CBE Sees Massive Capital Injection Ahead Of Exchange Rate Shocks

In a bid to avert the spillover of the exchange rate reform on the liabilities lurking in the portfolio of the Commercial Bank of Ethiopia (CBE), the government has opted for a massive capital injection of close to 900 billion birr into the state-owned giant.

“A substantial capital injection of 900 billion birr has bolstered the bank’s financial position, addressing legacy issues related to SOEs. Concurrent reforms are underway to transform the bank into a commercially viable entity, by enhancing governance and risk management practices,” reads an IMF document published this week.

The World Bank has agreed to provide USD 700 million, which the government intends to channel towards CBE, according to the document.

“The USD 700 million from the World Bank under the FSSP [Financial Sector Strengthening Project] will be used for recapitalization and continued support of the reform and restructuring of CBE. This will include a focus on governance and risk management, including CBEs ownership policy, mandate, and business plan to ensure CBE can compete as a sound, viable, and commercially oriented bank at arms-length from the government as the financial sector is opened,” reads the document.

Briefing government officials and banking executives this week, Prime Minister Abiy Ahmed (PhD) stressed that reforming CBE is essential for economic reform efforts.

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“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.  We told the IMF and WB that unless they inject at least 700 million dollars to CBE in additional financing, we cannot accept their reform proposal. This is because we decided the reform cannot succeed unless CBE recovers. CBE is a highly important institution that needs to be cured,” said the PM.

The Council of Ministers recently endorsed raising CBE’s capital in a bid to enable the Bank to absorb the risk of increments in its liabilities. These forex denominated liabilities are expected to surge substantially as the official exchange rate surged from around 56 birr to more than 80 birr per dollar following the floating of the exchange rate regime earlier this week.

An IMF report released Friday also refers to the need to shore up CBE’s finances.

“Strengthening of CBE’s capital has addressed an important macro-financial vulnerability. CBE is the largest bank (58 percent of banking system assets) and was historically heavily exposed to non-performing SOE debt. With World Bank support, the authorities have taken decisive steps to financially strengthen CBE and address legacy issues related to its role in SOE lending, including FX exposures. A capital injection of 870 billion birr (using government securities) has enabled CBE to write off all claims on LAMC [Liability and Asset Management Corporation]fully provision claims on EEP, and bring CBE’s capital adequacy ratio up to the regulatory minimum,” reads the report.

A memorandum of economic and financial policies addressed to the IMF indicates the government has restored CBE’s capital adequacy ratio to eight percent through a capital injection with government securities in an amount equal to CBE’s claim on LAMC.

LAMC was set up in 2021 to soak up the debts of underperforming state-owned enterprises. In August that year, the Corporation absorbed nearly 400 billion birr in SOE debt. It later paid off some of that debt to CBE using proceeds from the sale of the private telecom operator’s license to Safaricom Ethiopia. However, the latest reports indicate the Corporation’s debts had increased to more than 540 billion birr as of June 2023.