IMF Publishes Report on the 2018 Article IV Consultation with Ethiopia
IMF published its staff report under the 2018 Article IV Consultation with Federal Democratic Republic of Ethiopia. Directors noted that financial sector reforms would increase the effectiveness of monetary policy and support development goals. These reforms should include the development of a market for government securities, with market determined interest rates. Until this market develops, National Bank of Ethiopia (NBE) bills should be used solely to manage liquidity in the banking system and delinked from funding of the Development Bank of Ethiopia which needs to complete a comprehensive financial assessment. Gradual opening of the financial sector to foreign investors could improve services and transfer technology and know-how.
The staff report notes that commercial banks appear to be mostly well-capitalized and liquid, with nonperforming loans (NPLs) well below the statutory 5% ceiling. However, the state-owned Commercial Bank of Ethiopia (CBE) is exposed to state-owned enterprises, whose income may be adversely affected by the phasing out of implicit subsidies, restrictions to competition, and other distortions. To map early remedial actions, NBE has instructed CBE to undertake a comprehensive asset quality review. Moreover, asset quality in the state-owned Development Bank of Ethiopia, which is a non-deposit-taking institution and hence not part of the commercial banking system, continues to deteriorate. The Development Bank of Ethiopia's NPL ratio stood at 39% in 2017–18, posing substantial quasi-fiscal risks—as outstanding NBE credit to the DBE represents 2.4% of GDP. The authorities have undertaken a financial assessment of the Development Bank of Ethiopia and are considering remedial strategies.
NBE bills need to be reformed and delinked from Development Bank of Ethiopia funding. These five-year NBE bills must now be purchased by private commercial banks in an amount equivalent to 27% of gross credit extended, irrespective of the maturity of the loans—about 75% of these funds are then used to fund the Development Bank of Ethiopia. NBE bills now represent 30% to 40% of private commercial banks’ loans outstanding; although the interest rate on them was recently increased, it remains negative in real terms. The bills have been successful in reducing banks’ excess liquidity, but their design should be improved to better serve this purpose until a T-bills market develops—by reducing their maturity and possibly basing the purchase obligation on excess reserves. Further funding of the Development Bank of Ethiopia by NBE should be discontinued, at least until the ongoing comprehensive assessment of its financial situation is completed and resolution measures are implemented.
Related Link: Staff Report
Keywords: Middle East and Africa, Ethiopia, Banking, Securities, NPL, Article IV, IMF
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
