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Month: May 2023

How Blended Finance Can Enable Ethiopia To Regain Its Place As Africa’s Growth Engine

Posted on by Web Master

Ethiopia is an attractive destination for private capital due to its large population, abundant natural resources, and strategic location in East Africa. From 2004-2015, real economic growth in Ethiopia accelerated to 10.2% per annum, thanks in large part to a public investment-led growth model implemented since the mid-1990’s. However, from 2016-2021 the country saw growth decelerate to 7.8% per annum due to a series of macroeconomic challenges including foreign currency scarcity, mounting debt, and inflation, in addition to structural bottlenecks. To address these challenges and regain the growth momentum, the Government of Ethiopia is rightly transitioning towards a private sector-led growth model, by stimulating private sector investment and participation in the economy.

For several years, Ethiopia has been a recipient of development aid and concessional loans from international donors and financial institutions, which have helped finance critical infrastructure and social programs. However, the current leadership recognizes that traditional development assistance alone is not sufficient to achieve sustained economic growth and development. The country’s balance sheet is stretched due to exogenous factors including those stemming from the Russian invasion of Ukraine, and endogenous factors such as conflict and instability. Therefore, instead of a state-led model of development, Ethiopia should mobilize private capital to finance critical infrastructure, generate tax revenues, promote exports, create jobs and improve living standards.

Blended finance offers a viable pathway to this end. Blended finance is a financial structuring approach that combines public, philanthropic, and private capital to finance pro-poor investments that support sustainable development. It has gained traction in recent years as a means to leverage different types of funding to achieve development objectives, particularly in countries where traditional sources of financing may be limited or insufficient.

The Ethiopian Government’s Ten Year (2021-2030) Development Plan, ‘A Pathway to Prosperity,’ prioritizes agriculture, energy and financial services as a means to double per capita income by 2030. This represents as opportunity- according to Convergence, the global network for blended finance, these three sectors account for the largest share of blended finance transactions (>70%) to date, making the country’s priorities especially well aligned with the existing blended finance market.

In fact, Ethiopia has already seen the successful implementation of blended finance initiatives and transactions such as the Assela Wind Power Project, the financing of the Vision Fund Microfinance Institution (VFMI) and the acquisition of aircraft for Ethiopian Airlines.

The investment into Ethiopian Airlines is particularly noteworthy because it demonstrates how blended finance can combine public and private sector resources to support the growth of a strategic industry. The debt financing package, which involved the Export-Import Bank of the United States (Ex-Im Bank), JP Morgan, the Emerging Africa Infrastructure Fund (part of the Private Infrastructure Development Group) and ING Group amongst others, provided Ethiopian Airlines with the necessary funds to purchase 10 new Boeing 787-8 Dreamliner aircraft and support its expansion plans. A loan guarantee, longer tenor (scarce in the aircraft financing industry in Africa), and subordinate debt enabled commercially oriented investors to participate in this transaction which has helped to promote sustainable development in Ethiopia by creating jobs and supporting the country’s aviation industry.

 

 

Another example of a successful Ethiopian blended finance transaction is the risk sharing guarantee the Netherlands Development Finance Company (FMO) provided the Commercial Ban of Ethiopia (CBE) on a loan to VFMI, Ethiopia’s largest privately owned microfinance institution. Thanks to FMO’s guarantee, VFMI received access to a credit facility from CBE to help facilitate the expansion of its operations in rural and remote areas. FMO’s guarantee, part of the Micro and Small Enterprises Fund (MASSF), covered 65% of CBE’s loan, biting down significant risk from CBE. Without FMO’s guarantee, CBE would not have provided VFMI with this loan, which is now a major source of liquidity for on-lending to underserved rural and women clients.

Private sector investors are often hesitant to invest in developing countries due to real and perceived risks such as political instability, foreign exchange fluctuations, and credit risk amongst others. By leveraging development funding to reduce the absolute level of risk and/or alter the risk-return ratio, blended finance can help overcome some of the risks (real or perceived) faced by private investors when looking to finance transactions in Ethiopia.

However, increasing blended finance flows into a country requires a permissive policy regulatory environment: pro-investment government policies that prioritize macro stability, sensible tax policy and administration, and repatriation of profits (among others) are vital to unlocking financing flows into Ethiopia. This is why progress on the Home-Grown Economic Reform Agenda is followed with great interest by investors, and the next iteration of these reforms will be critical to facilitating the ease of doing business and investment attraction in the country.

The Government of Ethiopia would like to assess the potential of blended finance in terms of financing its development agenda.  Since blended finance requires multistakeholder engagement and collaboration, the Embassy of Canada in Addis Ababa, in partnership with Convergence and the Federal Democratic Republic of Ethiopia – Ministry of Finance will host a high-level blended finance forum in Addis Ababa on June 5th, 2023.  This event will bring together senior government officials, private investors, the donor community, and UN Agencies amongst others to discuss the potential of and create awareness around blended finance as a non-traditional source of development finance.

A visit to this dynamic country makes it clear that Ethiopia’s true economic potential is waiting to be unleashed. With a concerted effort from public, private, and philanthropic actors, Ethiopia can once again regain its rightful place as Africa’s growth engine.

 

Coauthored by

  • Aakif Merchant, Associate Director, Convergence Blended Finance
  • Olive Munene, Manager, Convergence Blended Finance

 

 

ZEMEN’S SKYWARD AMBITION

Posted on by Tizita S.

In a triumph over the trials of the pandemic, a rising tide of construction costs and inflation, Zemen Bank has opened a stunning 32-storey headquarters on Ras Abebe Aregay St., Sengatera area, a hub for banking in Ethiopia’s bustling capital. The architectural tour de force stands as an unignorable testament to the burgeoning prowess of the country’s financial sector.

With its inauguration presided over by an illustrious cast that included Mamo Mihretu, the central bank governor; Dereje Zenebe, Zemen Bank’s president; and Ermias Eshetu, the bank’s Board chairman, the building was revealed to the public five years after breaking ground. The project’s total cost, inspired by the shape of a bull’s horn, exceeded 1.5 billion Br, with an additional off-budget 300 million Br due to the extended construction period.

Constructed on a sprawling 2,300Sqm plot, the new headquarters represent a milestone for the Bank that began its journey with a modest paid-up capital of 87.9 million Br. Zemen Bank has notably broadened its reach this year by establishing 37 new branches, boosting its network to 100 branches – a significant deviation from its initial single-branch model it launched 15 years ago. The Bank’s paid-up capital had impressively increased to 3.64 billion Br last year; Ermias expressed confidence during the inauguration that they would meet the central bank’s five billion Birr capital threshold by the end of next month.

China Wu Yi Co. Ltd constructed the headquarters, while Jdaw Consulting Architects & Engineers Plc, a domestic firm, was enlisted for consultancy services. The sky-coloured tower graces the skyline of the banking district, a.k.a Addis Abeba’s Wall Street, joining a multitude of other towers by Hibret, Nib, and the state-owned Commercial Bank of Ethiopia (CBE) that have already erected their monumental buildings in the area.

