Highlight: Gov’t decides to convert salary contributions into a saving bond. Amount raised from Civil Servants estimated about 2 Billion Birr.

The one month salary contribution pledged by Civil Servants and other salaried citizens for the Renaissance dam(aka Millennium dam) is to be converted into bond purchase, the National Council of the Grand Renaissance Dam project decided on Monday.

The Council passed the decision in its extraordinary session held on Monday, which was chaired by its Secretary who also Secretary of the Council, Bereket Simon, Government communication Affairs Minister.

The decision is said to be taken in consideration of ‘the public’s economic challenges’ – as prices hike by 38.1 in June compared to the same month last year.

It is to be recalled that public and private sector employees fledged to donate an equivalent of a month’s salary in a spread of 12 months – i.e, July 2011-June 2012, to finance the Renaissance dam project. It would be equivalent to an 8.4%a voluntary tax for 8 months. This in addition to the treasury bonds issued for the same end. Investors and cooperatives had been pledging to buy bonds, in addition to their pledge to donate.

Though there is no official data on the actual amount raised so far, my estimation shows the government raised about 2 Billion Birr from Civil Servants alone. It is expected the Ministry of Finance will be withheld the amount pledged by Civil Servant when it disburses the budget of the new financial year that begins this month.

Civil Servants and employees made the pledges in the meeting they held ion their respective working places across the country since April. However, they were asked to confirm their decision by signing a pledge paper on individual basis on June. A move to address the criticism on the procedures and after the Deputy Prime Minister said in May that government agencies are instructed to ensure the voluntary nature of the process. [Please read my commentary: Collectivism: Raising funds for Renaissance dam]

The decision to convert the donations into bond purchase is only logical if the process is also meant to foster a culture of saving, as the 5-year Growth and Transformation Plan states. It will also enhance the fairness of the fund raising process between employed citizens and businessmen, as the latter are unlikely to donate 8.4% of their annual income.

It is expected the bond will be issued at individual level, though the news from Ethiopian TV didn’t indicate that.

The Ethiopian Government Saving Bond is officially on sale starting March 12, 2011. Though it was issued initially at Birr 500, 1000, 3000,5000, 10,000, 50,000 and 100,000 denominations, the Development Bank of Ethiopia(DBE) latter lower the minimum denomination to  Birr 50.

The interest rate on the government saving bond with the maturity period of 1-5 years is 5.5% per annum and for more than 6 years maturity period the interest rate per annum is 6%. Interest  earned from the bond is tax free. It can be traded in secondary market and or can be used as a collateral and may be transferred to a third party, according to the explanations of the Bank’s website.