A Path to Economic Stability

Debt Restructuring Crucial for Regaining Stability, Driving Future Growth

Ethiopia has made significant progress in addressing its debt burden. The country has agreed with some of its official bilateral creditors to suspend debt-service payments temporarily. The Ministry of Finance has also entered into negotiations to restructure a one billion dollar Eurobond that will mature next year. This development holds great promise for Ethiopia’s economic stability, enabling it to effectively manage its debt obligations and pave the way for a sustainable financial future.

However, Ethiopia faces significant challenges in its current financial situation. Limited availability of foreign currency has impeded the country’s ability to meet its foreign exchange needs, as funding from non-governmental organizations and other sources also diminished. The widening exchange rate between the parallel market and the formal market has been one of the primary reasons for the reduction in remittance inflows. Additionally, the adverse effects of the COVID-19 pandemic, internal conflicts and a decline in tourism income have exacerbated Ethiopia’s financial difficulties.

Addressing these challenges and ensuring a brighter economic future for Ethiopia hinges on successful debt restructuring. This process makes debt obligations more manageable, freeing up resources for essential investments. In this insightful report, EBR’s Najat Ahmed delves deeper into the complexities of Ethiopia’s financial situation and the prospects for successful debt restructuring. By tackling its current obstacles and seizing opportunities for sustainable debt management, Ethiopia can pave the way for a more stable future.

Ethiopia has made a significant breakthrough as it announced an initial agreement with its official bilateral creditors to suspend debt-service payments temporarily. The country’s finance ministry has also revealed its plan to commence negotiations to restructure a one billion Eurobond maturing next year. This development holds immense promise for Ethiopia’s economic stability, offering an opportunity to address its debt burden effectively.

Ethiopia’s finance ministry has successfully reached an initial agreement with its official bilateral creditors to suspend debt-service payments temporarily. This USD1.5 billion debt relief agreement provides much-needed respite for the cash-strapped nation, alleviating its immediate financial burden and creating space for further financial manoeuvring.

Sarah Alade (PhD), former deputy governor of the Central Bank of Nigeria, emphasized the significance of debt-service suspension, stating that temporary debt relief can allow countries like Ethiopia to stabilize their economies, invest in critical sectors, and chart a path towards sustainable growth. By providing fiscal breathing room, Ethiopia can redirect resources towards priority sectors such as infrastructure development, poverty reduction, and social welfare.

In addition to the debt-service suspension, Ethiopia’s finance ministry has announced its plans to negotiate the restructuring of a one billion dollar Eurobond maturing next year. Ethiopia’s decision to initiate talks to restructure this Eurobond demonstrates its proactive approach to managing debt obligations. Restructuring entails renegotiating the terms and conditions of the bond, extending its maturity and reducing repayment burdens. This process aims to strike a mutually beneficial solution that considers both Ethiopia’s interests and those of its creditors.

Carmen Reinhart (PhD), a former senior vice president and World Bank Group Chief Economist highlights the importance of debt restructuring: “For countries facing unsustainable debt burdens, restructuring can be a necessary tool to restore economic stability, regain access to financial markets, and promote investment,” explains Reinhart, who is also a professor of Economics at Harvard University. This shows that the restructuring of the Eurobond will involve modifying the existing terms and conditions to ease repayment burdens and enhance the country’s ability to meet its financial commitments. By engaging in negotiations, Ethiopia aims to secure more favourable terms, such as extended maturities, reduced interest rates, or even partial debt forgiveness. This restructuring process will provide the country additional financial flexibility and a sustainable path forward.

Ethiopia’s current debt condition underscores the urgency of finding viable solutions. As of 2021, the country’s total external debt stood at approximately USD 57 billion, a significant portion of which goes to international creditors. This high debt burden challenges Ethiopia’s long-term economic prospects, hindering foreign investment, access to credit markets, and sustainable development.

Ethiopia faces a significant challenge as its national debt continues to surge. According to forecasts by the International Monetary Fund (IMF), Ethiopia’s national debt is projected to soar by a staggering USD 75.1 billion US dollar, representing a substantial growth of 129.73 Pct between 2023 and 2028. This relentless upward trajectory in the country’s debt burden is cause for concern, as it poses economic risks and could hinder its long-term development prospects.

Vera Songwe (PhD), the first woman to head the UN’s Economic Commission for Africa (ECA) in Addis Ababa, at the level of Under-Secretary-General, also warns, “High debt burdens can hamper economic growth, limit fiscal space for essential investments, and reduce a country’s ability to respond to crises.”