The landscape of Ethiopia’s banking industry has been progressively evolving since its inception in the 1930s, reaching 31 licensed by the central bank. Operating close to 11,000 branches nationwide, these financial institutions collectively hold over two trillion Birr in deposits, a significant landmark for the banking industry. Governor Mamo underscored that the central bank is actively working on reforms to enhance the financial sector. He also urged the banks to prepare for active participation in the impending capital market. He emphasised the need for robust corporate governance, risk management, and prudent measures against liquidity crises.

Banks Ride the Waves of Change Grappling with Growth, Risk

Posted on by Tizita S.

Tauted as a somnolent giant, Ethiopia’s financial scene now stirs, roused by favourable demographics, geostrategic position and untapped markets, offering a tantalising prospect for growth. An incessant swell in GDP and a population bulge that is youthful and vibrant frames this narrative, yet the devil is in the detail.

A mere 35pc of Ethiopia’s adult populace in 2017, according to the World Bank’s Global Findex Database, possessed saving accounts with banks. Recent years have seen a transformative shift, especially in the realm of digital banking, despite the uneven terrain of development and access.

Today, one branch of a financial service company caters to just over 8,000 people. With 31 banks licensed by the National Bank of Ethiopia (NBE) and operating 10,968 branches, the financial firms have corralled over two trillion Birr deposits by March of this year, marking a 60pc surge from the previous year. In 2022/23, total deposit mobilisation soared to 2.059 trillion Br, which rose from 1.2 trillion Br two years ago. In the nine-month period of the current fiscal year, they have registered an increase of 354.3 billion Br, indicating a 20.8pc growth.

The state-owned banks, like the Development Bank of Ethiopia (DBE), have the lion’s share in the financial expanse, boasting a growth rate of 355.8pc—albeit from a modest base—piling 3.1 billion Br in deposits. Yet, the undisputed king remains the Commercial Bank of Ethiopia (CBE), which surpassed one trillion Birr in deposits by March 2023, a 13.8pc uptick from the year before.

Private banking, however, is no underdog.

The banking industry appears robust and dynamic, with the growth of private banks and the emergence of new players stimulating competition. The industry is marked by new entrants, with several of them beginning operations over the past two years, such as Tsedey, Shebelle, Siinqee, and Amhara banks. Tsedey Bank, for instance, mobilised an impressive 31.3 billion Br within its first year in business. This suggests that different banks may be following different strategies, facing various levels of competition, or operating in different market segments.

The private banks show a variety of growth paces, with banks like Enat and ZamZam showing higher growth rates. Others have grown moderately, and a few have even contracted slightly. The Cooperative Bank of Oromia (Oromia Coop) witnessed a steep 51.3pc decline in loan collections from cooperatives. The state-owned banks also saw a 5.1pc decrease, indicating an inherent vulnerability and constraints alarming the banking industry.

The private banking sector has contributed robustly to deposit mobilisation and loan disbursements. Awash Bank, a private contender, exemplifies this trend with a 37.7pc growth to 168.4 billion Br deposits, manifesting the increasing diversity within Ethiopia’s banking ecosystem.

Private banks made up the bulk of loan collections during the nine months ending in March 2023, amassing 220.3 billion Br—an 82.7pc increase from the preceding year. Dashen Bank, a private stalwart, epitomises this trend with a 116.4pc growth in loan collections, reaching 27.9 billion Br.

Yet the shadow of potential structural risks lurks beneath the rosy growth picture. Focusing on a narrow band of sectors, mainly agriculture, which saw a quadrupling of credit to 41.6 billion Br, signifies a concentration of risks. A slump in these sectors could trigger a cascade of loan defaults, hurtling banks into a crisis.

The dominance of the two state-owned banks, despite a decline in the share of outstanding loans over time from 61.1pc in March 2021 to 47.8pc this year, could potentially imperil the industry. Their financial health and corporate governance are critically intertwined with the financial sector’s stability. Should either falter, it could spark a banking crisis of considerable magnitude.

Though a catalyst for economic growth, private-sector lending has its perils, too. As history has shown, a surge in credit could dilute lending standards, inflating a dangerous bubble whose burst could wreak havoc.

The sudden surge in loans for agriculture to 100 billion Br may have aligned with the aspirations of the Prosperitians to boost productivity, but it also brings its risks. The sector is susceptible to weather vagaries, fluctuating global prices and conflict-induced productivity drops.

The mounting competition in the banking industry, while catalysing change and cost reduction, could destabilise the industry if banks fail to carve out a strong market position. The need for adequate safeguards against liquidity crunches for more minor, less-established banks is paramount as the upward trend of non-performing loans (NPLs) to 5.4pc of the 1.8 trillion Br in stock of outstanding loans should serve as a red flag. With the potential to erode asset quality and destabilise the financial system, this should be a concern that further exacerbates the burgeoning interconnectedness of the financial sector and the consequent cybersecurity threats.

As digitisation sweeps across banking services, an invulnerable cybersecurity infrastructure is crucial to fending off potential cyber threats that could inflict substantial financial losses and erode public trust.

The Ethiopian financial sector’s isolation from global money markets is a double-edged sword. While it shields the industry from global financial shocks, it simultaneously stifles access to international capital. Ethiopia`s banks need to navigate the delicate equilibrium between protecting domestic financial stability and reaping the benefits of global financial integration as the world grows increasingly interconnected.

The industry is grappling with the risk of foreign exchange exposure. A sizeable proportion of its loans is tied to international trade; any significant depreciation of the Birr against foreign currencies could incur heavy losses. The share of global trade from total outstanding loans may have slightly dropped to 16.4pc this year from nearly 19pc last year and 15.5pc the previous year. Its aggregate allocation was consistently upward from 189.8 billion Br in March 2021 to 274.9 billion Br in the same period the following year and a little over 300 billion Br this year.

Striking a balance in maintaining a foreign currency portfolio will thus be a daunting yet critical task for bank executives.

While the growth story of Ethiopia’s banking sector paints an optimistic picture, the narrative is nuanced with complex interplays of risk and reward, pointing to a sector undergoing a period of dynamic changes. This underlines the imperative need for regulatory vigilance and proactive risk management strategies at the corporate level.

The overarching macroeconomic climate adds another layer of complexity. The current political instability and uncertainty loom as considerable risks over the financial sector. While banks might not be able to influence this development directly, they need to formulate strategies to weather the impacts of these risks, which include economic downturns and political crises.

The tableau of Ethiopia’s banking sector is one of thrilling potential, interspersed with the intricate challenges of a dynamic and rapidly evolving market. From systemic risks to the need for effective regulatory vigilance and sectoral diversification, the terrain requires deft navigation and prudent strategy. As the financial giant stirs, the hope is that it rises, not merely to awaken but to shine.

