Hardly Any Room for External Debt Restructuring

The Ethiopian economy has been suffering from external debt distress for the past few years as has been observed in many developing countries. In the poorest countries, the debt distress arrived before COVID-19 as confirmed by the World Bank International Debt Statistics of 2021. In the wake of the COVID-19 outbreak, many countries demanded debt restructuring, motivating the World Bank and International Monetary Fund (IMF) to call for the Debt Service Suspension Initiative (DSSI), endorsed in April 2020. This initiative has benefited many countries in sub-Sahara Africa including Ethiopia, Kenya, Angola, Nigeria, Namibia, Chad, and Ghana, as they were eligible to borrow from the International Development Association (IDA). What makes the Ethiopian case different is that the risk of both total debt and external debt distress, already high since few years ago, has been exacerbated by the economic slowdown caused by the pandemic, political instability, the war in Tigray Region, severe forex shortages, and high levels of inflation. This forced Ethiopia to seek debt relief under the G20 Common Framework, an agreement of the G20 and Paris Club of countries to coordinate the debt treatments of low-income countries eligible for the DSSI. This application for debt relief, particularly the commercial ones, led to the downgrading of the sovereign credit standing of Ethiopia by the major global rating agencies.

In general, the severity of external debt is determined by the composition of the debt, the interest rates, trade deficit, and high inflation. For instance, a relatively high level of short-term debt in the total debt portfolio causes considerable distress on the economy.

The DSSI eligible countries are heavily indebted as a result of the bloating of state and state-guaranteed debt combined with an increase of commercial borrowing. What is striking is that they have significant obligations to private creditors. In contrast to this, the share of private external creditors over the total external debt is much smaller in Ethiopia in comparison to Kenya, Nigeria, Ghana, and others.

Although Ethiopia’s debt seems sustainable as shown by the total external debt stock of 29.68Pct of gross national income (GNI) in 2019, there are still lingering vulnerabilities as the debt servicing costs are increasing, while export proceeds have remained stagnant for a decade as manifested by total debt servicing as percentage of export ratio of 28.94 in 2019.

Under normal circumstances, external borrowings are refinanced through new borrowings. However, an economy defined by a number of economic woes including external and domestic debt accumulation, severe foreign exchange shortages, and inflationary pressures combined with political instability would find it difficult to secure additional borrowings, particularly from private creditors. This situation has left Ethiopia at the mercy of its creditors for debt relief.

Ethiopia sought debt relief under the G20 Common Framework as debt service suspension under DSSI only helps tackle immediate liquidity problems until the end of December 2021. The G20 Framework aims to address the debt burdens of many low-income countries by using debt restructuring including the reduction of the net present value of debt and deferral of a portion of debt payments, amongst others.

When using the G20 Common Framework, Ethiopia should consider it as a matter of expediency while taking extra caution when dealing with the case of commercial obligations as they affect Ethiopia’s credit standing as observed in the recent drop in the credit rating of the nation. Lower credit standing entails higher interest rates when borrowing from the market.

To help address the problem of debt distress, special drawing rights (SDRs) may be used to some extent. With an IMF SDR quota of 428.63 million, and an additional fund of SDR of 1.2028 billion and 751.75 million which was approved under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF), respectively, following the economic reform agreement in December 2019, Ethiopia has some room to address its external debt problem. However, in the past couple of years, the SDR quota has been used massively, increasing the SDR purchases and loans to 524.55 million (May 21) from 46.13 million (December 2018). Yet, there is a significant SDR balance pertaining to the economic reforms that could be used to alleviate the debt problem for a while provided that Ethiopia is on track with the IMF agreement.

Ethiopia has utilized the available means to get relief from external debt distress. There is hardly any room left pertaining to debt restructuring. Over the coming years, proceeds from the telecom licenses, sale of partial ownership of Ethio telecom, and privatization moves might bring some relief to the external debt problem. However, Ethiopia’s sustainable solution rests on improving its export performance, instituting fiscal discipline, and establishing effective external debt management by taking a lesson from previous borrowings, particularly commercial ones.

9th Year • Jun 16 – July 15 2021 • No. 99