REQUEST FOR EXPRESSIONS OF INTEREST

AFRICAN DEVELOPMENT BANK

REGIONAL DEVELOPMENT AND BUSINESS DELIVERY OFFICE, EAST AFRICA (RDGE)

Khushee Tower, Longonot Road, Upper Hill    P. O. Box 4861 – 00200, Nairobi, Kenya.tel: (+254-20) 2998352

Fax : (+254-20) 271 2938

Website : www.afdb.org; E-mail : [email protected] and [email protected].

Brief Description of the assignment : POSITIONING ERITREA’S FINANCIAL SECTOR TO INCREASE ACCESS TO CREDIT FOR MICRO, SMALL AND MEDIUM ENTERPRISES

Place of assignment :  Asmara, Eritrea and partly virtual

Period of assignment : December 2020 – June 2021

Expected start date of the assignment : December 2020

Last date for expressing interest : 4th      December 2020

Expression of interest to be submitted to : [email protected] and copy [email protected]

Any questions/ clarifications needed to be addressed to : [email protected] and [email protected]

Further details are as below.

TERMS OF REFERENCE

POSITIONING ERITREA’S FINANCIAL SECTOR TO INCREASE ACCESS TO CREDIT FOR MICRO, SMALL AND MEDIUM ENTERPRISES

GENERAL INFORMATION

 

 

Services/Work Description : Conduct a diagnostic study to (a) assess the impact of COVID-19 on Eritrea’s financial sector (b) assess the capacity of the Eritrean Investment and Development Bank (EIDB) to provide credit to Micro, Small and Medium Enterprises (MSMEs) and (c) develop a road map for financial sector development and proposal to strengthen the banking sector in general and EIDB in particular.

Type of the Contract:Individual Consultants
Expected Duration:Six (6) person months: December  2020 – June 2021
Expected Start Date:December 2020

 

Background :

Update on recent economic developments :

Eritrea remains trapped in a low and volatile growth situation resulting in pervasive poverty. Growth averaged -1.5% during 2015-2019, which is lower than the average growth in population of 2.3%. GDP growth was underpinned by fixed investment and public consumption, which registered average growth of 5.6% and 20.1%, respectively. On the other hand, the contribution from consumers’ spending is diminishing, with growth of negative 0.6% at an annualized rate. Net exports have remained a drag on domestic output growth by allowing imports that boost the demand for foreign output to supersede exports which increase domestic demand and job creation. Thus, real GDP is projected to contract to -1.1% compared to estimated growth of 3.1% in 2019 under the worse-case scenario assuming persistence in spread of the pandemic until end of 2020.

Eritrea’s public debt level is unsustainable, and the country is in debt distress. Public debt increased to unsustainable levels as a result of the accumulated debts contracted to finance the huge fiscal deficit (averaging 12.9% annually) in the decade before 2015. The national debt to GDP ratio increased to 190.3% in 2015 and 196.2% in 2017 before declining to 174.3% in 2018 and to 165.1% in 20191, reflecting fiscal consolidation efforts to stabilize the public debt. Domestic debt accounted for 61% of total public debt (100.6% of GDP) in 2019, with external debt accounting for an estimated at 64.4% of GDP. Eritrea is classified as a pre-decision Heavily Indebted Poor Countries (HIPC) initiative potential beneficiary but must commit to an International Monetary Fund (IMF) Staff Monitored Program to access debt relief under the HIPC and possibly Multilateral Debt Relief initiatives.

The current account registered increased surpluses during 2015-2019 compared to 2005-2014 largely driven by increased gross national savings, which averaged 15.4% and 24.3% of GDP during 2005-2014 and 2015-2019 respectively. Current account registered consecutive surpluses of 16.6 % of GDP in 2018 and 11.3 % of GDP in 2019 facilitated by government’s fiscal consolidation strategy which contributed to fiscal surpluses (part of national savings). The fiscal balance recorded surpluses of 10.9 % and 0.6% of GDP in 2018 and 2019 respectively.