Moving Woes

Posted on by Tizita S.

In the bustling streets of Addis Abeba, an undercurrent of unease shadows the necessary act of moving house. Siyoum Haile, a civil servant at a federal agency and father of two, became the latest entrant in an expanding list of residents confronted by an unnerving trend.

Siyoum found himself facing off with six men demanding a whopping 4,000 Br for unloading his possessions at his new residence in “41 Eyesus Condominium”, in the northern part of the city. The fee was a hard pill to swallow, given that it amounted to half of his monthly rent.

“It’s the unexpected cost of change, really,” Siyoum ruefully noted.

The movers’ demands took a toll on his carefully planned budget, threatening to derail his life in this new neighbourhood before it had barely begun.

For Siyoum, a man earning a gross monthly salary of 12,000 Br, the demand was steep. Initially, he had not even intended to hire help for the move, banking on the support of a few friends instead. He made a plea for fairness to the men, but his words fell on deaf ears.

“They didn’t just decline,” Siyoum recalled. “They actively refused to let me handle my stuff.”

Neither did he find members of the community police present nearby helpful. In his account, they simply suggested negotiation rather than stepping in to enforce the law. They stood by as the dispute rolled on for over an hour. Eventually, Siyoum was compelled to part with 800 Br, while receiving no help in return.

This is a story that echoes through the lives of many among the 3.8 million inhabitants of Addis Abeba. Residents regularly face confrontations with groups of men who claim exclusive rights to loading and unloading possessions within neighbourhoods. They demand astronomical fees for their services and cause a public stir if their offer is rejected.

The self-proclaimed movers allege they have received permits from local Wereda authorities under a job creation initiative.

Yet, Wereda administrations deny acknowledging such permissions.

Alem Yeshiwas, head of the job creation and market linkage team at the Wereda 01 of Yeka District, argued permits are given to youth associations involved in loading and unloading for businesses or projects, such as workshops or at construction sites. These associations are meant to raise initial capital and establish a steady business.

Says Alem: “We create jobs, not side hustles.”

In an alarming display of audacity, these self-styled movers often hold customers’ belongings hostage until their high charges are paid. Ironically, Alem was one of their victims. Having bought a new refrigerator, she had a run-in with these individuals.

“I didn’t even ask for their help,” she said.

It was only her position at the Wereda that deterred them.

Law enforcement authorities are often called to mediate in such instances, a fact that speaks volumes about the seriousness of the issue. Residents, wary of souring relations with these movers, often prefer to settle with a payment, avoiding any potential reprisals.

Alazar Abayneh, a community police officer at the Wereda 08 of Lideta District, noted that such conflicts become alarmingly common, especially around condominium sites. The disputes occasionally turn physical, leading to the movers damaging belongings.

In an attempt to curb these unauthorised activities, the Addis Abeba Police Commission established a task force last week in all 11 districts to oversee security concerns caused by the porters.

Dereje Diriba, the head of the Peace & Security Bureau in the Lideta District, stated that they intend to draw clear lines between workers with and without permits, enforcing strict measures to deter unauthorised behaviour.

“It’ll allow us to handle the issue holistically,” Diriba told Fortune.

To further streamline operations, a directive is underway to regulate the fees for loading and unloading businesses. This move, many hope, will finally put an end to the inflated demands made by the self-appointed porters.

These changes are not just about responding to residents’ immediate problems but also about rebuilding public faith in law enforcement, city law enforcement officials believe. A senior police commander in the capital, who remains anonymous because he was not authorised to speak, underscored this, emphasising that the increasing complaints from residents were causing them to lose confidence in the legal system.

Unemployment lies at the heart of the issue. The unemployment rate in the capital is a staggering 25pc, according to the Ethiopian Central Statistics Services (CSS). This economic hardship could potentially be pushing young men into desperate and often confrontational encounters to earn a living.

The shifting sands of Addis Abeba’s moving woes underscore the need for decisive law enforcement, economic reforms, and entrepreneurial solutions. Moving, an already stressful event has become a dreaded task due to the unauthorised and overcharging porters.

Jemal Kerim, an unemployed man in his late 20s, highlighted this struggle. Last week, he was idling around “Sengaterra Condominium” near Mexico Square. He and his friends were helping on the loading and unloading of oxygen cylinders from a nearby filling facility, although their main focus was residents moving into the neighbouring condo.

“We’re not the villains some made us to be,” he told Fortune.

Jemal’s group decides what to charge movers based on the volume of stuff to be unloaded and the stories they have to climb in the condo apartments. However, he is adamant that they often help low-income newcomers for free, but the money they do earn is shared among several members, providing a precarious lifeline in these tough economic times.

Ironically, the growing urban populace and their mobility have created promising business opportunities. This rise in demand has given a boom for companies such as Pack Addis Movers & Packers, founded by Habib Abera five years ago with an initial capital of 100,000 Br.

Habib’s company, one of the 16 movers in the capital, has gained a strong foothold by offering safe handling and professional moving services. However, their operations have not been entirely confrontation-free. They have had their share of run-ins with the unauthorised porters, often leading to damage to their trucks and, occasionally, physical altercations.

Abdulmejid Wabela, an employee of Pack Addis, recalled one such dispute.

“Some of my friends were severely injured,” he told Fortune.

These experiences underscore the need for decisive regulation of the moving business and the real risks faced by legitimate service providers.

For the residents, hiring a moving firm like Pack Addis is not just about convenience; it is also about safety. When Yemane Habte, a private business owner, decided to move due to escalating rental costs, he prioritised the secure transport of his belongings.

“They’ve the resources and the expertise to make things easier,” he said.

Although companies like Pack Addis might seem expensive at first, the value of their professional service outweighs the potential risks of dealing with unauthorised porters.

Law enforcement inefficacy contributes to this chaos, according to legal experts. Michael Teshome, a legal professional, underlines the need for robust enforcement measures to ensure that residents get the assistance they need from law enforcement agencies promptly and reliably.

The recent establishment of command centres across the city to tackle these issues underscores the gravity of the situation. For Michael, however, these initiatives need to be sustainable. There is an alarming trend among residents of seeking extra-legal means to resolve their problems due to a lack of faith in law enforcement.

Residents have increased reliance on registered businesses as a prudent move, despite the higher upfront costs. Although the volume of items to be moved and distance are factored in to determine the fees, Pack Addis charges an average of 40,000 Br. The company employed 14 staff, handling moving up to four a day during pick summer seasons. The staff size could go to 18 and the one-truck fleet may be supported with rentals. Low seasons could see 15 jobs in a month.

However, for the money they pay, people like Yemane hope the professional movers would not only provide reliable services but secure their belonging from loss and damage.

The entrepreneurial spirit embodied by companies like Pack Addis Movers & Packers, when given an enabling business environment, can help tackle the dual problem of unemployment and unregulated services. They exemplify how market-based solutions can rise to the occasion and offer beneficial services.

