Common Framework: Not Do or Die

Feb 26 , 2022
By Christian Tesfaye

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Double-digit GDP growth for over a decade has not come without costs. The hope was that investments in infrastructure would pay for themselves in time. Unfortunately, export revenues lagged so significantly over the last decade, especially compared to GDP growth, that the country has an unhealthy foreign currency reserve that makes debt settlement hard.

And then COVID-19 happened. Now, the end game is near. The administration of Prime Minister Abiy Ahmed (PhD) has to find a way to pay back an estimated 1.9 billion dollars this year in debt installments. About 66 million dollars of this is interest on the billion-dollar Eurobond maturing in 2024.

Some economists believe that the fate of the economy over the next few years rests in the hands of the G20 Common Framework debt relief initiative, which can lead to the restructuring of the country’s debt.

How does it work?

The Common Framework is the more extreme cousin of the Debt Service Suspension Initiative (DSSI), put in place shortly after the COVID-19 became a global pandemic and wrought an economic crisis. Countries eligible for the DSSI, the poorest worldwide, could apply to pause debt service. Ethiopia did, like many other countries around the world. Unfortunately, the DSSI ended last December even though every estimate shows that the recovery of developing countries will be slow relative to the industrialised world.

But a small opening was left. It was given an uninspired name, the Common Framework for Debt Treatment beyond the DSSI, a harbinger of the neglect that would be afforded to countries that apply to it. It will allow countries to seek further restructuring of stressed debt, leading perhaps to debt service suspension and extension of maturities.

The IMF is warning that unless the process for countries that apply for the Common Framework – currently, Ethiopia, Zambia and Chad, but maybe more this year – there could be a wave of debt defaults in emerging markets and low-income countries.

Debt default is terrible but neither is the Common Framework as unproblematic as it sounds. It does not merely seek to restructure debt owed to multilateral institutions and bilateral lenders but also private creditors. This is hard to swallow for credit rating agencies such as Fitch, which consider treatment under the Common Framework no less than default.

The best-case scenario would be to receive clarity that private creditors would not be affected. For whatever reason, though, this has not been forthcoming. Without building up this confidence, further engagement in the Common Framework is agreeing to what amounts to default and thrashing further Ethiopia’s credit rating. It will not help to cry about it later like Ghana is doing now with a credit rating downgrade that seems suspect.

Anything less than clarity on how private creditors will be affected, Ethiopia should look elsewhere to address its debt stress. Things are not as bleak as they look without the Common Framework, especially if the government plays its hand with the long term in mind.

Some of the good news could be a result of good luck. Fuel prices may come down, but the war between Russia and Ukraine will mean the complete opposite. Coffee prices may also be high going into the next year, depending on how fast production in Brazil picks up. The government needs to sustain the impressive growth in coffee exports this year by increasing exporters’ foreign currency retention to incentivise production. The windfall will not be around forever. More IMF special drawing right (SDR) allocations could also come Africa’s way, and some of it would trickle down to Ethiopia, if developed countries are willing to donate their share. The initial allocation will help the government service debt this year. More of it will not hurt.

Within the capacity of the government to address the macroeconomic situation is to build up foreign currency reserves. One positive already is that COVID-19 is retreating. This is good news for the hospitality sector and the most significant source of foreign currency for the country, Ethiopian Airlines. We need to build on this by bringing back peace to the country. It does not mean that 100 million people hold hands and sing Kumbaya anytime soon. But, for the economy to return to peak condition, the state of war needs to be ended.

A less precarious political situation would have one more benefit. It makes it possible to accelerate reform in the telecom sector. Some 40pc of Ethio telecom’s shares need to be sold this year before Safaricom Ethiopia decimates its market leadership. A second telecom player buying in would further consolidate the foreign currency reserve.

If the government plays its hand right, COVID-19 does truly retreat and some things turn out in the country's favour (more IMF SDR allocation to Africa, high coffee prices into next year or low fuel prices), Ethiopia can do without a faulty Common Framework.

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PUBLISHED ON Feb 26,2022 [ VOL 22 , NO 1139]

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