Finance Minister Ahmed Wants Sustainable Debt, Not Simply Available Loans

May 28 , 2024

Ethiopia's Finance Minister, Ahmed Shedie, issued a stark reminder about the importance of sustainable debt practices during a panel at the African Development Bank (AfDB) annual meetings in Nairobi, Kenya. Speaking candidly today, May 28, 2024, he stressed that debt should not be taken simply because it is available but should be leveraged when proven sustainable, marking it as a responsibility.

His remarks come as Ethiopia finds itself among 22 African economies that are highly indebted or on the brink of default. The country's external debt has reached 28 billion dollars, part of the 1.15 trillion dollar debt stock held by African countries, nearly twice the continent’s GDP.

The debt dilemma was a prominent topic at the AfDB meetings, where African leaders and financial experts debated balancing debt management with economic growth. Minister Ahmed advocated for using debt to spur economic development while maintaining sustainability.

"The most important thing is what you do with the debt," he asserted.

"We must find new, sustainable financing methods that align with long-term economic goals."

Ahmed pointed to domestic resource mobilisation and prudent external and  local borrowing as key strategies. However, he faces an economy that generates only eight percent of its GDP in taxes, well below the 13pc average for sub-Saharan Africa.

Despite this, he detailed Ethiopia’s efforts over the past 15 years, stating that public investments in critical infrastructure such as railways, highways, and electricity generation are crucial for boosting economic growth and reducing poverty.

"We’ve created valuable assets that are crucial for economic transformation," he told the panel, which included Mavis O. Gyamfi, executive vice president of the African Centre for Economic Transformation (ACET); Jean-Yves Adou, acting director of monitoring and evaluation for the African Peer Review Mechanism (APRM); and Olivier Pognon, director of the African Legal Support Facility (ALSF).

"Our focus now is in improving the business environment to attract foreign direct investment and generate exports."

But he spoke little of the violent conflicts engulfing the country, particularly in Amhara and Oromia regional states, that scare investments off, disrupt logistics and discourage tourists from travelling to the conflict hotspots.

Gyamfi from ACET provided a broader perspective on Africa's cyclical nature of debt crises. She argued that African countries must strengthen their legal and institutional frameworks to break this cycle.

"Governance and legal structures within Africa are critical,” she said.

“We need to ensure robust implementation of these frameworks to manage debt effectively."

She pointed out that while some African countries have exemplary legal frameworks, they often struggle with implementation.

"This gap needs to be addressed urgently."

Gyamfi envisioned a future where African countries invest wisely, diversify their economies, and enhance the effectiveness of public spending.

"In 40 years, I hope we will have borrowed wisely and invested in economic transformation," said Gyamfi. "We need to strive for 100pc effective utilisation of borrowed funds."

She also advocated for increased funding of African financial institutions by African governments to ensure independence and drive the continent's economic agenda.

According to Adou of APRM, over two decades of public debt policies in Africa have shown varying degrees of success. Some countries have managed to significantly reduce their debt burden, while others have seen their debt levels increase due to governance issues. Adou urged countries to address governance issues such as corruption and public mismanagement to ensure that debt is used effectively for development. But, for Pognon of the ALSF, the potential of collective action clauses in debt restructuring processes is no less crucial.

"When several borrowers come together to negotiate, they can exert more pressure on creditors to move towards favourable terms," Pognon said.

The panellists also discussed the importance of balancing domestic and external debt. While domestic borrowing can reduce foreign exchange risks, it also has implications for the domestic economy. Gyamfi expressed concerns about the risks associated with domestic borrowing, such as crowding out the private sector and impacting middle-class members.

"We must always consider the cost of domestic borrowing and its impact on the local economy,” she told the panel. “The recent debt renegotiation in my country had an alarming effect on the middle class and the private sector."

Finance Minister Ahmed agreed that domestic resource mobilisation could be crucial but argued that responsible borrowing practices must complement it. He outlined Ethiopia's efforts to balance domestic and external debt while focusing on generating growth and exports.

"Our strategy involves controlling inflation, restructuring debt for sustainability, and enhancing the competitiveness of our economy," he said. "This holistic approach is necessary to avoid repeatedly falling into a debt trap."

The panel also discussed the role of multilateral development banks in supporting African countries with concessional financing. Gyamfi and Pognon agreed that increased support from these institutions could help African countries build essential infrastructure without falling into unsustainable debt.

"We need more concessional financing to accelerate infrastructure development and reduce fragility," Gyamfi said.

Minister Ahmed and his co-panellists expressed optimism about Africa's economic future, provided the right policies and frameworks are in place.

"If we learn from our past mistakes and use our resources wisely to generate growth, we can avoid future debt crises," he said. "The future is much brighter if we can implement these strategies effectively."

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