Ethiopia’s 900 Billion Birr Bond Plan: EEP, Sugar Corporation, and Railway Corporation Lead in Major Debt Overhaul for Commercial Bank

The Ethiopian government has unveiled a major financial proposal to issue 900 billion birr in government bonds. This move aims to address significant debt obligations held by government development organizations and to strengthen the capital reserves of the Commercial Bank of Ethiopia (CBE), the country’s largest state-owned bank. Below are the key details and implications of the bond issuance, segmented by the primary objectives outlined in the government’s draft decree.

The Ministry of Finance has drafted a decree submitted to Parliament for approval, authorizing the issuance of government bonds worth 900 billion birr. The purpose of this substantial bond issuance is twofold:

1. Debt Repayment: The funds will be used to clear substantial unpaid debts of government development organizations held by CBE.
2. Capital Augmentation: The remaining portion of the funds will be allocated toward increasing CBE’s capital base, ensuring the bank can sustain and grow its market position.

The draft decree, titled “Government Debt Document,” emphasizes that the high debt level held by CBE due to these unpaid loans has significantly impacted the bank’s financial health.

Background on Debt Accumulation

The Commercial Bank of Ethiopia has long provided extensive lending to government-owned enterprises for the purpose of executing large-scale infrastructure projects. However, many of these projects have encountered complex challenges and have not generated the expected revenue to repay the borrowed amounts, leading to cumulative debt levels that now exceed 845.3 billion birr.

Key Government Debtors

1. Ethiopian Electric Power Corporation (EEP): The largest debtor, EEP owes 191.79 billion birr, including interest. These loans were largely intended for infrastructure projects aimed at improving the national power grid.
2. Ethiopian Sugar Corporation (ESC): ESC follows as the second-largest borrower, with two rounds of loans totaling 110.68 billion birr. The funds were allocated for projects to expand Ethiopia’s sugar production capacity.
3. Ethiopian Railway Corporation (ERC): With two rounds of borrowing amounting to 80.17 billion birr, ERC ranks third among government debtors to CBE. The loans were primarily used for the construction and expansion of the country’s railway network.

Other government entities, including the Ethiopian Electric Utility, Ethio-Engineering Group, and Ethiopian Construction Works Corporation, have also borrowed substantial sums from CBE for various development projects.

The Role of the Debt and Wealth Management Corporation

In response to the unsustainable debt levels of government enterprises, the Ethiopian government established the Debt and Wealth Management Corporation in 2013. The purpose of this entity is to manage and alleviate the debt burdens of public enterprises, specifically those debts held by CBE. The corporation’s main functions include:

• Debt Assumption: Taking over the debts of public enterprises from CBE to enable these entities to operate more sustainably.
• Debt Servicing: Using allocated funds to gradually repay these debts to CBE. However, this has been hindered by funding shortages, resulting in accumulating interest and further strain on CBE’s financial position.

While the corporation was set up with funds from the industrial development fund and income from its own business activities, its resources have been insufficient to cover the growing debt burden.

Structure of the Bond Issuance

The bond issuance decree stipulates that the government debt securities will have a three-year grace period, with a repayment schedule spanning 10 years. This structure is designed to provide a manageable repayment timeline for government entities while stabilizing CBE’s financial base.

Allocation of Bond Proceeds

• Debt Repayment: Of the 900 billion birr, approximately 846 billion birr will be directed toward settling the unpaid debts held by CBE. This action is expected to alleviate the immediate financial pressures facing CBE and improve its overall liquidity.
• Capital Increase for CBE: The remaining 54.6 billion birr will be allocated toward enhancing CBE’s capital base. Although CBE is the dominant player in Ethiopia’s commercial banking sector, its current authorized capital is limited to four billion birr, an amount deemed insufficient given the size and scope of its operations. Increasing its capital base will position CBE to maintain and potentially expand its market share.

Financial Implications for CBE and the Ethiopian Banking Sector

The government’s proposed bond issuance highlights a significant strategy to stabilize CBE and support the country’s largest bank in maintaining its market leadership. By increasing the bank’s capital reserves through bonds rather than direct cash infusion, the government aims to balance fiscal constraints with the need to bolster CBE’s financial resilience.

While the bond issuance will provide necessary liquidity, the capital increase comes at a time when CBE is already managing substantial debt exposure. The decree acknowledges the urgency of reinforcing CBE’s capital to ensure it remains competitive within Ethiopia’s growing banking sector.

Though the issuance of the bond addresses immediate debt obligations, it does not eliminate the underlying challenges faced by government development projects that have struggled to generate expected returns. The decree calls for ongoing management and monitoring to prevent further debt accumulation and to ensure that new infrastructure investments are both financially and operationally viable.

The bond issuance represents a critical financial intervention by the government. It serves as a mechanism not only to alleviate CBE’s current financial strain but also to enhance the bank’s capacity to serve as a reliable funding source for the country’s development agenda.