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Ethiopia’s economy, like most other economies, has taken a hit from the COVID-19 pandemic. When the rest of the world’s troubles eased over time, Ethiopia had to fight its own war– literally. In October 2020, a war broke out between federal and allied forces and the Tigray Liberation Front (TPLF). The war took a heavy toll on the economy as well as on humanity, claiming more than 600,000 lives. Ethiopia’s attempt to restructure the mounting debt, and access another round of support remained unthinkable, owing primarily to the civil war. Following an agreement between the warring sides in November, 2022, a few doors appear to be opening. The government has been knocking on all those slightly open doors, wasting no time to save the last breath in the dying pulse of the economy. Whether these efforts will come in time or bring about the needed relief remains to be seen and felt, though, writes EBR’s Addisu Deresse.

In 2021, Prime Minister Abiy Ahmed’s (Ph.D.) administration requested the restructuring of the more than USD 26 billion of debt under the Group of 20’s Common Framework. The process was stalled due to the war that broke out between the federal government and TPLF in October 2020.

Following the agreement signed by the two warring sides in Pretoria in November 2022, debt restructuring seems to be back on the table. Further support for the country’s Homegrown Economic Reform (HGER) also seems to be on the horizon. “An International Monetary Fund loan for Ethiopia is “definitely back on the table,” according to S&P Global Ratings, a key step to restart the Horn of Africa nation’s delayed debt-restructuring plans,” Bloomberg reported in March 2023.

PM Abiy and his officials have not wasted a single minute since the signing of the deal. The PM himself and his high officials have been flying around the world, pleading with international institutions and governments to come to the aid of a severely impacted economy.

On February 6, 2023, PM Abiy flew to Rome, Italy, to sign the Ethiopian Italian Cooperation Framework 2023-2025 agreement. In the agreement that was signed with the Italian President of the Council of Ministers, Giorgia Meloni, PM Abiy secured 140 million euros (100 million in soft loans and 40 million in grants).

“The Cooperation Framework Agreement has two main pillars of action: economic development and job creation, and access to basic services. Particular importance is devoted to vocational training that will foster job creation and access to basic services, in particular health, education, water, and the environment,” reads the statement released by the Italian Embassy in Addis Ababa.

The Italian Deputy Prime Minister Antonio Tajani and the Ethiopian Minister of Finance Ahmed Shide also signed two additional agreements for new programs: “WASH, resilience, and energy in Ethiopia’s lowlands,” worth 31.5 million euros, and “Minimizing investment risk in the Ethiopian coffee sector and providing institutional support to the Ethiopian Coffee Authority (ECTA),” worth 10.5 million euros.

According to the statement, the total sum of the agreements signed in Rome is 182 million euros, bringing the total value of the Italy-funded development projects in Ethiopia to 200 million euros.

PM Abiy flew to Paris on February 7 and met his “friend,” Emmanuel Macron. He was received at the Elysée Palace by the president on Tuesday, and PM Abiy was hoping to capitalize on the momentum created by the peace agreement. However, no significant announcement was made following the visit. “We very much welcome investments by French companies in Ethiopia,” Abiy said briefly on Twitter after his visit to Paris.

After returning from France empty-handed, PM Abiy sent a high-level Ethiopian delegation, led by Ahmed Shide, Minister of Finance, that arrived in Beijing, China, on February 20, 2023.

The delegation, which included Mamo Mihretu, governor of the National Bank of Ethiopia (NBE), Lelise Nami, commissioner of the Ethiopian Investment Commission (EIC), Eyob Tekalegn (PhD), state minister of finance, and other senior government officials, met with Chinese financial institutions and investment firms in addition to holding strategic meetings with important government ministries. The delegation also attended events hosted by the Ethiopian Embassy in China, such as the Joint Economic and Trade Commission and an Ethio-Chinese investment forum.

The delegation’s visit to China was also not followed by any significant announcement.