Meqelle Struggles to Reclaim EFFORT’s Control Amidst Post-War Saga

Posted on by Tizita S.

Meqelle is in an animated bid to reclaim control of the management of companies under the Endowment Fund for Rehabilitation of Tigray (EFFORT), a conglomerate housing 31 companies.

EFFORT’s Board seeks dominion from the state-owned Commercial Nominees, its imposed custodian after war broke out in Tigray Regional State. The move, directors say, is driven by mounting fees and the strain of managing its operations under the caretaker’s supervision.

For legal experts, the case represents a significant example of the tensions that can arise when political and business interests intersect, especially in situations involving war and conflicts as well as their subsequent resolutions. They see the story of EFFORT unfolds as it offers lessons in managing large-scale, state-involved corporate entities amid political turmoil.

Beyene Mikeru, CEO of EFFORT, dispatched a formal petition last month to the Ministry of Justice, urging the Ministry to reinstate the company’s status. He cited the recent peace accord signed between the federal government and the TPLF as a spur for normalized relations, which, he believes, should provide the impetus for EFFORT to manage companies under its portfolio.

A ruling in April of the previous year by the Federal High Court presided over by judges Genenew Assefa, Abdu Ibrahim, and Hawi Osana, had designated caretaker responsibilities to Commercial Nominees. This came during a bloody civil war in the Northern region of Ethiopia in November 2020.

Beyene has pleased officials of the Ministry to dispatch a reinstatement letter to the High Court, providing EFFORT with the right to access its accounts and handle its financial matters without hindrance. His plea comes a month after the Ministry put on hold pending lawsuits against the civil and military leaders in Tigray, marking the progressive implementation of the Pretoria peace deal signed in November 2022.

EFFORT came into being in 1995 as a public endowment company, aspiring to revitalize the regional state’s war-torn economy and promote the region’s industrialisation. Initially, a 25-members council chaired by Tewolde Weldemariam, then vice chairman of the TPLF, installed a board of directors led by Seyee Abraha and included Sebhat Nega and Abadi Zemo. Launched with a 2.7 billion Br investment, the conglomerate entered into a mix of interests from mining, construction and agriculture to transportation and textile sectors.

Its pioneering companies were clustered in five sectors of mining (under Tedros Hagos), industry (Abadi Zemo), finance and trade (Sebhat Nega), construction and transport (Arkebe Oqubay) as well as agriculture (Tsegaye Taimyallew). However, some companies predate EFFORT’s formation, such as Mesebo Building Materials Construction Plc, incorporated with 60 million Br capital registered under five senior members of the TPLF.

It was restructured two years later with 240 million Br capital where EFFORT took control of the majority shares, along with minority shareholders such as Meskerem Investment Plc, Sur Construction S.C., Trasn-Ethiopia (Transport) S.C. and Abadi Zemo.

So were Mesfin Industrial Engineering, Meskrem Investment, Almeda Textile, Sur Construction, Sheba Tannery, Addis Pharmaceuticals, Guna Trading, Trans-Ethiopia, and Hiwot Agricultural Mechanisation went into similar restructuring in the mid-1990s, their individual founding shareholders giving way a network of companies. In the late 2010s, its corporate governance was transferred to the regional state’s regulatory bodies as the companies and their assets were made publically owned.

EFFORT’s portfolio houses several industry titans. One such company is Sur Construction, a first-grade contractor entrusted with multiple significant projects before the war.

When it was first incorporated with a 100 million Br registered capital, its founding shareholders in 1992 were Yelem Seyoum, Kahsay Weldemichael, Yemane Tewelde, Tadesse Debelu and Medhin Kiros. In August 1995, they transferred 96pc of the share to EFFORT, with the remaining distributed among Berehan Building Construction, Mesebo and Meskerem Investment. Arekebe had received one share with a 1,000 Br par value to serve the board as a chairman.

Zenfu Asfaw, its current managing director, said that the protracted war has resulted in the company losing 85pc of its machinery to looting, damage, or abandonment. He told Fortune that the management caretaker company has become a barrier to accessing Sur’s accounts. Zenfu alleged that the caretaker company has become a tie-up for their operations and claimed the service fees by Commercial Nominees are exorbitant.

The now-defunct Construction & Business Bank established Commercial Nominees three decades before EFFORT’s inception. The company was formed to provide various services, including management services, employee benefit funds, real estate administration, and representing international money transfer services. Today, the company boasts over 43,000 employees across 33 branches.

Its CEO, Tilahun Tesagye, asserts that the concerns raised by EFFORT’s management about high management fees and reclaiming management are issues that lie beyond their purview, as standing Judges order binds them. The fees charged are significantly lower than the initially proposed, Tilahun said in response to the allegations of high service fees.

Commercial Nominees’ responsibilities include settling EFFORT companies’ liabilities, renewing their licenses, authorising pending payments, and managing debt. Only a few of the companies were within reach for effective management due to the war, Tilahun told Fortune.

Managers of Guna Trading, another enterprise within EFFORT’s fold, alleged that the caretaker company has hindered the company’s recovery efforts.

Guna Trading HouseS.C. was first incorporated in 1992 with a 4.5 million Br capital registered under Girmay Gebremedihin, Gidey Gebremichael, Hibur Gebrekidan, Solomon Gebrehiwot, and Tsegaye Taimyallew, all TPLF leaders at the time. Three years later, the company increased its capital to 10 million Br, with EFFORT acquiring 97pc of the shares, with Almeda Textile, Trans-Ethiopia and Mesebo taking the remaining from the founding shareholders. Sebehat Nega was appointed board chairman, although he had owned one share worth 1,000 Br.

Hagos Kidan, its current CEO, revealed that the company has suffered a colossal loss of 600 million Br due to the war. The company could not pay its 540 employees during the two-year wartime, Kidan revealed.

“We’re rationing basic goods in our inventory to our employees during the war,” he told Fortune.

Managers of Sur Construction and Guna Trading have independently lodged their petitions with the Ministry of Justice seeking the reinstitution of their respective management, showing a strong desire to reclaim the companies` governance.

Fikadu Tesaga, the state minister for Justice, while unaware of the specific letter sent by Beyene, did not dismiss the probability of EFFORT regaining its status.

“It’s actually inevitable,” he told Fortune.

Arba Beyene, a legal expert, concures. He believes the initial decision to assign a caretaker management to EFFORT was essentially political, with little bearing on the practicalities of the situation. He argued that Commercial Nominees were tasked with caretaking duties without acquiring the conglomerate’s assets; the reinstatement of EFFORT’s rights was a foregone conclusion. According to him, the caretaker company has the legitimate right to invoice for any additional fees incurred while performing its court-ordered duties.

Addis Abeba Revamps Title Transfer Fees to Tackle Outdated Valuations

Posted on by Tizita S.

