Ethiopian Review

During the first quarter of 2008/09, monetary policy continued focusing on maintaining price and exchange rate stability amidst inflationary pressures. The National Bank of Ethiopia (NBE) said it is closely monitoring the efficacy of monetary policy measures taken in the preceding fiscal year. The measures taken, coupled with other fiscal and administrative actions, are envisaged to contribute towards slowing down the pace of inflation and inflationary expectations.

NBE’s quarterly report reveals that domestic liquidity as measured by broad money supply (M2) reached 71.4 billion birr in the first quarter of 2008/09, up by 4.8 and 22.2 percent vis-à-vis the preceding quarter and the corresponding period of last year, respectively. This growth was wholly driven by the expansion of domestic credit that offset the continued decline in net foreign assets. Domestic credit registered annual growth rate of 36.8 percent as the credit channeled to the non-government sector surged by about 57 percent. Credit to the government increased by 15.8 percent.

Net foreign assets, on the other hand, declined by 31.8 and 11 percent on yearly and quarterly basis, respectively, and reached 10.4 billion birr, largely reflecting the widening of the current account deficit. On the liability side, both narrow and quasi-money witnessed substantial annual increments of 23.4 and 20.9 percent, respectively driven by the rise in all components of broad money, except time deposits. On quarterly basis, however, demand and savings deposits expanded by 16.6 and 6.7 percent, while currency outside banks and time deposits fell by 7.5 and 10.5 percent, respectively.

Year-on-year basis, reserve money increased substantially by 32.3 percent due to a 32.3 percent increase in both currency in circulation and deposits of banks at NBE. On quarterly basis, however, reserve money showed a modest growth of 0.7 percent, solely driven by 5.3 percent increase in bank deposits at NBE, offsetting the 2.9 percent decline in currency in circulation. The first quarter of 2008/09 witnessed a significant decline in excess reserves of commercial banks, partly reflecting the increased lending activities of the Commercial Bank of Ethiopia, the holder of large stock of excess reserves. Accordingly, excess reserves reached 4.7 billion birr by the end of September 2008, compared to 6.5 billion birr a year ago.

The ratio of quasi-money to broad money grew by 0.2 percent in the first quarter of 2008/09 vis-à-vis the preceding quarter, indicating a relatively larger savings mobilization, and a shift from currency to deposit holding by the public. On an annual basis, however, all ratios, except quasi money to broad money, registered noticeable increments. Average savings and weighted demand deposit rates of commercial banks stood at the preceding quarter level of 4.08 and 0.04 percent, respectively. While time deposit rate declined from 5.16 to 5.11 percent, bond yields remained at the preceding quarter level of 4.14 percent. In contrast, weighted average yield on treasury bills (T-bills) slightly rose to 0.65 percent from 0.62 percent in the previous quarter. All deposit interest rates, weighted average yields on T-bills and government bonds remained negative in real terms during the review quarter as a result of higher inflation. The major financial institutions operating in Ethiopia are banks, insurance companies and microfinance institutions. With the establishment of two new banks, namely, Zemen Bank and Oromia International Bank, the number of banks has grown to 13, of which 10 are private commercial banks while the remaining three public banks. Six new bank branches were opened during the first quarter of 2008/09, thus, raising the total number of bank branches to 568. Consequently, the ratio of bank branch to total population dropped from 136,108 during the fourth quarter of 2007/08 to 134,670. About 38.2 percent of the total bank branches are located in Addis Ababa, major business centre and capital of the country. Out of the total number of bank branches, the share of private banks slightly increased to 53.5 percent from 53.0 percent in the preceding quarter, according to the report.

The total capital of the banking system reached 10.5 billion birr by the end of the first quarter of 2008/09, which was 5.6 percent higher than that of the previous quarter. Of the total capital, the share of private banks rose to 36.2 percent from 33.8 percent in the previous quarter, largely reflecting the new injection of capital by the newly established banks. Meanwhile, the number of insurance companies stood at 10, while their branches went up to 175, following the opening up of two new branches by NIB Insurance Company and Awash Insurance Company. Private insurance companies accounted for 78.9 percent of the total branches. Accordingly, one branch insurance company in the country serves almost 437,101 people. Of the total branches of insurance companies, 52 percent were situated in Addis Ababa.

The number of micro finance institutions (MFIs) operating in the country was 28 by end of September 2008. These institutions mobilized deposits amounting to 1.7 billion birr, up by 7.7 percent against the previous quarter. Similarly, credit outstanding of the MFIs grew by 4.4 percent to 4.7 billion birr and their total assets to 5.7 billion birr by the end of the review quarter. The top five largest MFIs; namely, Amhara, Dedebit, Oromia, Omo and Addis Credit and Savings Institutions accounted for 84.5 percent of the total capital, 92.8 percent of the savings, 90.7 percent of credit, and 90.5 percent of the total assets of the MFIs operating in the country.

