-Return on Eurobond investment remains nil though repayment date nears due
-Interest rate due in 2023 rose to USD 1.6 bln
Ethiopia’s external debts mature en masse as the country’s foreign exchange reserves dwindle, jeopardizing its ability to repay its loan on time.
In the following few quarters, prior to June 2023, it is anticipated that Ethiopia will be liable for servicing a total of USD 1.6 billion in interest on loans.
According to sources, debt payment requests from creditors to the Ethiopian government were USD 320 million for December 2022 alone, with China contributing USD 104 million.
According to the latest Ministry of Finance (MoF) debt analysis report published earlier this month, external debt service is expected to rise steadily over the next two years.
Assuming that the committed and undisbursed amounts are disbursed over the coming years, Ethiopia’s total estimated external debt to be serviced (Principal plus Interest) will increase from USD 2.3 billion in 2022/23 to USD 4.1 billion in 2024-25, becoming the country’s highest debt obligation in a single year.
Approximately USD 6.2 billion in central government domestic debt principal payments are due in 2022–23 and 2023–24, including Treasury bills but excluding direct advances. It is a situation that has worried policymakers who are striving to achieve the debt restructuring request that was made to G20 countries in 2020, which is being delayed owing to the turmoil in Ethiopia and the reluctance of China to finish Ethiopia’s debt restructuring.
Ethiopia’s FX reserves have fallen to USD 1.5 billion, enough just to cover less than a month’s import bills but insufficient to satisfy debt commitments. According to Fitch’s latest outlook, published on December 20, 2022, the current account deficit will remain unchanged until 2023. Ethiopia’s Long-Term Foreign-Currency Issuer Default Rating was likewise reduced from ‘CCC’ to ‘CCC-‘ by the international rating agency. Ethiopia is bound to default, according to the rating.
“In the absence of a CF debt treatment that would reduce Ethiopia’s external debt servicing burden and facilitate the disbursement of additional external financing, the country’s external liquidity will continue to worsen,” stated Fitch’s report.
Fitch’s downgrade is reasonable but has no impact on Ethiopia because the country has already exhausted its options for external loans, according to Abdulmenan Mohammad (PhD). However, it may discourage global investors from coming to Ethiopia with the intention of making an investment there.
One of the liabilities that are offsetting the due stocks is the one billion dollar Eurobond that has a maturity date in the next two years and carries an annual interest rate of 6.625 percent. The Eurobond had a maturity period of 10 years and was issued in 2014 with the purpose of financing the construction of six different industrial parks, with the largest portion of the financing going toward financing Hawassa Industrial Park.
According to the latest report by the World Bank, MoF has paid USD 348 million in semiannual interest payments to IPDC to cover the interest payments on the Eurobonds. In December 2024, at the end of the Eurobond’s maturity period, interest payments will reach USD 497 million. The World Bank’s report suggests, however, that each of these industrial parks may become profitable between the years 2022 and 2026.
“The terms of the Eurobond were wrong. The government was completely shortsighted while issuing the Eurobond to mature in ten years, with 6.6 percent interest,” argues Abdulmenan. “Ethiopian government at the time agreed blindly. They never thought about the return on the investment and the paying period. The payment period should have been at least thirty years.”
When compared to the total external debt of about USD 28 billion, of which USD 19 billion is owed to the central government and USD nine billion is owed to SOEs, the Eurobond seems like a drop in the ocean. The SOEs appear to be in a stronger financial position to repay their debt.
AAU’s lecturer and financial expert, Sewale Abate (Ph.D.), notes that the current moment is “make or break” for the Ethiopian government.
“It is projected that Ethiopia will have significant debt service requirements over the next two years. The country of Ethiopia continues to have the worst foreign exchange position in the world. Because of this, the difficulties already facing Ethiopia will only worsen,” he said.
While Sewale sees some dark times ahead, he also sees some promising openings.
“On the one hand, Ethiopia’s external liquidity decreased, and the country’s debt payment possibility worsened. Since the conflict in the country’s north escalated, Ethiopia’s access to foreign currency has diminished. There is also little hope for the imminent arrival of the G20 framework to alleviate poor countries’ debt burdens,” he added.
It’s possible, according to Abdulmenan, that China will restructure Ethiopia’s debt.
“To restructure and perhaps even forgive some of the loans, I believe China will take the necessary measures. If Ethiopia defaults, China will gain nothing,” he remarked.
Various initiatives are already under way as part of the Ethiopian government’s plan to pay off its debts. The signing of the peace accord between the government and the TPLF raised expectations for a new IMF program and the restructuring of debt.
The macroeconomic team met in Bishoftu two weeks ago to discuss the formidable task ahead. To attract financial support from external sources, the government is contemplating implementing additional suggestions made by the International Monetary Fund and the World Bank.