The economic outlook is overshadowed by the impact of the COVID-19 crisis. Real GDP growth, inflation, budget and current account balances will all be adversely affected by the COVID-19 crisis. The demand and supply shocks associated with COVID-19 are projected to slow down real GDP growth in 2020 although a modest recovery is expected in 2021 as the COVID-19 pandemic is contained. Preliminary projections indicate that real GDP growth will contract to 0.3% in 2020 under the baseline scenario where COVID-19 is contained by the third quarter of 2020 and to -1.1% under the worse-case scenario if COVID-19 persists to the end of 2020 compared to 3.1% in 2019. Increased public spending in response to the COVID-19 crisis amid depressed revenues will result into a fiscal deficit of 4.7% and 5.7% of GDP in 2020 under the baseline and worse-case scenarios respectively compared to a surplus of 0.6 % of GDP in 2019. The fiscal deficits will deplete the national savings in the face of increased COVID-19 induced investment needs for economic recovery, increasing the savings-investment gap which would only be covered by reducing the current account surpluses. Current account surplus is projected to drop to 10.3% of GDP in 2020 under the baseline scenario and 8.1% under the worse-case scenario compared from 11.3% in 2019. Inflation is expected to the drop in total public debt is largely from external component. It is noteworthy that the overall fiscal balance reflects not only the current but also the previous policies, the accumulated fiscal surpluses are being used to service the country’s debt obligations. In tandem with this, debt service as a percent of exports increased from 6.3 in 2017 to 6.8 in 2018 and it further increased to 8.3 in 2019. ncrease to 5.0 % in 2020 relative to negative 27.6% in 2019 in response to COVID-19 induced supply shocks due to disruptions in regional and global supply chains which are likely to more than offset the impact of subdued demand.

Rationale for the study: the need to mitigate the impact of COVID-19 on the financial sector and private sector especially micro, small and medium enterprises (MSMEs)

Impact on the Micro, small and medium enterprises: MSMEs and workers are feeling the economic brunt of the COVID-19 pandemic. The outbreak is quickly evolving from a health emergency into a full-blown economic crisis, spreading rapidly throughout the financial sector and other sectors of the economy. Without timely support, there may be persistent harm as otherwise-healthy firms are shuttered and the related jobs are permanently lost. The objective of supporting MSMEs in the short- to longer-term should be to address immediate liquidity challenges, limit MSME closures/bankruptcies, particularly in cases where more productive MSME may be at greater risk of closure and prevent widespread layoffs. The impact of COVID-19 on MSMEs can be traced through two important channels. Demand-side shocks: (a) negative impact on final consumption and export demand and (b) negative impact through value chains as MSMEs experience lower demand from other firms that are themselves experiencing a drop-in demand, or customers going into bankruptcy resulting in payment delays and defaults. Supply-side shocks:(a) decline in the availability of labor as firms must stay closed due to containment measures and workers’ lives are disrupted and remain unable to fully participate because of illness, childcare or household duties or face restrictions related to their mobility and (b) decline in firm productivity as workers are less efficient as they adapt to a new working environment. The overall impact of these demand and supply shocks is liquidity problems as reduced sales reduce firm’s ability to pay creditors, including financial institutions and suppliers.

Impact on the financial sector :

Revamping the economy and increasing overall investment and private consumption demand would be impossible without a well-functioning and efficient financial sector, which provides quality credit to the MSMEs. While the government has started relaxing containment measures in certain locations, the economic impact of COVID-19 on the MSME and financial sector is expected to be severe. In this context, understanding COVID-19’s impact on the financial sector including the state-owned EIDB remains key. The EIDB was established under proclamation No. 91/1996 with a mandate to extend development and investment loans, credits and all other banking services throughout the country; (b) promote and accelerate the country’s development through the provision of development finance to viable development-oriented projects in all sectors of the economy in form of credits, administered funds and equity investments; and (c) mobilize funds from national and international organizations/entities whether private or public for facilitating the financing of development-oriented projects and investments. Given the potential impact of COVID-19 on the MSME and on the financial sector including EIDB, a diagnostic study is needed to inform required actions to position Eritrea’s financial sector to increase credit to MSMEs and accelerate post COVID-19 economic recovery.

II Objective of the assignment : 

The objective of the assignment is to support the Government of Eritrea to generate rigorous analytical work to (a) assess the impact of COVID-19 on Eritrea’s financial sector; (b) assess the readiness of EIDB to provide credit to Micro, Small and Medium Enterprises(MSMEs); and (c) identify gaps and develop a road map to strengthen the financial sector. Findings from this study will inform the required financial sector actions to accelerate create to MSMEs and accelerate the post COVID-19 recovery. The study outcome will also inform potential support from development partners, including the African Development Bank.

III. Scope of Work :

The African Development is seeking to recruit individual consultants to undertake a financial sector diagnostic study to (a) assess the impact of COVID-19 on Eritrea’s financial sector (b) assess the readiness of the Eritrean Investment and Development Bank(EIDB) to provide credit to Micro, Small and Medium Enterprises(MSMEs) (c) develop a detailed road map necessary to strengthen the financial sector, increase access to credit for MSMEs and accelerate the post COVID-19 economic recovery. In this context, the successful individual consultants will work with the national authorities, EIDB and Central Bank to immediately identify and prioritize the pertinent financial sector policy interventions that will support the post-COVID-19 economic recovery. Findings from this assignment are expected to inform potential support from development partners to strengthen Eritrea’s financial sector.