Officials at the Addis Abeba City Administration have recently changed the title transfer fees following revised building valuation rates imposed by the Construction Regulatory Authority. This move aims to address the discrepancy between outdated construction cost valuation estimates and current market conditions.

The authorities believe the previous valuation estimates, in use for the past five years, failed to reflect the current state of the market. The revised rates are designed to better align with present construction costs and inform real estate developers in making accurate financial assessments, according to Sitotaw Akale, head of the Construction Regulatory Authority.

He instructed the city’s Land Holdings & Registration Agency to apply the new rates.

The new system calculates title transfer fees by considering the size of plots and the estimated construction cost. The Agency charges a six percent transfer fee based on these factors. Notably, the valuation rate for one square meter of a single-storey building has doubled from 10,000 Br. Properties with more than 15-story would be subjected to 40,000 Br for a square meter.

Sitotaw believes that the adjusted rates were necessary due to impending inflation.

“The revised rates aim to give developers a more realistic account of costs and facilitate improved contractor selection criteria,” he told Fortune.

Before implementing the new rates, a comprehensive two-month-long study was conducted, considering current construction input prices.

Melkam Ayalew heads the Department of Property Evaluation at Debre Markos University. He argued a blanket rate imposed simultaneously might not accurately capture properties’ market value. Instead, he proposed that evaluations should be based on the specific nature of each property, including its location and construction type.

The new rates have already been implemented by the Land Holdings & Registration Agency’s cadaster system, with evaluators across the capital adopting them for the past week. The Agency’s cadaster system manages holdings registered under its jurisdiction, covering 27pc of the 600,000 plots in the city. The remaining falls under the Land Development & Administration Bureau.

The Bureau has transferred no less than 120,000 parcels of land to the Agency`s Cadaster Mapping System this year, disclosed Hassen Muda, the Information Service Head at the Agency.

The Agency had previously established a digital infrastructure that consumed 67 million Br, whose contract was awarded to a Chinese firm, Hansa Luftbid, almost a decade ago. The Agency has been managing the system on its own since the contract period ended.

The cadaster system, created under Gifawosen Desisa, the head of the Agency, was implemented to address discrepancies between blueprints and actual land holdings. Its purpose was to prevent illegal holdings and the expansion of plots. Hassen claimed the system effectively prevented the illicit merging and slicing of plots, ensuring proper land management practices by the Agency.

Abush Abera, a broker with a decade of experience in the capital, pointed out existing loopholes that allow property undervaluation and rampant tax evasion. He expects this practice to continue with the increased rates.

The Agency has witnessed significant revenue growth, collecting 2.8 billion Br in the third quarter of the current fiscal year, one billion Birr higher than the previous year. This surge in revenue can be attributed to the increased title transfer fees resulting from the revised valuation rates.

Despite the Agency’s efforts to ensure accuracy and transparency, property owners are discontented with the new rates.

Wenit Hailu, Land Holding & Registration Branch head in Kirkos District, saw customers surprised by the new rates. However, Wenit believes that the Branch’s role is limited to implementing and not changing the rates. Her Branch registered more than 21,000 parcels into the cadaster system, with five Werdas in the process of being included.

Wudineh Zenebe of the Bole Branch acknowledged that while the new rates better reflect property values, they still do not entirely align with the actual market prices. Managing a busy Branch with 67,593 housing units in the cadaster system, Wudineh witnessed initial customers’ apprehension and resistance during the first few days of implementing the new rates.

Slaughtered Husbandry Sector Poised for Reform under New Policy

Posted on by Tizita S.

The absence of technological equipment to control the contraband trade near national borders and low-quality animal feed has cast a shadow on livestock export, undermining possible forex earnings while serving as a breeding ground for black market exchanges.

The Ministry of Trade & Regional Integration experts proposed a bill to regulate the largely informal and underdeveloped animal husbandry sector’s supply chain, logistics, and infrastructure, availed for public discussion a fortnight ago.

Enabling access to credit for breeders, facilitation of land for prospective investors, construction of animal quarantine centres around dry ports and creation of a transport infrastructure capable of accommodating the movement of live animals are laid out as some of the strategic goals in the policy pending a nod from the Council of Ministers.

The country has gained 4.3 million dollars from livestock, which accounted for a meagre 0.4pc of total earnings in the first quarter of 2023. The volume of livestock export declined by 46pc while international prices have shown a 39pc increase.

The lacklustre performance is attributed to the absence of a legal framework to regulate the sector, despite having the continent’s largest livestock population, with nearly 70 million cattle, 40 million sheep and 50 million goats.

Exporters are opting out of the business and waiting to see if the air will clear with the new policy.

Ahmed Amin, a livestock exporter for over two decades, resides in Harari Regional State. He is waiting to see if the markets settle down to get back in the game, unable to compete with the illicit traders with a clear advantage.

It would cost around 2,000 dollars to buy a first-grade camel weighing above 600Kg from a breeder for a licensed trader like Ahmed. In contrast, an illicit trader could buy it for half the amount.

“The discrepancy between formal and black market exchange is taking us out of business,” he said.

Livestock exporters also call for quality to be prioritised in fostering better international trade. They suggest introducing better feed to demand higher prices as exporters observe deteriorating qualities.

A report to Alliance Biodiversity by Sintayehu Alemayehu indicated that livestock productivity declines during the dry season when the quality and quantity of forage are limited. Decreased pasture production coupled with limited water availability was cited as a significant constraint for producers, making them unable to meet the necessary nutritional requirements.

A lecturer at Addis Abeba University, Abdi Feyissa (PhD), stressed the importance of maintaining the health of livestock. He emphasized the intricate relationship between nutrition and the immunity of animals. Abdi mentioned that nutrient-deficient livestock can lead to decreased productivity. On the other hand, constant engagement with academics can significantly increase the sector’s productivity.

“You get what you put out,” he said.

Experts argue the nutritional composition of the feed is intricate and has an impact that stretches far beyond productivity, stressing the need to streamline the supply chain.

Ewnetu Kebede, an animal production expert with a list of publications to his name, believes animals require a balanced diet to remain productive and healthy. He says maize and soybeans are energy-rich crops with immense contributions to a balanced feed but are not cultivated for those purposes.

“There isn’t an inch of land cultivated for animal feed,” he said.

Ewnetu observes the feed produced by factories lacks essential vitamins necessary for productive livestock. For him, the infusion of Alfalfa, a perennial flowering plant used as forage, with similar crops would positively correlate to production.

He recommends stronger unions between breeders to acquire land dedicated to animal feed production, taking experiences from countries like Brazil.

There are 42 animal feed producer companies regulated by the Ethiopian Agricultural Authority.

The Director of Feed Registration & Regulation, Zelalem Abebe, said companies choose to produce industrially than cultivate.

“We can only regulate quality, not what they choose to produce,” he told Fortune.

