News Analysis: Bill to resolve 845 billion birr bad debt of state enterprises sparks heated debate in parliament before majority endorsement

Addis Abeba – A bill aimed at addressing nearly 845.4 billion birr in bad loans accumulated by state-owned enterprises (SOEs) at the state-run Commercial Bank of Ethiopia (CBE) has sparked a heated debate in parliament, with lawmakers voicing concerns about the potential consequences for the nation’s economy.

Tabled before legislators on 05 November, 2024, by Tesfaye Beljige, the government’s chief whip, the bill proposes that the Ministry of Finance issue 10-year local Treasury bonds, with the proceeds allocated to repay debts owed to the CBE by state-owned firms. The government will have a three-year grace period before commencing the repayment of these bad debts through the issuance of Treasury bonds.

The government proposal also includes an increase in the capital of the CBE by an additional 54.6 billion birr.

In his explanation, Tesfaye stated that SOEs have failed to repay the loans they received from the CBE and that the high interest rates on these loans are placing significant pressure on the bank.

He requested that the draft proclamation be forwarded directly to the second reading stage, followed by a discussion and subsequent approval.

Desalegn Chane (PhD), a Member of Parliament (MP) representing the National Movement of Amhara (NaMA), criticized the government’s decision to introduce and immediately seek approval of the bill on the same day.

“Such a crucial piece of legislation warrants public deliberation,” argued Desalegn. “It should be referred to the standing committee for thorough scrutiny.”

Desalegn stated that the accumulation of this significant bad debt reflects the failure of SOEs that borrowed from the CBE. “However, no one has been held accountable for this failure,” he added.

Eyob Tekalign, the State Minister for Finance, attended the parliamentary session to defend the government’s decision and address concerns raised by lawmakers.

According to the State Minister, the bad debt accumulated to its current level due to the non-payment of interest within the stipulated timeframe. “Consequently, the interest payments have exceeded the original principal loan amount,” he explained.

Eyob, however, acknowledged that many of the projects undertaken by these SOEs were initiated without conducting feasibility studies. However, he clarified that responsibility for these failures lies with the previous administration.

“The current administration inherited these failures and implemented a strategy to resolve them,” Eyob noted. “As a result, most SOEs have transitioned from loss-incurring institutions to profitable enterprises.”

According to Eyob, one of the government’s strategies involved establishing the Liability Asset Management Corporation (LAMC) to consolidate and service a portion of SOE debt, thereby improving their balance sheets.

“This initiative has strengthened the financial position of many SOEs,” he stated.

Following the Council of Ministers’ endorsement in January 2021, the Corporation was established with a subscribed capital of 570 billion birr. It was tasked with the consolidation and servicing of a portion of seven state-owned enterprises (SOEs), including the Ethio-Engineering Group (formerly METEC), Ethiopian Electric Power, Ethiopian Electric Utility, and Ethiopian Railway Corporation.

However, Eyob acknowledged that LAMC was unable to consistently service the debts of all enterprises, leading to the recent government decision to directly assume the debt.

He explained that the major SOEs are consolidated under the umbrella of Ethiopian Investment Holdings (EIH), which currently boasts a capital of $30 billion.

However, several Members of Parliament expressed concerns regarding the long-term viability of SOEs. They argued that the current operational model of these entities could potentially strain the nation’s economy.

One MP proposed that a comprehensive analysis of the financial performance of SOEs be conducted and subsequently presented to Parliament.

Desalegn also inquired about the potential burden that transferring the debt to the government might impose on the economy.

In his recent address to Parliament, Prime Minister Abiy Ahmed announced that the government has successfully decreased its debt-to-GDP ratio from 30% to 17% in the past six years.

He further disclosed that the objective is to continue reducing this ratio to below 10% in the near future.

According to the most recent Public Sector Debt Statistical Bulletin published by the Ministry of Finance, the total public sector debt, encompassing both domestic and external obligations, reached $68 billion as of June 2024. During the same period, domestic debt alone accounted for $36.9 billion.

While acknowledging that the debt repayment is likely to impose an additional financial burden on the government, Eyob argued that the impact is projected to be mitigated due to the annual payment schedule and the government’s increasing revenue collection capacity.

Following over an hour of deliberation and intense debate, the parliament approved the bill by a majority vote, with one MP opposing the proposal. AS