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PoliticsEthiopia Creditors’ Committee meets to treat debt 

Ethiopia Creditors’ Committee meets to treat debt 

The Ministry of Finance expressed its delight following the formation of a Creditors’ Committee for Ethiopia to readjust its loans from bilateral sources, which could eventually lead to similar measures by corporate lenders.

Although it was in the interests of the International Monetary Fund (IMF) to form this committee before the expiry of the Extended Credit Facility (ECC) on September 16, 2021, the Committee cochaired by France and China virtually met on this day to discuss readjusting Ethiopia’s debt repayment.

The amount of debt to be readjusted is yet to be decided based on IMF’s Common Framework, which is intended to help countries cope with the economic challenges of COVID-19 through case-by-case debt treatment to support essential public spending.

It was in February 2020 that Ethiopia requested the Group of 20 (G20) and the Paris Club to form Creditor’s Committee to benefit from this Common Framework.

“The authorities’ aim is to create fiscal space for development spending and lower the risk of debt distress rating to moderate by reprofiling debt service obligations. The formation of the committee will help Ethiopia in this regard,” said Gerry Rice, the spokesperson for the IMF in January 2021.

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Debt servicing usually takes a huge chunk of Ethiopia’s annual budget. The third largest federal government expenditure for the 2021/22 fiscal year, for instance, is appropriated to debt servicing which amounts to 45.12 billion birr taking 13.05 percent of the total budget.

The IMF board in December 2019 approved USD 2.9 billion for Ethiopia over two financial arrangements entitled Extended Credit Facility (ECF) and Extended Fund Facility (EFF). The loan was meant to help the country implement the homegrown economic reform Plan to maintain macroeconomic stability and improve living standards. However, the fund expired on September 19, 2021, while Ethiopian authorities were finalizing the USD 30 billion debt restructuring negotiations. But, Ethiopia had requested similar amount from the IMF.

State Minister of Finance, Eyob Tekalegn (Ph.D.), told reporters on Wednesday that the G20 creditors common framework meeting cochaired by China and France was a “successful meeting” to renew the release of fund.

In this closed meeting, all the Ethiopian creditors were present and Ethiopia was able to virtually present its request through a delegation led by the Minister, Ahmed Shide.

According to the State Minister, at the meeting, Ethiopia made a clear presentation that the country has no problem with solvency rather the required debt rework is because of short-term liquidity challenges.

“Although there is disappointment because of the delay since Ethiopia requested the debt restructuring back in February 2021, we are very pleased that the latest meeting and deliberation of the committee through closed meeting finally agreed on Ethiopia’s request,” said Eyob adding the need to expedite it.

Since the Creditors’ Committee meeting, IMF is working on a new Debt sustainability analysis (DSA) to inform the creditor’s committee of the amount of debt restructuring required to put Ethiopia on a sustainable macroeconomic path, Eyob added.

Tewodros Mekonnen (PhD), Country Economist with the International Growth Center, says that, by implication, this sends a message that Ethiopia is not capable of servicing its debt at this time.

“This shows Ethiopia has difficulties in repaying its debt. Hence, rating companies will immediately downgrade the country’s credit worthiness,” he points out.

This would eventually challenge the country to access more commercial loans, while it gives relief to the government to redirect its debt repayment commitments to other expenditures. This is because, the readjustment would give the government the much-needed fiscal space as the economy is stretched by military and other expenses.

Hence, it would benefit the government, he observes. This should also help the government deal with the forex shortages in the economy as it is the government that spends much in different aspects consuming foreign currency.

According to reports from the Ministry of Finance, Ethiopia’s external debt stands at USD 30 billion. Fitch rated Ethiopia’s credit worthiness at CCC with a high risk of defaulting on its credit. Moody’s had previously downgraded Ethiopia’s rating following the government’s announcement to benefit from IMF’s Common Framework to recover from COVID-19 shocks.

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