The nutritional value is not debatable among veterinarians that support the broader cultivation of the crop.

Yilma Yehunshet, a veterinarian who distributes feed for poultry and dairy farms, said better nutrition will augment the quality of dairy and meat products while malnutrition compromises the immune system of livestock.

The high cost of Alfalfa which is over 3,000 Br per Kg, has hampered its wide adoption while the Ministry of Agriculture recognizes its utility to increase productivity and boost the immune system of livestock.

The Ministry of Trade & Regional Integration officials revealed the long-term plan to establish a sustainable supply chain by utilising agricultural and industrial byproducts. The Director of Feed Development, Araya Abraham, reported the production of approximately 144 million tons of dry matter feed on more than 26,000hct of land this year.

He also highlighted the training provided to over a 1,000 farmers on managing their byproducts from crops like maize and soybeans, allowing them to be submitted to factories. Abraham stressed the need for a collaborative effort among all stakeholders to maximize gains across the supply chain.

Tax Relief Bonanza Avails for Crumbling Industry Players

Posted on by Tizita S.

The excise tax imposed on digital products, including video cameras, is fully exempted, creaking hope for the crumbling players in the film industry.

The tax proclamation imposed on the industry required adjustments, according to Wasihun Abate, a tax policy advisor of the Ministry of Finance, who disclosed that the film industry has suffered an economic blow and needed a relief period to recover.

The high excise tax levied on cameras has been cited as one of the factors for filmmakers producing under-quality and substandard videos. Ephrem Moges, president of the Ethiopian Filmmakers Association, observes that although the relief period could be seen as a step forward to revive the industry, there were prerequisites that should have come forth.

For Ephrem, the prospective investment opportunities have been bottlenecked by a lack of recognition as a business sector which has prompted most producers to turn to commercials and documentaries with hopes of avoiding losses.

“It’s the cart before the horse,” he said.

The Association was established in 1993 to lobby on behalf of filmmakers and has 96 active members under its fleet. Ephrem states that low social protection, rare public funding, and the fragmented policy structure have hindered filmmakers from flourishing as an industry.

“It’s one of the most discouraged business sectors,” he told Fortune.

As a producer for over a decade, Ephrem observes the challenges in financing that have resulted in low-quality sub-standard films and a reduction in the number of audiences.

UNESCO reports indicate that the country lacks a clear pathway for equity investment through which prospective investors can engage with producers. This has led most filmmakers to tap into their own resources or settle for low-budget films. The average annual production of local films reaches up to 140, where most are produced below standard and tethered by low-budget productions. The challenge has been conspicuous for the industry as empty cinema chairs have become prevalent.

Urban Film Production Plc. Incorporated five years ago, with a 200,000 Br capital. The company has mainly focused on commercials and documentaries to garner profit.

Daniel Damtew, the general manager, concurs that the excise tax breeds little fruit unless the industry is recognized and categorized as a legitimate business. He has been importing video cameras for the last two years and has had to pay a series of taxes amounting to 133pc.

Throughout his 11 years in the profession, he noticed that technical abilities have improved, but knowledge and discipline have remained stagnant. He also observed that peripheral courses primarily focus on the theoretical aspects and lack the practical approach necessary for mastering the craft.

“Scarcity of professionals has crippled the industry,” Daniel told Fortune.

The chocolate and sweet factories are the other sectors that were hit hard, with nearly three-quarters of 130 factories shutting down. Espoused as a “luxury item”, the 10pc excise tax duty on sugar, candy and chocolate resulted in a nominal decrease from a 20pc initially levied on the companies three years ago.

According to Elias Teshome, vice president Ethiopia Sugar & Sweet Producers Association (ESSPA), the excise tax has exacerbated the sweet manufacturers that were hampered by the pandemic and scarce sugar supply.

Strict taxes and regulations have made it difficult for local manufacturers, while lack of supervision at the borders has led to contraband trade of sweet products and the decline of factories.

The tax expert Wassihun agrees that the contraband trade has pushed local factories to shrink production and driven them out of business, plummeting the tax revenues collected.

“The business needs to revive,” he said.

NIB Candy & Chocolate Plc, incorporated in 1965, has seen a substantial production crunch for the past two years. Elias, the factory’s general manager, stated that even though the endowment of excise tax seems promising, the sweet industry lagged behind in receiving the support it requires over the years as an infant industry.

“The industry has not been encouraged,” he said.

Three years ago, a proclamation was issued imposing an excise tax on various items considered luxury or harmful to public health. The list of items taxed included video cameras, alcohol, tobacco, cooking oil, sweets, and bottled water. Manufacturers and producers were required to pay up to 40pc in taxes.

Economists such as Shewaferaw Shetaw believe expanding the tax base on ‘luxury items’ is necessary for a post-war economy. He argues that the economic growth model should be seen through the lens of health, education, and living standards per capita.

While he thinks sufficient tax collection is crucial along with broadening the tax base on goods and services, the expert recommends the government builds a relationship with the private sector by being transparent and accountable to support the sectors.

“Pressing political decisions need clarifications,” he told Fortune.

Ministry’s Social Health Insurance Initiative Derailed by Fiscal Squeeze

Posted on by Tizita S.

The implementation of the Social Health Insurance (SHI) scheme, which was scheduled to begin next fiscal year, has been halted due to budget constraints.

The scheme aimed to benefit public service and private company employees, with the federal government covering three percent of the cost and an equivalent rate deducted from their gross salaries.

However, the Ministry of Health has put a hold on the commencement due to difficulties in obtaining the expected five billion Birr from the government’s side. The Minister of Health, Lia Tadesse, has indicated that a possible mid-year implementation or postponement to the subsequent budget year may be necessary.

The budgetary constraints are further tightened by the waning of funding from development partners, limiting access to finance for the already wounded sector.

“Prevailing budgetary conditions would not permit this,” said Lia during a nine-month performance report to Parliament a couple of weeks ago.

Since its establishment 12 years ago, the Ethiopian Health Insurance Agency has been working towards implementing two types of health insurance systems in the country.

Community-Based Health Insurance (CBHI) that caters to the informal sector has garnered wide acceptance while SHI, which was up for commencement next year, was planned to include the formal employment sector.

Deputy Director of the Agency, Muluken Argaw (PhD), said the utility of both insurance schemes is self-evident. He said engagement with hospitals and other health institutions is in motion, where preliminary tasks have been completed to implement the SHI.

“We’re waiting on further instructions,” he told Fortune.

According to Muluken, close to six billion Birr has been pooled this year from 12 million households for implementing CBHI, with funds pooled through a 25-75pc scheme between the federal government and districts for the poorest members of society.

“It covers almost 90pc of Weredas the country,” said Muluken.

Social Health Insurance schemes have been indicated as holding the promise of universal coverage by literature in developmental studies since its inception in Germany in 1883.

