Ethiopia Compels Private Banks to Buy Bonds to Fund Development

Ethiopia: Awash International Bank (AIB)
Awash International Bank (AIB) is the first private bank to construct its own headquarter building in the heart of Addis Ababa, Ethiopia.

By William Davison (Bloomberg) — Ethiopia will compel private lenders to purchase government bonds equivalent to 27 percent of their annual loans to help fund development in the country, a central bank official said.

A policy directive has been issued to ensure banks provide funds for long-term infrastructure projects, National Bank of Ethiopia Deputy Governor of Monetary Stability Yohannes Ayalew said in an interview yesterday in Addis Ababa, the capital.

“Banks are meant to contribute toward development projects,” Yohannes said.

Ethiopia needs to spend $5.1 billion annually over the next decade to address a shortage of power, roads and telecommunications infrastructure, according to a World Bank report published last year. That level of investment is beyond what the government can currently afford, according to the report.

Projects currently under way in the Horn of Africa country include a $6 billion program to build a 2,395-kilometer (1,488- mile) railway network, according to the Ethiopian government. Last month, Water Minister Alemayehu Tegenu said the country will build a 5,250 megawatt hydropower dam in the Nile River basin at a cost of $4.76 billion. The project will be funded partly through the sale of government bonds, Alemayehu said.

Five-Year Bills

Under the central bank directive, five-year National Bank bonds will be bought by lenders at the end of each month, according to Yohannes. The securities will offer a coupon of 3 percent, he said. State-owned banks including Commercial Bank of Ethiopia, the country’s biggest lender, will be exempt as they routinely finance long-term projects, Yohannes said.

The government also plans to raise as much as 15 billion birr ($892.2 million) over five years from the sale of Government Savings Bonds, according to Yohannes. The securities will pay 5.5 percent when held for as long as five years, and six percent for longer, he said.

Ethiopia, Africa’s second-most populous nation with 83 million people, was Africa’s fastest-growing economy in 2009 with an annual growth rate of 9.9 percent, according to the International Monetary Fund’s website. The growth rate has averaged 11 percent over the past seven years, IMF data shows.

–Editors: Paul Richardson, Philip Sanders.

To contact the reporter on this story: William Davison in Addis Ababa via Nairobi at pmrichardson@bloomberg.net.

To contact the editor responsible for this story: Paul Richardson in Nairobi at pmrichardson@bloomberg.net.