Fortune News | Feb 09,2019
Amidst alarmingly low foreign exchange reserves, a flock of senior Ethiopian officials on the economic front were in Washington D.C. last week, pleading for the resumption of external debt restricting.
Led by Finance Minister Ahmed Shide, Ethiopia’s delegation of five included Central Bank Governor Yinager Dessie (PhD), Fistume Assefa, minister of Planning Commission, Eyob Tekalegn (PhD), state minister for Finance, and Teklewold Atnafu, former governor of the central bank, serving now as a monetary policy advisor to the Prime Minister.
The mood in the boardrooms on 18th Street was all but inspiring. Minister Ahmed has a clear message to delegates of countries which are Ethiopia’s creditors. Push forward for implementing a “common framework for debt treatment” to avert a looming economic crisis in a country he described as “an anchor of stability” in the Horn of Africa region.
With a mounting amount of debt and servicing, his government faces the prospect of defaulting on Ethiopia’s external debt.
Jointly chaired by China and France, Ethiopia’s creditors established a committee last year to treat Ethiopia’s stock of external debt nearing 30 billion dollars. China and the World Bank claim two-thirds of the total, followed by the Africa Development Bank (AfDB) and its sister organization, the African Development Fund (AfDF).
“Default risks are also high in Ethiopia,” Virág Fórizs, Africa economist at the London-based Capital Economics, told The Africa Report, last week. “Especially following the latest flare-up in the country’s internal conflict.”
Despite the raging civil war in Tigray and neighbouring regional states, and resurged insurgency in the southern and western parts of the country, Ahmed conveyed to finance ministers of the G7 countries that the glass is half full. He spoke of the economic reforms Ethiopia’s government took over the past four years.
Prime Minister Abiy Ahmed’s (PhD) administration brought down non-concessional borrowing, and the debt state-owned enterprises owed have dropped by half a share of GDP. Ahmed championed in Washington D.C. the cause of opening up the economy for private and foreign competition, began the formation of capital markets, and the phasing out of fuel subsidies he characterized as “wasteful”.
The Finance Minister pledged to pursue a policy of moving the exchange market to a “market-determined exchange rate” regime.
Ahmed and a troupe of ministers were in Washington attending the biannual joint meeting held by the World Bank and the IMF. They were not alone. Almost all board chairs and presidents of commercial banks were pushing shoulders with them, entering the Britton Woods headquarters amidst protestors voicing their opposition against the ongoing war.
Silencing the guns through a negotiated ceasefire is a position the Group Seven (G7) countries have placed before Ethiopian authorities to resume negotiations for debt restructuring. A team of IMF experts who visited Addis Abeba as part of the annual consultation have delivered this message in no uncertain terms.
Not surprisingly, the key to Ethiopia’s delegation to move forward on the negotiations for debt restructuring may lay a couple of blocks from where Ahmed and the team spent much of their days last week. On 21st Street is where the U.S. State Department is headquartered.
The Secretary of State, Anthony Blinken, twitted on Friday, October 14, calling on the governments of Ethiopia and Eritrea “to cease their joint offensive and on Tigrayan authorities to cease provocative actions.”
Blinken wrote: “It is time for the government of Ethiopia and Tigray regional authorities to pursue peace.”
The absence of peace or the prevalence of active war stands in the way of Ethiopia’s creditors’ reluctance to move forward on the talks for debt treatment. This put Ethiopia in the league of African countries – Ghana, Kenya and Zambia – with economies under fiscal pressures and risk default.
“The backdrop of aggressive monetary policy tightening by central banks of advanced economies including the Fed (U.S. Federal Reserve) together with growing risk-off sentiment amid concerns about a global recession is certainly unfavourable for African sovereign dollar bonds,” says Fórizs of Capital Economics.
Ethiopia is eyeing a maturity date in December 2024 of a one billion dollars euro bond, issued with an interest rate of 6.62pc last week. Primary holders of these bonds being investment companies in the United States, Ethiopia floated this bond in 2014 to develop industrial parks, such as Hawassa.
The performance of this bond in the international money market has been swinging from the lowest (5.47pc) in 2018 to 9.68pc two years earlier, according to Cepheus Capital, a domestic private equity firm. This, however, may not last long.
“In much of Sub-Saharan Africa, we expect Eurobond yields to rise further over the coming months,” warns Fórizs. “Mounting investor concerns about the balance of payments problems and public debt woes have weighed on sovereign dollar bonds in addition to the unfavourable global backdrop.”
These are the two most vexing issues Ethiopia’s policymakers have confronted.
Public debt is on a sharp rise and is projected to continue unabated. It is estimated to reach nearly 70 billion dollars next year, against 19.4 billion dollars five years ago. Public debt is projected to reach 127 billion dollars in another five years.
Experts fear, in the absence of an agreed debt treatment, the ballooning debt burden will widen the gap in the public debt ratio to the GDP to an unsustainable level. The amount of money Ethiopia pays annually to service its external debt exceeded two billion dollars, claiming half of what it earns from export revenues, compared to 26pc two years ago.
“The country is mired in an excessive debt situation,” Sara Confalonieri wrote in a report for BNP Paribas, a French bank.
Neither is the balance of payments position helpful to Minister Ahmed and his team. The same week he was in Washington, his State Minister, Semereta Sewasew, issued a proclamation banning the imports of merchandise in 38 categories, from liquor and cigarette to packed food, drinks and from home and office furniture to cars.
It makes it apparent how depleted the foreign currency reserve has plummeted below one billion dollars. According to the IMF, it is only sufficient to cover the country’s imports for three weeks, the lowest in nearly three decades.
Part of the response by Ethiopia’s policymakers to the mounting public debt pressure in the economy is financing it through domestic borrowing and treasury bill sales. The central bank sold 317.6 billion Br in T-bills by June this year.
It is a pattern several countries in Africa under the same pressure appear to follow.
“Heavily indebted nations in Africa have been ramping up domestic borrowing to fill their financing gaps,” noted Fórizs.
Domestic borrowing has sent the federal budget deficit to the roof. It has reached four percent of the GDP, the highest in decades, and one percentage point above what economic pundits consider is a prudent level.
The rise in the budget deficit and the move by the authorities to pay for borrowing from the central bank has caused soaring inflation. Year-on-year prices for food recorded in the consumer price index (CPI) remains above 30pc, although the rate for August this year subsided by 2.3 percentage points from 35.5pc a month before.
However, the reminder for consumers of how fleeting prices have become comes from a glance at the menus of restaurants across the city.
PUBLISHED ON Oct 15,2022 [ VOL 23 , NO 1172]
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