Last year, a study published by the American National Library of Medicine indicated that considerations in SHI implementation planning should include per capita income, capacities of formal and informal sectors, target groups and geographical population distribution. It considers a sizeable formal sector and a willing employee base as prerequisites for successful implementation, while economic development, a strong government financial and administrative capacity, and higher trade union density increase the likelihood of success.

Demis Mulatu is a lecturer at the Department of Health System & Policy at Gonder University. He observes that efforts by the government to implement CBHI schemes widely have been accepted favourably by rural communities.

“It has had a remarkable reach,” he told Fortune.

Demis said resource-pooling schemes seeking to share financial burdens while distributing gains to members are crucial in promoting public health.

The now scraped SIH plan was poised to be operational by next year after two city administrations and health bureaus within regional states reported their employee size to the Ethiopian Health Insurance Service.

Per capita health expenditure in Ethiopia is 33.2 dollars. Close to 32pc of the total health expenditure is covered by the government, while 31pc is out of pocket, and the rest is covered by development partners, according to data from the Ministry of Health.

Getasew Amare, a health economist, said that being watchful of frustrations from members of social health insurance schemes is essential. He observes a high drop-out rate due to poor service provision from health institutions, pointing out the need for input from employees within the formal sector.

He recommends engagement modality of insurance companies be incorporated to realise success, as premiums will be mandatory.

“Engagement with the private sector is pivotal,” he told Fortune.

ESL’s Slashing of Shipping Tariffs Signals Hope for Import Sector.

Posted on by Tizita S.

Business owners in the import-export sector are hopeful the price adjustment will be in their favour to turn things around as shipping rates show a significant drop, slashing the prices of Ethiopian Shipping Logistics (ESL).

The new list of prices was revealed a month after the new management under Berisso Amalo (PhD) replaced Roba Megerssa. The adjusted prices show a decline of as much as 183pc, as routes unclog back to pre-pandemic periods and global consumer spending.

Executives attribute the price slash to decreased international prices, while ESL seeks to play its part in managing the inflation rate, which stands at 33.7pc in the country.

“It’ll definitely impact local prices,” said Demsew Benti, communications director.

ESL has been the country’s flagship logistics company for six decades, travelling to over 327 seaports. It had quadrupled in price during the pandemic due to container shortages and plummeting production from China, accounting for most of its market share. Asia imported 63.5pc of all goods into the country last year.

The company amassed a little over 5.6 billion Br in profit through its shipping, freight forwarding, trucking, and dry port services. The expanded portfolio of services emerged from a merger of four different enterprises that coalesced over time, with the latest consolidation being Comet Transport Share Company in 2016. Listed among Ethiopian Investment Holding (EIH) companies, it now manages nine dry ports and 11 vessels, transporting over seven million metric tonnes annually.

The executives have observed a monthly demand shift in the new payment schedule.

“There is definitely increased traffic after cutting prices,” Demsew told Fortune.

Experts estimate that the surge in shipping costs during 2021 added about two percentage points to global inflation.

A study published last year on shipping costs and inflation presented to the Centre for Economic Policy Research suggests that rises in shipping costs impact lower-income countries more severely than developed ones. It looked at the economies of 149 countries and suggests that when shipping costs rise, the local-currency price of imported goods goes up almost immediately, with 90pc of the increase transmitted within two months.

Industry players are looking to turn a corner by taking advantage of the price adjustment that will impact the market.

The rates differ for each country, with an average 40pc decline for a 20ft container observed. The largest rate decrease is from selected ports in India, with rates falling by as much as 183pc for a 40ft container. Chinese shipments have declined by 47pc for 20ft containers and 64pc for 40-foot containers.

Mehari Yohannes, who has been a tyre importer for over a decade, said rates from China, which have declined two-thirds to around 6,000 dollars for a 20ft container, are sure to attract importers. He has been struggling to get sufficient access to dollars despite exporting sesame.

“It’ll have significant consequences in the market,” he said.

Mehari said shipping rates have held up a sizeable proportion of costs ever since the pandemic. He believes that paying less out of a limited foreign currency allowance will boost the revenues of several import businesses.

The merchandise trade deficit had widened to 14 billion dollars in the last fiscal year due to import bills bloating by 26.6pc to a staggering 18 billion dollars. With consumer goods accounting for 42pc of the import bill and an import-to-GDP ratio of 14.3pc, the weight of costs adding to imported inflation can not be understated.

Experts stress the importance of trans-Atlantic routes from Asia towards Europe and the United States having a significant sway over rates worldwide.

According to Mulugeta Assefa, founder of MACCFA freight and logistics, Asian producers choose the Western market over African importers. He explained that the combination of decreased manpower during the pandemic to manage freight operations and producers’ preferences had shrunk the supply to ports around the Red Sea.

“These markets pay tenfold for goods and services,” said Mulugeta.

While Mulugeta foresees a certain degree of stabilisation in inflation due to the slashed rates, he believes several factors are at play for Ethiopia’s general rise in price levels.

The logistics sector veteran indicated that ESL’s monopoly over shipping in Ethiopia might allow it to set prices well above market clearing rates. He established the company (MACCFA) nearly three decades ago and acknowledged the large volumes of negotiations handled by Enterprise when dealing with international carriers.

“As supply chain disruption worldwide subsides, it is to be expected that rates will fall,” he told Fortune.

Backsliding on Maternal Mortality

Posted on by Tizita S.

In 2020, an estimated 287,000 women died in pregnancy, childbirth, or soon after delivering, according to the latest data from the United Nations Maternal Mortality Estimation Inter-Agency Group, which includes the United Nations Population Fund (UNFPA). This figure is roughly equivalent to the death toll of the 2004 Indian Ocean tsunami or the 2010 earthquake in Haiti, two of the deadliest natural disasters in modern history.

Human devastation on this scale is usually met with weeks of news coverage, an outpouring of public support, and calls for urgent action. Yet the staggering number of women dying every year in the act of giving life remains largely a silent crisis. Even more worrying, the group found that progress on reducing maternal deaths has ground to a halt.

How many of us know someone who died or came close to dying during pregnancy or childbirth?

Perhaps the pervasiveness of suffering is part of the problem – maternal deaths may seem inevitable. Yet the vast majority are preventable with simple interventions that save money in the long run.

One of the most cost-effective ways to reduce maternal mortality globally is to invest in community-based care, including educating and deploying midwives. Achieving this will require scaling up the workforce substantially – the world is currently facing a shortage of 900,000 midwives – and countering persistent gender norms that devalue the contributions of a predominantly female field.

Lowering the high number of unintended pregnancies is another crucial step toward reducing maternal mortality. UNFPA research shows that nearly half of all pregnancies are unintended, more than 60pc of unintended pregnancies end in abortion, and an estimated 45pc of all abortions are unsafe, making them a leading cause of maternal death. Policymakers know how to address this issue: increase access to quality contraceptives, improve comprehensive sexuality education, and protect women’s right to decide whether, when, and with whom to have children.