“The Chinese government, financial institutions, and investors have had in-depth and fruitful discussions with the delegation,” Wu Peng, Director-General at the Department of African Affairs, briefly tweeted following the visit by the Ethiopian delegation.

The visit to Addis Ababa of Mr. Alvaro Piris, an economist at the International Monetary Fund (IMF), and his team from March 27 to April 7, 2023, was the next major event in PM Abiy’s administration’s effort to save the dying economy. Alvaro and his team visited Addis Ababa to discuss the authorities’ request for IMF support for their reform program.

“The IMF team welcomes the authorities’ Homegrown Economic Reform Agenda (HGER II), an ambitious reform program that aims to address key macroeconomic vulnerabilities and unleash Ethiopia’s considerable economic potential,” read the statement released by Alvaro at the end of their visit. “We made progress in discussing the scope for IMF support for this reform program.”

The objective of HGER II, which was put in place after PM Abiy took office, is to preserve economic growth by promoting an environment for business that stimulates more private investment and structural transformation. It has three key elements at the macro-financial, structural, and sectoral levels.

Before HGER, the Ethiopian government, headed by the Ethiopian People’s Revolutionary Democratic Front (EPRDF), had been enacting what were known as the Growth and Transformation Plans (GTP) I and II, which were intended to stimulate national economic growth. Both GTP I and II had received criticism for being overly ambitious because they struggled to meet their objectives, especially in the areas of manufacturing and exports.

The HGER of Abiy’s incumbent, the Prosperity Party, has also been under fire for not being “home grown” and being overly ambitious. The incumbent also dared to succeed with the reform at a time when the country was embroiled in disputes and a full-scale war in the north.

The backing required from the west and its institutions of the reform, as well as the conditions linked to that support, have made it more difficult for it to achieve its goals.

Now that the war against TPLF seems to have eased, the administration is seeing light at the end of the tunnel.

An Ethiopian delegation led by Ahmed and Mamo attended the World Bank and IMF’s spring meetings, which began in Washington in the second week of April, 2023. This time, Ahmed and Mamo were joined by Sileshi Bekele (Eng.) to hold sideline discussions with the officials of the World Bank, the IMF, and the International Finance Corporation (IFC).

According to reports in the international media shortly after the talks began in Washington, Ethiopia is in talks with the IMF to borrow at least USD 2 billion as part of a reform program. According to the source, the IMF is currently evaluating whether the country’s debt is sustainable in light of a request for a program that would be about equal to the size of its holdings with the multilateral lender—or 500 Pct.

According to two people familiar with the negotiations, the IMF predicted in its initial debt study that Ethiopia would have a financing deficit of at least USD 6 billion through 2026. Even if the country is successful in securing the amount under consideration, it will still face a financing gap of almost USD 4 billion during that time frame.

“The scope of the support for Ethiopia is not yet set in stone, both parties are still working on the debt sustainability analysis,” the global media reported, quoting an anonymous source.

Mamo tweeted during the discussions, “Excellent discussion on sideline of WB/IMF spring meetings with Governor Erik Thedeen of Central Bank of Sweden and Governor Andrew Bailey of Bank of England on capacity building support and recent lessons on global financial and monetary stability.”

“Discussed Ethiopia’s economic challenges and prospects, including how the IMF can support the ambitious reform plans in their HGER,” Kristalina Georgieva, managing director of the IMF, said after meeting Ahmed and Mamo. “The IMF stands by Africa.”

However, the agreement with TPLF may not ensure a rescue from the international financial institutions. According to reports, the IMF, as it always has, is strongly recommending, among other things, the unification of the parallel markets for exchange rates. The official rate for a single USD now stands at a little more than ETB 54, while the rate exceeds ETB 100 in the black market. By unifying, the Ethiopian government should double the official rates.

In January, 2023, Eyob strongly denied any consideration by the government to devalue the birr any further. “There is a widespread rumor that devaluation is in the making,” Eyob tweeted on January 19. “This is just a rumor. Completely unfounded. A sensible macro reform is always on our agenda, but there should not be any concern about mere devaluation.”