The report indicated that resource mobilized (consisting of deposits, collection of loans and borrowings) by the banking system reached 10.4 billion birr during the first quarter of 2008/09, up by 39.8 and 31.5 percent vis-à-vis the preceding quarter and same quarter of last year, respectively. This was largely attributed to the surge in net deposits. Total deposit liabilities of the banking system registered quarterly and annual growth rates of 6.9 and 18.6 percent, respectively, and reached 67.3 billion birr by the end of the first quarter of 2008/09. Component-wise, time deposits showed a marginal quarterly and annual decline of 6.4 percent and 12.7 percent, respectively. On the other hand, saving deposits increased by 6.7 and 25.9 percent on quarterly and annual basis, respectively and reached 31.5 billion birr. Similarly, demand deposits went up by 8.8 and 16.5 percent during the same period. The share of government-owned banks in total deposits slightly fell to 64.3 percent from 64.8 percent in the previous quarter, whereas that of private commercial banks rose to 35.7 percent, from 35.2 percent in the previous quarter.

Collection of loans by the banking system went down by 12 percent in the review quarter compared to the preceding quarter, but went up by 15.5 percent vis-à-vis the corresponding period of last year. Of the total loans collected, 2.4 billion birr (41.9 percent) was by private banks and the balance by public banks. About 62.3 percent of the total loan was collected from the private sector followed by cooperatives (21.1 percent) and public enterprises (16.1 percent). The total outstanding borrowing of the banking system reached 2.9 billion birr at the end of the first quarter, registering an annual and quarterly growth rate of 21.7 and 9.4 percent, respectively. On annual basis, domestic and external borrowing of banks rose by 22 and 20.4 percent, respectively. Of the total borrowing, 2.4 billion birr (82.2 percent) was from domestic sources, while the remaining 523 million birr (17.8 percent) from external sources.

Fresh loan disbursements by banks increased by 88.5 percent to 7.4 billion birr compared to the corresponding period of last year, but declined by 17.0 percent vis-à-vis the preceding quarter. Of the total new loans disbursed, 32.7 percent was provided by private commercial banks. Regarding the beneficiaries of the new loans, some 52.8 percent went to finance international trade followed by housing and construction (14.1 percent), domestic trade (12.5 percent), industry (8.4 percent), and agriculture (5.2 percent). The other major beneficiary was the transport and communications sub-sector, receiving about 3.4 percent of the total fresh loans disbursed during the stated period.

By the end of September 2008, the report says, the total outstanding credit of the banking system (including credit to the government) reached 48.7 billion birr, 1.0 and 4.3 percent higher than that of the preceding quarter and the same period of last year, respectively. Of the total outstanding credit, the private sector took the lion’s share (59.0 percent) followed by public enterprises (22.5 percent) and central government. Sector-wise, credit channeled to the international trade ranked first accounting for 27.2 percent of the total credit, followed by industry (17.0 percent), central government (13.3 percent), housing and construction (11.0 percent), agriculture (10.1 percent), domestic trade (9.8 percent), as well as transport and communications (5.2 percent).

Total claims of NBE on the central government reached 44.3 billion birr at the end of the first quarter of 2008/09. This was 6.5 and 46.3 percent greater than that of the preceding quarter and same period last year, respectively. Direct advances reached 34.6 billion birr (or 78.1 percent of total claims), showing a quarterly and annual increment of 8.7 and 69.7 percent, respectively. In contrast, NBE’s holdings of government bonds declined by 2.1 percent compared to last year and reached 9,693.0 million birr by the end of the review quarter.

Meanwhile, the deposits of the federal government and financial institutions at the NBE reached 23.9 billion birr, up by 10.2 percent against the preceding quarter and 17.4 percent vis-à-vis the corresponding period of last year. Of the total deposits, 30.2 percent belongs to the federal government, which declined annually by 10.1 percent but increased quarterly by 17.3 percent. Similarly, the deposits of financial institutions registered an annual and quarterly increment of 35.2 and 7.4 percent, respectively.

The amount of T-bills supplied to the auction market was 7.9 billion birr during the first quarter of 2008/09. Of the total bills supplied, bills worth 7.1 billion birr were sold. The amount of T-bills fell by 15 and 61 percent compared to the preceding quarter and same period last year, respectively. The demand for T-bills reached 9.9 billion birr which increased by about 20 percent compared to the preceding quarter but declined by 58 percent against the corresponding period of last year. All the T-bills sold in the review quarter were bought by the non-bank institutions. As a result, the outstanding T-bills held by banks dwindled dramatically and reached 2.3 billion birr or 29.4 percent from 12.6 billion birr (86.4 percent) a year ago.

The average weighted yield on T-bills of different maturities, except for the 28-day bills, rose in the review quarter, vis-à-vis the preceding quarter. Accordingly, the yield on 28-day bills declined from 0.805 percent in the previous quarter to 0.501 percent. Year-on-year basis yields of all types of T-bills declined and stood at 0.65 percent compared to 1.01 percent last year.

(Reporter)