World leaders have made significant progress when called upon to save women’s lives. In 2000, governments agreed to the Millennium Development Goals (MDG), which aimed for a 75pc reduction in the global maternal mortality rate by 2015. The 44pc decrease in deaths over that period was a meaningful accomplishment – even if it ultimately fell short of the goal.

In 2015, with the UN’s 17 Sustainable Development Goals (SDG), countries once again committed to reducing the maternal death ratio, this time to below 70 deaths per 100,000 live births by 2030. Yet, eight years on, we are nowhere near achieving that target, and progress has stalled.

The maternal mortality rate has increased in two regions – Europe and Northern America, and Latin America and the Caribbean – since 2016. These estimates, which end in 2020, do not account for the full impact of the COVID-19 pandemic on health systems.

Underinvestment in addressing persistent racial and ethnic disparities in maternal healthcare delivery contributes to this stagnation. In the United States, for example, the 2021 maternal mortality rate for Black women was 2.6 times the rate for non-Hispanic white women. Similar disparities can be observed in Afro-descendant communities in Latin America and the Caribbean.

A holistic, community-based approach to care is crucial to eliminating these disparities.

Early in my career, I worked as a pediatrician and HIV researcher in Harlem at a time when crack cocaine and AIDS were devastating the poorest and most marginalized patients and communities. It became clear that I could not treat a child without understanding the broader social context and the challenges facing the child’s mother. And the medical needs of the mothers and pregnant women I met often paled compared to the urgency of their social needs, highlighting the importance of treating the whole person.

Even though progress on maternal mortality has stagnated globally, some glimmers of hope exist. Nepal, for example, decreased maternal deaths by nearly one-third between 2015 and 2020 after halving the country’s rate between 2000 and 2015. In this period, the government doubled health spending, legalized abortion, and made maternity care free of charge.

Similarly, Sri Lanka has halved maternal deaths at least every 12 years since 1935, owing mainly to a health system that provides free services to the entire population and to a dramatic increase in the number of skilled midwives, who now attend 97pc of births, compared to 30pc in 1940.

While the latest maternal mortality rates reveal the damage caused by neglecting life-saving solutions, there is a way to end this needless suffering. Building midwifery capacity and ensuring equal access to quality sexual and reproductive healthcare would significantly improve health outcomes for mothers and pregnant women.

But getting back on track requires reviving the sense of urgency among governments, communities, and all stakeholders needed to provide adequate financing and create a conducive legal and social environment for these interventions. We know the reasons why women still die giving birth. Indifference should not be one of them.

A World of Debt

Posted on by Tizita S.

Recent headlines seem to augur a global debt crisis.

The United States is teetering on the precipice of a self-inflicted default. Egypt, Ghana, Pakistan, and many other countries face grave financial difficulties. Italy and Japan’s debt burdens have grown heavier. And the Chinese are delaying or hampering multilateral efforts to restructure low- and middle-income countries’ debt.

The International Monetary Fund (IMF) counts 41 countries as being heavily indebted, and that does not include middle-income countries such as Argentina, Pakistan, and Sri Lanka.

The concerns these stories have fueled are real, but there are fundamental differences between them. The US has the capacity to service its debts, and it has been a reliable borrower for many years. Its problem is political.

By contrast, the question for poorer countries is whether or how much they can repay. Many heavily indebted low-income countries have debt levels that are already unsustainable or will be soon. Some have missed payments or announced that they will have to suspend debt service.

Private lenders have responded by refusing to lend more.

But this cohort of indebted countries can be broken down into two groups. Some countries were in relatively satisfactory positions until COVID-19 forced them to borrow more to finance pandemic-related expenditures. International financial institutions have created special facilities to help these countries secure rapid additional financing, and to sustain normal financing as their economies recover.

The other group already had high and rising debts before COVID-19, often because they had splurged on projects with low or negative rates of return. Sri Lanka is a case in point.

A new government took office in 2019 and cut taxes dramatically, increasing already large fiscal deficits and borrowing even more. While ill-advised domestic policies – notably prohibiting imported agricultural inputs – sharply reduced the country’s agricultural production, the government spent down its foreign-exchange reserves and then borrowed at higher interest rates (especially from China) until it could borrow no more.

Because many heavily indebted countries rely on imports for essential food, medicines, and intermediate goods, an inability to finance imports during a crisis can result in factory closures and a sharp decline in economic activity – as happened in Sri Lanka. Essentials will remain scarce until the afflicted country acquires the foreign exchange needed to finance renewed import flows.

In these cases, the IMF works with the government to formulate policies to enable the country to restore growth and creditworthiness. If the IMF did not insist on such reforms, it would merely be increasing the country’s indebtedness and postponing an inevitable reckoning.

Hence, to ensure that the country follows through, the IMF generally disburses funds in tranches as reforms are carried out, with the initial disbursement enabling a resumption of import flows and debt servicing.

Recognising the impact of such crises on the poor, some observers have called for debt reduction and new funds to be offered without any condition that the country corrects the policy failures that led to extreme indebtedness. But in assuming that new lending will help the poor, they fail to see that this is often a case of “throwing good money after bad.”

In many cases, one reason why the country is poor is that its previously accumulated debt went toward low-productivity investments.

Despite the lengthy process the IMF undertakes before agreeing to a program, additional complications may emerge after it is established. When the IMF deems a country’s debt burden too heavy for it to sustain its debt-servicing requirements, restructuring of sovereign debt must be part of the agreed IMF program and negotiated with private and public creditors.

Sometimes, reforms and IMF money can help a country achieve growth and finance its debt service. But in other cases, the debt has become so large that it is unreasonable to expect the government to resume servicing it fully.

To address this issue, officials from the creditor countries’ governments will meet and agree on debt-restructuring terms, which might include a reduction in the face value of the debt, a rescheduling of principal repayments, or even a grace period. Traditionally, private creditors will also participate in these talks and agree to a haircut on outstanding debt.

But China’s rise as emerging and developing economies’ largest bilateral creditor has frustrated matters. The Chinese have been reluctant to restructure debts, and have insisted on lending to debtor countries whatever they need to cover their obligations. If the IMF disbursed funds under those conditions, some portion of them would go to repay China, which would then be treated more favourably than other creditors.

IMF programs, therefore, cannot be implemented until all creditors have reached a restructuring agreement.

Sri Lanka could not receive funds from the IMF for months because the Chinese refused to take a haircut on loans they had made. Instead, they wanted to lend even more money to Sri Lanka so that it could service its debt (and increase its overall debt to China). Likewise, Zambia’s restructuring has been delayed since November 2020.

True, China finally has made arrangements with several countries to enable the IMF to disburse funds. But many other indebted countries still need to undertake policy reforms in accordance with an agreed IMF program, which means that more delays can be expected.

One hopes that China will see that it is in its own interest to devise a smoother, faster process for policy reforms and debt restructuring.