23 August 2018

Ethiopia: Dealing With Foreign Debt

Photo: World Bank

As a consequence of the decline in reserves in hard currency and foreign exchange, Ethiopia's foreign debt, totaled 26 billion USD, was rated high risk by 2017. While the national foreign debt was rated low and moderate risk between 2012 and 2016, the current status necessitates various remedies to deal with it.

Globally, the net present value of external debt-to-exports is the baseline to assess the debt risk of a given country. In addition, there is now the debt service to-exports-plus-remittances indicator.

Accordingly, the value of Ethiopia's exports in the just ended budget year has been 2.8 billion USD, registering a 2.8 percent reduction from the previous year performance, Ministry of Finance and Economic Cooperation (MoFEC) report indicated.

Then again, the total value of the country's imports has been 55.5 billion USD, exceeding last year's imports by 24.6 billion USD. The decline in the values of export and significant increment in the value of imports has once again widened up trade balance.

MoFEC has introduced strict control mechanisms on state-owned enterprises which resulted in easing the debt distress, IMF stated.

However, stagnant exports performance in 2016/17, weak external environment, delays in completing key export-oriented mega projects, and maturity of non-concessional borrowing contracted during the previous years have put the country's Debt Sustainability Analysis (DSA) at high risk, according to IMF.

These days, external debt distress in Ethiopia is in a high risk situation, says Fassil Tadesse, Instructor of Economics at Unity University in the Capital Addis Ababa.

He says the government has to boost the value of Ethiopia's currency, the Birr, as a first step to ease the burden. Then, the real power of the Birr would reduce the debt risks that result from foreign markets.

To do this, he advises the government has to monetize symmetrical moderate seasons that recur in the east-west north and south tropics. And this should be used as inputs for formulating economic policies.

The Ethiopian Calendar has exceptional nature with additional month (13th month of Puageme with five or six days). And the value of labor is not properly estimated during this period by taking local contexts into consideration to estimate the value of the economy, Fassil advises.

With steadfast implementation of the announced policies, and the expected export take-off, risks are projected to diminish. However, policy slippages or further delays in export supply would keep risks elevated for an extended period in Ethiopia, experts say.

Kidanemariam Gidey, development economists, on his parts says if the foreign debt trend continues like this, it would deter the country from securing loans form development partners, including international financial organizations and creditor countries, he states.

He also stresses that while the country is not entirely in shock, but it is heading to a difficult situation.

The way forward, according to Kidanemariam, is accomplishing the ongoing mega projects quickly. This would help diversify the export items in variety, quality and quantity to stimulate the stagnant export sector.

Industrial parks whose construction has already been completed has to go operational very soon, he adds.

The commitment of government institutions is crucial to raise the performance of the export sector, says Fassil adding with the fact that Ethiopia is home to various international organizations and the third diplomatic seat in the world, the status of country does not allow financial shocks like what was happened in Greece eight years ago.

Recently, Haji Ebsa, Communication Director at MoFEC told The Ethiopian Herald that while the country has reimbursed 16.97 billion USD local and foreign debts in the just ended budget year, it has also planned to repay some 22 billion USD this year.

Previously, the amount of foreign remittance has been significantly low, but after the coming to power of Prime Minister Abiy Ahmed, things are getting better.

Revival of remittance by the Diaspora, currency devaluation, and the support of partners are also enabling industrial parks to commence production. This would gradually help solve the foreign currency shortage, he added.

The Ethiopian Herald's Tsegaye Tilahun has also contributed to this story.


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