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    Money TalksBeyond Debt Restructuring

    Beyond Debt Restructuring

    Date:

    Over the years, external loan has been the low hanging fruit for the government of Ethiopia to bridge the wide gap between exponentially growing investment needs and meager domestic resource mobilization. Behind most of Ethiopia’s major public projects are financiers waiting for a return of their loans.

    Between 2016 and 2021, Ethiopia received loan disbursement totaling USD 14.1 billion through multilateral, bilateral and private creditors. Out of the total, roads and transport infrastructure took USD 2.5 billion, while USD 2.4 billion went into energy projects, USD 2.2 billion to railway, USD 1.4 billion to agriculture, and USD 1.2 billion to industry, among others.

    These projects had varying timetables for their loan repayment and expected contribution to development. Documents of the Ministry of Finance indicate that the average maturity time for external debt owed to the central government is 32 years, while those owed to SoEs is 11 years. However, the return on investment of the projects take longer period, which is a minimum of eleven years for soundly performing projects like Addis-Adama toll road and up to fifty years in the case of the railway projects.

    Nonetheless the performance of these projects to live up to expectations and serve their loans has further deteriorated as some of them are mired up in conflict zones, and others see a defocus as government reiterates on painstaking conflict and external pressures.  

    “Obviously the war is affecting the performance of major projects, and this will have its toll on the amount of foreign currency they generate and return their loans. It will also limit the government’s capacity to pursue new projects,” said Shiferaw Solomon, Deputy CEO for Industrial Parks Operation at the Industrial Parks Development Corporation (IPDC).

    The corporation developed some eight industrial parks at a total cost of close to USD 1.5 billion over the decade. So far, the parks have generated USD 730 million from exports. “Industrial Parks have been a major source of Ethiopia’s industrial export. But currently, some of them are in conflict zones and we have no information of their status.” A month ago, CEO of IPDC, Sandokan Debebe told reporters that one of the three industrial parks in Tigray was looted while another one was damaged.

    Amidst the grim situation of Ethiopia’s economy, creditors’ appetite to provide additional loans and place the economy back on track remains hanging on the balance.

    Lately, governmental efforts to access external loans and give lifeline to a stagflation economy have seen indifference from international creditors, both private as well as new platforms like the DSSI. The common explanation for failure by long-term partners such as IMF to disburse even the USD 2.9 billion it promised, boils down to Ethiopia’s failure to restructure its outstanding debt stock. China, which holds half of Ethiopia’s external loan, is also not alluded to the debt restructuring flag IMF pulled on Ethiopia. In fact, china chairs the creditors’ committee installed to oversee Ethiopia’s debt requests, along France.

    ‘As of the end of June 2021, the undisbursed balance from external loan commitments was USD 11.2 billion, of which 61 percent is from the central government committed amount and the remaining 38 percent is from SoEs and NBE (IMF loans for ECF and EFF Programs). From multilateral creditors, IDA and IMF have very large undisbursed balances amounting to USD 3.1 billion (27.18 percent) and USD 2.7 billion (24.17 percent), respectively,’ states the Debt Portfolio analysis published recently by the Ministry of Finance.

    “The West is not in a position to deliver the commitments, as of now. China is also not interested in restructuring Ethiopia’s debt. Russia also cannot be the alternative source because its economy is weak. Of course, Russia can provide in kind, but not finance,” said a seasoned expert working in an international organization based in Addis Ababa. He predicts the gap in finance, coupled with cost of the conflict, will pull back Ethiopia’s economy.

    For Alemayehu Geda (PhD), professor of economics and lecturer of international finance at AAU, the implications of the ABSENCE OF external loans on Ethiopia, will depend on who provided the loans. “Loans from the west, including those from the World Bank and the IMF, are being used as leverage for political interests. The concern of Western creditors is not whether the projects are performing well or not. They will resume the finance with whoever wins this war. But they are holding the financing because the war is extended,” he remarked.

    In fact, IMF and WB loan constitutes only 12 percent of Ethiopia’s loan disbursed over the last fifteen years. Speaking of bilateral debt, however, China has the biggest debt power on Ethiopia. China’s loan constitutes 30 percent of Ethiopia’s loan over the last fifteen years.

     “If we have to fear external debt, it should be China we should be afraid of. However, it is the World Bank and IMF using a slice of loan as a threat against Ethiopia. Of course, IMF is the gateway to access western financing. IMF provides the feel of approval for western creditors. You get western finance only if IMF nods. PM Abiy’s homegrown economic policy perfectly aligns with IMF and WB policies. So they cannot refuse additional loans based on economic policy terms. But IMF and WB are refusing additional loan for Ethiopia, due to the west’s political interest. How Ethiopia performs in this war will determine the next course,” asserted the Professor.

    Debt restructuring is simply an excuse, according to Alemayehu. “The west has been bagging tons of loans during EPRDF without concern to debt restructuring or whatsoever. Abiy’s administration is trying everything to reform the economy but the west is not willing to assist. This is an historic and practical time to take the final note that IIMF is not the mother for poor countries. Though I don’t agree with the ongoing liberalization, Abiy’s measures stand in stark contrast with Meles’. Meles even refused privatization; yet they gave out loans. Abiy is an ideal candidate for the west’s economic policy terms. He fulfilled their terms in miles and bounds, compared to Meles. But the west has other interests.”

    The economist stressed PM Abiy’s administration posed three major political threats to the west. “First, he entered treaty with Eritrea and Somalia, which the west fears would create a powerful axis over the Red Sea. The Red Sea global highway makes USD 400 million worth of business passages every single minute and we have seen what happened to the global trade when a single ship got stuck in the Suez Canal. The west does not want any exclusive power over the Red Sea. Secondly, Abiy’s commitment on the GERD hurts Egypt, which is a US buffer zone in its policy in the Middle East. Thirdly, China’s belt and road initiative is even the biggest threat. The BRI, which passes through the horn of Africa, is not only infrastructure but also strategic military system. BRI matches Ethiopia’s interests, which is why the US is nerved. China, despite holding half of Ethiopia’s external debt stock, is not asking for debt structuring. This is because Ethiopia’s and china’s interests matched. But the west is asking for debt restructuring because their interest faltered with Ethiopia’s interest.”

    The experts stress that development partners and western nations must walk the talk, and stick to the principles, when it comes to assisting the LDCs way out of poverty. “If the World Bank, IMF and the western countries really believe in their promises to support the poor, they have to lift their bans on loans to Ethiopia. Ethiopia had never needed that loan more than now. They must stand with the Ethiopian people, not regimes. Their talks about debt restructuring must wait until the war is over,” concluded Alemayehu.

    But Shiferaw noted that the consequence of isolating Ethiopia from international finance would eventually affect western countries. “For instance, there are over 80,000 people employed inside industrial parks. There is already an accrual in the failure to create the 2 million job demand created annually. If this huge workforce is not contained, the migration crisis will be imminent especially for Europe. Some European countries that are aware of such implications are communicating with us on how to maintain their support for projects especially in industrial parks. I believe the US decision to delist Ethiopia from AGOA and place sanctions on Ethiopia will not be simulated by Europe and the rest of the world,” hopes Shiferaw.

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