopia’s ongoing economic reform, we are talking about CBE,” said Prime Minister Abiy.
SOE Debt and CBE’s Restructuring
CBE’s financial troubles are also tied to its historical role in lending to SOEs, many of which have struggled to repay their debts. The Liability and Asset Management Corporation (LAMC), established in 2021, was created to absorb nearly 400 billion birr in SOE debt, including debts owed to CBE. However, the Corporation’s total liabilities have since grown to more than 540 billion birr as of June 2023.
With the help of the World Bank and the Ethiopian government, CBE is undergoing extensive restructuring to address these financial challenges. The introduction of VAT on banking services, alongside other tax measures, is part of this effort to improve the bank’s capital position and ensure its long-term sustainability.
