Taxpayers To Foot Massive 845bln Bill For Bad CBE Loans

Finance Ministry ready to issue 900bl birr bond to salvage state bank

A staggering 845 billion birr in bad loans extended to state-owned enterprises by the Commercial Bank of Ethiopia (CBE) had legislators fuming this week as officials from the Ministry of Finance proposed the issuance of an unprecedented 900 billion birr in bonds to bail out the banking behemoth.

The state-owned CBE’s non-performing loans (NPLs) have been piling up since the EPRDF era, with much of the arrears coming from bad loans provided to state-owned enterprises and large-scale public projects over the last three decades.

Many of these projects, including Yayu Fertilizer Complex, a dozen mega sugar estates, and several others under the former Metals and Engineering Corporation (MetEC) and other enterprises, have failed. As a result, CBE has been unable to collect on the debts owed to it, casting a shadow of doubt over the standing of what is the country’s largest commercial bank by far.

Finance Ministry officials are scrambling to remedy the situation, proposing a contentious final resort to Parliament this week.

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The ‘Government Bond Proclamation’ tabled to lawmakers proposes to issue bonds valued at 900 billion birr in a bid to service the debt and bail CBE out. The Ministry is looking to begin settling the bonds after a three-year grace period, with the final payment set to be made within 10 years.

The figure is only marginally lower than the entire federal budget allocated for this financial year.

Of the unprecedented bond value, a little over 845 billion birr is set to be put towards servicing debts owed to CBE. The remaining 54.6 billion birr is to be injected into CBE’s paid-up capital, which has remained stagnant for a long time.

The proposal startled MPs, who questioned the implications of issuing the bonds on the financial system, market, and overall economy.

“The news that CBE is carrying a huge 845 billion in bad loans has been hidden to date. Every year, the government reports that CBE is making profits. This is a huge amount of debt,” said Desalegn Chane (PhD), an MP representing Bahir Dar.

He characterized the situation as a “great waste” and asked why the public should shoulder the responsibility of covering debts owed for badly planned projects.

“These projects failed either because of faulty feasibility studies or weak project execution. What is worse than the unpaid debt is that the officials who mishandled the projects have never been held accountable. Now, what are the implications of issuing 900 billion birr bonds?” said Desalegn.

Eyob Tekalign (PhD), a state minister of Finance who was in Parliament to present and defend the controversial proposal, claimed the crisis was inherited from the EPRDF and told lawmakers that SOEs have undergone comprehensive reform under the Prosperity Party.

He claimed that SOEs like the former MetEC (now the Ethio Engineering Group) are registering profits, while the Ethiopian Investment Holdings (EIH), which oversees the largest state enterprises, hold USD 30 billion in assets.

“Because the SOEs failed to pay their debts to CBE on time, the interest on the loans has piled up in the past years. The interest is surpassing the principals now,” said Eyob.

In 2021, the federal government established the Liability Asset Management Corporation (LAMC) in a bid to soak up the considerable debts owed by SOEs and settle accounts with lenders, particularly CBE.

The Corporation was formed with 570 billion birr in authorized capital, 142 billion of which was supposed to be paid up. However, the government has been unable to allocate more than 44 billion birr to the paid-up capital.

“Because the government could not inject funding and raise LAMC’s capital, LAMC could not service CBE’s loans on behalf of the failed SOEs,” states a document submitted to Parliament by the Finance Ministry.

“We decided to re-allocate the debt from LAMC to the Ministry of Finance because the longer it takes [to repay the debt] the more the interest piles up and impacts CBE’s balance sheet,” said Eyob.

LAMC has soaked up SOE debt on two separate occasions over the last few years. In the first, it took on almost 400 billion birr in SOE debt, in addition to 33 billion birr in interest.

The debt belonged to Ethiopian Electric Power (179 billion birr principal, 12 billion birr interest), the Ethiopian Railway Corporation (68 billion birr principal, 4 billion birr interest), and Ethio Engineering Group (11 billion birr principal, 5 billion birr interest). , Ethiopian Sugar Corporation (92 billion birr principal, nine billion birr interest) and Ethiopian Electric Utility (three billion birr principal, 120 million birr interest).

Under the second phase, LAM soaked up nearly 28 billion birr in accumulated debt from some of the same SOEs, putting its total adopted debt at 427 billion birr.

The Corporation was supposed to use proceeds from SOE privatization, including the partial privatization of Ethio telecom and nearly a dozen sugar estates, to raise its capital and settle the arrears. However, the sale of these state businesses never materialized, leaving LAMC on the line for hundreds of billions in debt.

“LAMC was established to provide a short-term solution by soaking up SOE debts and paying it to CBE after raising its capital. But since LAMC could not raise its capital, it could not service the debts to CBE. Therefore, the government has decided to provide a long-term solution now. We have decided to transfer the accumulated debt from LAMC to  the Ministry and pay it off in the form of bonds,” said Eyob.

The Ministry will issue the bonds to generate money to settle accounts with CBE, and the government will repay the bond over a 10-year period using funds raised through taxes and other sources.

In short, taxpayers will have to foot the bill.

“We are aggressively reforming our tax system to raise more revenue to pay the CBE loans and bonds,” stated Eyob.

He conceded that issuing bonds valued at 900 billion birr in one go will inflict fiscal pressure on the government, but argued that not doing so would result in worse macroeconomic distortions.

“The 900 billion bond is a big additional expenditure for the government, but it won’t inflict macro distortions on the economy,” said Eyob.

He tried to convince MPs that state enterprise reforms have made certain that this kind of situation will not repeat itself.

In the end, only one MP opposed the motion to ratify the Government Bond Proclamation, and the bill was passed.