Gov’t Extends Service Period For T-bills, Bonds As Domestic Debt Pressure Mounts

Mandatory purchase requirements for banks to be scrapped as part of IMF deal

Central bank regulators and officials at the Ministry of Finance have enacted drastic alterations to debt instruments like direct advances, treasury bills, and other bonds in a bid to ease the government’s mounting domestic debt burden.

Chief among the recent changes is the conversion of more than 266 billion birr owed to two pension fund agencies into a 13-year bond bearing a nine percent interest rate. The Public Servants Social Security Agency (PSSSA) accounts for nearly 177 billion birr, while the Private Organizations Social Security Agency (POSSA) is owed the remaining 89 billion birr.

The conversion brings the total owed to the two agencies to 395 billion birr, representing a 199 percent jump over the last five years. Although the figure accounts for around 17.5 percent of all domestic debt, it now makes up 28 percent of the government’s total domestic debt portfolio.

Recent reports published by the Finance Ministry and the International Monetary Fund (IMF) state that the conversion was “voluntary.”

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“The conversion provides debt service relief to the Treasury and an instrument that better matches the pension funds’ asset and liability durations [and] protects pensioners through returns expected to keep pace with medium-term inflation,” reads one government document.

Representatives from the pension agencies did not respond to The Reporter’s inquiries about what effect the changes will have on their financial standing.

Direct advances from the National Bank of Ethiopia (NBE) have also been restructured, with 242 billion birr in advances converted into long-term bonds due to mature in 25 years, and carrying three percent interest.

The changes were elaborated on in a letter of intent addressed to IMF Managing Director Kristalina Georgieva from Finance Minister Ahmed Shide and NBE Governor Mamo Mihretu. In the letter, the duo reaffirm Ethiopia’s commitment to the IMF program that began in July 2024.

The conversion of direct advances into 25-year bonds is the third of its kind in the last five years, with 192 billion birr in advances treated similarly in 2020, and another 236 billion birr converted in October 2022.

The latest conversion brings the total to 670 billion birr in direct advances from the central bank turned into long-term bonds.

The latest reports from the Finance Ministry indicate that total domestic debt has grown by an average of 20 percent annually, from 919 billion birr in 2019/20 to nearly 2.3 trillion birr by the end of 2023/24.

State-owned enterprise (SOE) debt has nearly doubled to 845 billion birr since 2020, while various types of treasury bills constitute nearly a third of the total domestic debt stock. Officials hope the restructuring of these short-term bills into long-term bonds will provide relief to the government as it struggles to service its mounting obligations.

Meanwhile, the stock of government bonds has more than tripled to 717 billion birr over the last five years. A large portion of these bonds are held by commercial banks, who are obligated to spend a portion of their annual profits on purchasing them.

However, the mandatory purchase of T-bills by commercial banks is set to come to an end as part of the terms of the deal with the IMF.

“The mandatory purchase of five-year treasury bonds at sub-market interest rates by commercial banks will be phased out by end-June 2025, with an intention to develop the market for longer-dated government securities. The requirement that financial institutions purchase [Development Bank of Ethiopia] bonds will be removed before the fifth review of the Fund program,” reads an IMF assessment report published this week.

The decision to scrap the T-bill rules was referred into in the letter penned by the Minister and the Governor.

“In 2024/25, we will require banks to purchase 55 billion birr of five-year T-bonds at nine percent interest (minimum savings rate plus 2 percent). Thereafter, we intend to develop the market for longer-dated government securities exclusively through market-based mechanisms,” reads the letter addressed to the IMF chief.

The government is looking to use market-based instruments to source domestic credit in its bid to bridge the widening budget deficit.

“For all other purposes, we will rely on market-based domestic financing, notably through developing the T-bill market. We will inform Fund staff before taking any action to roll over or restructure public sector liabilities at rates below contemporaneous T-bill rates, including the T-bill exchange noted above,” reads the letter.

It also refers to plans to draw up a sustainable funding strategy for DBE to replace its current mandatory bond policy before the fifth review under the IMF program.

“In the interim, the yield on newly issued DBE bonds will be aligned to the yield of the most recent Treasury bond at time of issuance,” reads the letter.

Treasury bills are short-term securities that the government auctions off bimonthly to raise funds from the general public. Treasury bills with maturities of 28, 91, 182, and 364 days are currently available for purchase. The most frequent holders of the bills are government banks (the Commercial Bank of Ethiopia), the pension agencies, and private commercial banks.

The banking industry holds around 45 percent of the total T-bill stock, which made up nearly 32 percent of total government debt at the end of 2023/24. The state-owned CBE holds double the amount held by all other banks combined, while the pension agencies hold the remaining 55 percent.

Last year, 364-day treasury bills accounted for more than half of all bills, while 182-day bills accounted for a quarter.

The reports indicate the government continues to rely on quantitative instruments, such as the cap on private sector credit growth, to limit inflation in the near term of tepid demand in light of low and slow-changing T-bill and deposit rates.

The IMF warns that continued dependence on these instruments could lead to inefficient allocation of credit and distort monetary transmission.

“Efforts to improve Treasury bill market functioning continue. Following the authorities’ outreach effort to ensure auction rules are well understood, Treasury bill rates have moved closer to the policy rate. Nevertheless, and reflecting tight liquidity, auctions remain undersubscribed, and there is a need to significantly increase participation to mobilize domestic resources,” reads the Fund’s assessment.