Over the past years, Ethiopia’s national debt has steadily grown. This worrisome pattern has garnered the attention of global financial institutions, including the IMF. The general government gross debt, encompassing all liabilities that require future payments of interest and principal, has steadily increased, imposing an ever-growing burden on the economy.

Based on IMF estimates, if the current trend persists, Ethiopia’s national debt is anticipated to reach a record high of USD 132.97 billion US dollars by 2028. This projection indicates a decade of consecutive debt increases, underscoring the urgency for the Ethiopian government to promptly address the issue and implement necessary measures to curb the escalating burden.

The surging national debt carries several implications for Ethiopia’s economy. The increased debt servicing costs can initially divert a significant portion of the government’s budget from vital sectors such as healthcare, education, and infrastructure development. This diversion could impede the country’s ability to invest in critical areas crucial for sustainable economic growth and social welfare.

Moreover, a high debt-to-GDP ratio can undermine investor confidence and negatively impact the country’s credit rating. This situation may lead to elevated borrowing costs, making it more challenging for the government to access affordable credit in the international financial markets. Consequently, this could limit Ethiopia’s ability to fund critical projects and exacerbate its economic challenges.

The Ethiopian government should consider implementing a comprehensive strategy to tackle this mounting debt burden. This strategy should focus on fiscal discipline, enhanced revenue generation, and prudent debt management. Encouraging domestic resource mobilization, such as expanding the tax base and improving tax administration, can help bolster government revenues and reduce reliance on external borrowing.

Simultaneously, the government should prioritize investments in productive sectors of the economy to generate sustainable economic growth, create employment opportunities, and increase export earnings. This approach would aid in diversifying the economy and reducing its vulnerability to external shocks, ultimately supporting efforts to decrease the national debt.

Ethiopia’s national debt is projected to reach unprecedented heights in the coming years, posing significant challenges to the country’s economic stability and long-term development prospects. That’s why the government should take decisive action to address this issue by implementing sound fiscal policies, enhancing revenue generation, and promoting responsible debt management. By doing so, Ethiopia can mitigate the risks associated with its escalating debt burden and pave the way for a more sustainable and stable future.

According to the MoF’s Public Sector Debt Statistical Bulletin published in June 2023, as of March 31, 2023, Ethiopia’s total public sector debt (domestic and external) was around USD 60.6 billion. Domestic debt accounts for 53.5 Pct, while external debt makes up 46.5 Pct. The government owed the majority of the debt, followed by state-owned enterprises. The external debt increased slightly compared to the previous year, while its domestic debt was about ETB 1.7 trillion, with a decrease in outstanding Treasury Bills. Ethiopia is eligible for debt relief initiatives and has yet to benefit from the Common Framework, an initiative endorsed by the G20, together with the Paris Club, to support, in a structural manner, low-income countries with unsustainable debt. It is an initiative for debt treatment on a case-by-case basis, driven by requests from eligible debtor countries.

The recent address of the Prime Minister to the House of Representatives resonates with the recent announcement of Ethiopia’s preliminary agreement with its official bilateral creditors to suspend debt-service payments temporarily. This agreement, amounting to 1.5 billion Euros, offers a much-needed respite from the nation’s financial constraints. The Premiere’s emphasis on diminishing foreign debt and outlining plans for further debt restructuring demonstrates the government’s proactive approach to tackling the debt burden and ensuring economic stability.

Moreover, the Prime Minister’s discussion on the remarkable achievements in the agricultural sector complements the positive strides made in managing the debt situation. The success in utilizing over 20 million hectares of land for crop cultivation and reaping a harvest of 600 million quintals reflects Ethiopia’s potential for sustainable economic growth and safeguarding its food security. The government bolsters the agricultural sector’s contribution to the country’s financial stability by expanding farmland and setting ambitious harvest targets.

The amalgamation of the initial debt relief agreement and the highlighted agricultural successes in the Prime Minister’s speech signifies the government’s comprehensive strategy to address Ethiopia’s economic challenges. By temporarily suspending debt-service payments and pursuing debt restructuring, the government aims to alleviate the immediate financial burden and create leeway for further financial manoeuvring. Simultaneously, the progress in the agricultural sector showcases Ethiopia’s capacity to drive economic growth and reduce reliance on external factors.

Overall, the Prime Minister’s address and the recent developments underscore Ethiopia’s commitment to addressing its debt burden and ensuring economic stability. The collaborative efforts between the government and bilateral creditors are pivotal in navigating the challenges and working towards a better future for the nation.

Restructuring Ethiopia’s debts through the suspension of debt-service payments and Eurobond negotiations is essential for several reasons. To begin with, it allows the government to alleviate immediate financial pressures, freeing up resources to invest in critical sectors and address social and economic challenges.