The major tasks to be undertaken in the preparation of this analytical work comprise, among others :

2.1 Undertake a financial sector diagnostic study covering the following areas: (i) the stability and contribution of the banking sector to the country’s development; (ii) opportunities and constraints to financial intermediation of commercial banks operating in Eritrea; (iii) options for improving access to financial services by MSMEs; (iv) actions to improve the effectiveness of EIDB; (v) refinements to the legal framework to enhance financial sector development; (vi) payments and settlement systems; and (vii) development and regulation of the insurance sector. The study will also examine the progress made in developing Eritrea’s financial sector, identify any remaining gaps and corresponding remedial actions.

2.2 Provide hands-on advisory services and implementation support to the Central Bank and EIDB to integrate the study findings and roadmap into the national financial sector strategies and implementation plans.

2.3 Prepare three reports, namely: (i) financial sector diagnostic (see 2.1); (ii) a roadmap for implementing the proposed policy recommendations, including development of required financial infrastructure; and (iii) report summarizing the key outcomes of the hands-on advisory services and implementation support to the Central Bank and EIDB.

2.4 Presentation of the proposed policy actions will reflect: (i) synergy—to ensure relevance and alignment of proposed actions with broader development goals; (ii) sequencing—prioritization to optimize developmental impact; and (iii) sustainability—integrating all stakeholders and development practitioners to generate lasting developmental results and transformation.

Deliverables :

The primary deliverables to be undertaken by the successful consultant during the period October 2020 – April 2021 will include :

  1. Inception Report capturing: (a) review of recent financial sector developments and the current status of implementation of the Financial Sector Road Map if any (b) methodology to be used in responding to the study questions (as presented in section III above); (c) the key stakeholders to be engaged in the preparation of the analytical work; and (d) and outline of the diagnostic study report ;
  2. Financial Sector Diagnostic study report ;
  3. Roadmap for implementing the proposed policy recommendations, explicitly indicating the required actions, implementation timelines, stakeholders and their responsibilities ;
  4. Presentation of the draft study reports including a summary report of the key outcomes of the hands-on advisory services and implementation support to the central bank and EIDB at a workshop in Asmara or virtually for review and inputs; and
  5. Submission of final reports mentioned in ii – iii to RDGE.

Table 1: Deliverables and Timelines :

ActivityIndicative
Timeline
Deliverable 1 (D1):
Inception  Report  capturing:  (a)  review  of  recent  financial  sector  developments  (b)November
methodology to be used in responding to the study questions (as presented in section III
2020
above); (c) the key stakeholders to be engaged in the preparation of the analytical work;
and (d) and outline of the diagnostic study report;
Deliverable 2 (D2):December
•  Financial Sector Diagnostic study report;
2020
Deliverable 3 (D3):
Roadmap for implementing the proposed policy recommendations, explicitlyJanuary
indicating the required actions, implementation timelines, stakeholders and their
2021
responsibilities.
Deliverable 4(D4):February
Presentation of the draft study reports at a workshop in Asmara or virtually for review and
2021
inputs.
Deliverable 5 (D5):March/ April
•  Submission of final reports mentioned in D2 – D3.2021
5

Level of Effort :

The successful consultants will need to commit an effort equivalent to six (6) person months for this assignment.

DESIRED QUALIFICATIONS AND COMPETENCIES :

Two individual consultants will be hired. The team leader will be an international consultant and supported by a national consultant. The individual consultants should be able to demonstrate professional, operational and academic competence in the field of banking and finance, macroeconomics, and economic growth, with experience of working with governments in developing countries, particularly transitional states. Individual candidates should be able to demonstrate the following academic qualifications and professional experience, at a minimum:

Academic qualification :

At least a Master’s degree or equivalent in Banking and Finance, economics, law, or related field. A PhD is added advantage.

Experience :

  1. At least fifteen (15) years for the international consultant/ team leader and 10 years for the national consultant, of progressive responsibility in the field of banking and finance, financial sector analysis and macroeconomics ;
  2. Specific experience in relevant areas that include Banking, Central Banking, and structural transformation ;
  3. Experience in preparing diagnostic reports, policy analysis, roadmaps and bankable projects ;
  4. Excellent ability to communicate concise and persuasive economic analysis and policy advice in writing and orally ;
  5. Adequate knowledge of the macro and socioeconomic landscape and current dynamics of the Eritrea economy in terms of policy environment, opportunities, weaknesses and challenges.

REMUNERATION :

The proposed remuneration will be defined based on the consultant’s financial proposal in accordance with the Bank’s remuneration grid and budget availability. The cost should be inclusive of honorarium and reimbursable costs. Should the highest scoring consultant’s financial proposal exceed the budgeted amount, the consultant will be contacted for negotiations. If no agreement is reached, the next highest scoring consultant shall be contacted until a suitable financial proposal is achieved.