When the State Takes All the Credit

A crowding-out that has already arrived

Ethiopia’s public finances are increasingly defined by the government’s growing appetite for domestic borrowing. Debt servicing now consumes the largest share of federal spending: in the 2017 budget year, “52 percent of the funds allocated for recurrent expenditure… will be used for debt servicing,” according to the budget explanatory document. Nearly one-fifth of all major federal outlays—18.97 percent—now goes to paying creditors, outstripping allocations for roads, education and defence.

The shift is not only about the scale of spending but about how it is funded. Having previously relied on money creation to plug deficits, the government now leans heavily on the Treasury-bill market. That may satisfy donors wary of unrestrained monetary expansion, but it has created a different strain on the financial system.

With the National Bank of Ethiopia’s credit cap freezing banks’ loan books, the state has enjoyed almost uncontested access to liquidity. The cap, originally intended to rein in inflation by limiting private-sector lending, has had a more consequential side-effect: it channels bank funds directly into government paper.

Christian Tesfaye, a financial consultant, says the surge in government borrowing is already squeezing out businesses. “The increasing treasury bill rate restricts banks’ lending activities and requires analysis,” he warns. He adds that the macroeconomic adjustments introduced by the government—credit ceilings, limits on lending rates and cash-flow constraints—have “put negative pressure on the business sector.”

Henok Gedlu, another financial-sector analyst, calls the booming T-bill market a “double-edged sword.” In his view, banks see government securities as “secure and highly attractive”—a safer option than lending to the private sector. But this strategic retreat from risk, he says, intensifies the “crowding-out effect,” leaving small firms struggling for credit. Commercial banks and pension funds, which together hold nearly 80 percent of outstanding securities, have seen T-bill income soar. As Henok puts it: “Banks are strategically choosing these secure, high-yield options.”

The data bear that out. In September 2025 the NBE raised 32.9bn birr in a single auction, with bids oversubscribed by 27 percent. Short-term maturities—especially the 28-day and 91-day bills—were swamped with demand. Investors’ confidence fades with maturity: the one-year paper was undersubscribed, and its cut-off yield reached a punishing 20.1 percent.

This domestic borrowing spree now sits at the centre of stalled IMF discussions. The Fund wants Ethiopia to lift its credit cap as part of the fourth review of its Extended Credit Facility, arguing that the cap distorts credit allocation and entrenches state dominance. Ethiopia fears the opposite: officials insist that removing the cap too soon would unleash a flood of private credit into an inflation-prone economy. Lifting it, one government adviser warns privately, would “pour fuel on an unsteady fire.”

Abdulmanan Mohammed (PhD), a long-time critic of the government’s financing strategy, argues that the macroeconomic risks stem not from the cap but from the state’s debt appetite. “Since the treasury bills that are arbitrarily taken carry high interest rates, the government is taking on multiple tax burdens to cover its debt,” he explains. In his view, high-yield domestic borrowing is contributing directly to inflation and fiscal strain. “The sharp increase in government spending… has created a negative impact on the overall macroeconomic situation.”

He notes that federal spending grew by 107 percent between 2012 and 2016, a surge financed largely by Treasury bills. “It has a significant role in causing overall inflation,” he says. High interest costs—now routinely above 15 percent, sometimes above 20 percent—amount to future tax hikes in disguise.

The structure of Ethiopia’s domestic debt is shifting sharply toward the short end. Investor preference for one- and three-month maturities is unmistakable: the 28-day bill was oversubscribed at 596 percent in September, while the 364-day bill attracted barely a third of the bids required.

The Ministry of Finance calls this a sign of “a robust and increasingly liquid domestic debt market.” But short-term rollover dependence exposes the state to sudden shifts in market sentiment. Pension funds and the Commercial Bank of Ethiopia together now hold 77 percent of the T-bill market—a concentration that heightens liquidity risks.

Meanwhile, the government’s spending needs continue to grow. The 2018 draft budget totals 1.93trn birr, the largest in Ethiopia’s history. Finance Minister Ahmed Shide says that 73 percent of it must be raised from tax revenue, with the rest from development partners and domestic borrowing. The deficit—2.2 percent of GDP by official estimates—will be funded not by central-bank advances but by more T-bill issuance.

For businesses, the effect is suffocating. “The price of electricity consumption, property tax, and revised laws on the service sector have made the economy more than it can bear,” notes Atlaw Alemu of Addis Ababa University. Crowding-out from domestic borrowing adds yet another handicap.

High borrowing costs compound the pressure. The 20 percent yields on one-year paper are filtering into banks’ deposit rates, raising funding costs and forcing lenders to ration credit. With inflation still high, real lending rates remain uncomfortably tight for borrowers.

Banks face a bind. To attract deposits, they must raise interest rates; to remain profitable, they must divert more of those deposits into government securities; and to remain within regulatory limits, they must curtail lending. The credit cap locks them into this loop.

Ethiopia’s pivot from money printing to domestic borrowing was intended to stabilise the macroeconomy. Instead, it has entrenched state dominance of the financial system while starving the private sector of credit. Even the government’s own advisers acknowledge that domestic borrowing needs closer scrutiny.

A senior researcher at the Ethiopian Economic Experts Association warns that the Treasury-bill programme “requires strong criticism and should be closely monitored.” The combination of conflict-driven spending, slowing growth and heavy refinancing needs has left fiscal policy reliant on increasingly expensive short-term borrowing.

The IMF sees lifting the credit cap as the first step toward unlocking private credit, improving financial intermediation and restoring market balance. Ethiopian officials see inflation risk. Either way, the government’s grip on domestic liquidity is tightening.

For now the state continues to absorb most available credit, leaving businesses scrambling for what remains. In Ethiopia’s great contest for financial resources, the government is pulling hardest—and the private sector is losing its footing.