Subsequently, debt restructuring allows one to align debt obligations with the country’s economic realities. Ethiopia has faced many challenges, including the impact of the COVID-19 pandemic, internal conflicts, and a decline in tourism income. These factors have significantly strained the country’s finances, making it necessary to adjust debt terms to ensure sustainability and avoid default.

Ethiopia’s annual debt servicing has reached two billion dollars this year, taking 50Pct of the country’s average commodity export revenues. Servicing this debt has become a steep journey as the government has lost significant donors over the past few years. Remittance has also decreased because of the widening gap in the exchange rates between the parallel market and the official rates; this is in addition to the declining tourism and foreign direct investment, which have significantly affected incoming foreign currencies. In light of these realities, servicing debts has become burdensome. “It’s reached a very critical level for the country,” says Alemayehun Gedha (PhD), professor of macroeconomics at Addis Ababa University.

In light of this daunting situation, expecting a positive response from creditors to postpone the debt-paying period could be uncertain. However, according to the Professor, the likelihood of a positive response is high. Given the response given to countries such as Zambia and Ghana, Ethiopia can expect positive response.

Unless the debt restructuring plan is favourably accepted, Ethiopia’s social and economic crisis will boil to the point of becoming a political crisis, in which case the Horn of Africa will be unstable. “The creditors know the consequences of such an unfortunate scenario, so they will do everything to stop this because the consequence will be Europe being flooded with immigrants from the region and the horn of Africa becoming a hotspot of terrorism, which they don’t want”, explains the macroeconomist.

Successful debt restructuring can help restore investor confidence. By demonstrating a proactive approach to managing its debts, the country signals its commitment to responsible financial governance and its determination to overcome existing challenges. This, in turn, can attract foreign investment, stimulate economic growth, and foster long-term stability.

Ethiopia’s debt condition has been a pressing concern, with its external debt reaching approximately USD30 billion in recent years. The combination of external shocks and domestic challenges has made it increasingly difficult for the country to service its debt obligations.

However, the recent debt-service suspension agreement and the initiation of Eurobond restructuring talks offer hope for Ethiopia’s economic prospects. These measures provide a much-needed breathing space for the government to address its financial challenges while signaling its commitment to responsible debt management.

Even though the measures implemented by Ethiopia to secure a debt-service suspension agreement and embark on Eurobond restructuring carry several good things to the economy, it also significantly impacts the country and its economic prospects.

First and foremost, the debt-service suspension agreement provides Ethiopia with immediate respite by temporarily halting debt payments. This allows the country to allocate its limited resources towards critical sectors such as healthcare, education, infrastructure, and social welfare. Ethiopia can address pressing socio-economic challenges by alleviating the immediate financial burden.

Secondly, through restructuring the one billion dollar Eurobond, Ethiopia aims to modify the terms and conditions to alleviate the strain of repayment. This restructuring process grants the country greater financial flexibility, enabling it to manage its debt obligations better. This flexibility allows Ethiopia to allocate resources more efficiently and pursue strategic investments for long-term economic growth.

Furthermore, debt restructuring is pivotal in aligning Ethiopia’s debt obligations with its current economic realities. The nation has faced various obstacles, including the repercussions of the COVID-19 pandemic, internal conflicts, and reduced tourism revenue. By adjusting debt terms, Ethiopia can establish a more sustainable debt repayment plan considering its economic circumstances. This proactive approach to debt management mitigates the risk of default and ensures long-term financial stability.

Moreover, successful debt restructuring and a commitment to responsible debt management can restore investor confidence. By demonstrating a proactive approach to addressing its debt burden, the country signals its commitment to prudent financial governance. This, in turn, attracts foreign investment, stimulates economic growth, and creates job creation and development opportunities.

In the long run, the consequences of these actions will ultimately contribute to improved living standards for the people. The government can invest in healthcare, education, and social welfare programs by addressing debt burdens and redirecting resources to critical sectors. This can enhance access to quality services, generate employment opportunities, and improve the population’s well-being.

That’s why Ethiopia should continue implementing sound fiscal policies, prioritizing economic diversification, and attracting foreign investment. By effectively leveraging this debt relief opportunity and implementing comprehensive reforms, Ethiopia can pave the way for sustainable economic growth.

As Ethiopia navigates its path to recovery, its continued strive for fiscal discipline, pursuing sustainable growth strategies, and fostering an enabling environment for domestic and foreign investment will result in better economic stability. With careful implementation of reforms and prudent debt management, Ethiopia can unlock its full economic potential and create a prosperous future for its people. EBR

12th Year • January 16 2024 – February 15 2024 • No. 125


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