“Devaluation is frequently used by the government as a means of boosting exports,” says Dr. Atlaw Alemu, a lecturer at Addis Ababa University. “But that hasn’t been a long-term answer, despite the fact that it could appear like one at the moment. Flotation of the birr in the absence of sufficient foreign exchange would be disastrous as it would result in an increase in the cost of imported goods.”

According to consultation with the Republic of Ethiopia and its requests for a three-year Arrangement Under the Extended Credit Facility and an Arrangement Under the Extended Fund Facility, a paper published by the IMF in 2029, the public investment-driven growth model has reached its limits. Macroeconomic and structural reforms outlined by the authorities are anticipated to result in greater growth, investment, and exports over the medium term, as well as a decrease in public debt and external vulnerabilities. The outlook is more vulnerable to negative risks.

“Prior to the upcoming elections, domestic resistance to reforms could make investors more hesitant and hinder growth and investment,” the paper reads. “Rising protectionism, poorer than anticipated global growth, and shocks connected to climate change are all examples of external risks.” According to the National Bank of Ethiopia’s annual report for fiscal year 2020-2021, Ethiopia’s external debt stood at USD 29.5 billion in July 2021.

Ethiopia’s total (internal and external) debt as of March 31, 2022, according to a statistical bulletin released by the Ethiopian Ministry of Finance in May 2022, was USD 56.5 billion. Out of that, USD 28.5 billion are owed to foreign creditors. The remaining USD 28 billion (internal debt) were owed to domestic creditors. As a result, 50.4Pct of Ethiopia’s total debt is external debt, while 49.6Pct is domestic debt.

Ethiopia obtains the majority of its borrowing from multilateral financial institutions. Ethiopia had a total of USD 29.5 billion in external debt as of the 2020–21 fiscal year, with USD 19.5 billion owed to multilateral lenders, 6.7 billion owed to bilateral creditors, and the remaining 3.3 billion owed to commercial lenders.

As of March 31, 2022, Ethiopia owed multilateral creditors like the International Development Association (a subsidiary of the World Bank), the African Development Fund (a subsidiary of the African Development Bank), the International Monetary Fund (IMF), and the International Fund for Agricultural Development (a UN agency) a total of USD 28.5 billion, or USD 14.9 billion, or 52Pct of its total external debt.

Loans from multilateral development institutions such as the World Bank, IMF, and African Development Bank are generally affordable and available. Additionally, because of their poor creditworthiness and the danger of default, poorer countries frequently seek loans from these development banks.

Ethiopia’s creditworthiness has occasionally been declining. This indicates that foreign lenders are not fully confident to offer loans to Ethiopia. Ethiopia’s creditworthiness was downgraded to “junk” status by Standard & Poor’s (S&P), a leading worldwide credit rating agency, in the previous year. Additionally, Moody’s Investors Service cut Ethiopia’s credit rating from B2 to Caa1, indicating a larger risk of debt default on Ethiopia’s part.

Ethiopia’s external debt has been continuously rising since 2007. According to the World Bank, the nation’s external debt stock was USD 2.59 billion in 2007. Since then, it has significantly grown, reaching USD 30.36 billion in 2020.

Ethiopia’s external debt declined considerably in 2006, reaching its lowest level in since 1982. In 1982, it was USD 3.28 billion, while in 2006, it was USD 2.22 billion. From USD 6.18 billion the year before and USD 10.36 billion in 1998, Ethiopia’s external debt decreased to USD 2.22 billion in 2006.

Ethiopia benfited from both the Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Reduction Initiative (MDRI), two debt reduction programs aimed at developing nations. The debt relief to poor and indebted countries was started by the well-known multilateral financial institutions, the World Bank and the IMF, along with the governments of developed countries, particularly the G8 countries.

The IMF and World Bank created the HIPC Initiative in 1996 to aid developing nations that were struggling under heavy debt loads. The G8 nations approved the MDRI proposal in June 2005.

 


11th Year • May 2023 • No. 117 EBR

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