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Money TalksEthiopia’s vicious cycle of infeasible loans, unrealistic public projects

Ethiopia’s vicious cycle of infeasible loans, unrealistic public projects

In Ethiopia, it is as rare as finding hen’s teeth for a public project to be finished on schedule, make a profit, and pay back the loan that was used to fund it. It would appear that the return on investment of public projects is the government’s final criterion when deciding whether or not to take out loans. Public projects are often developed with less consideration for sound financial management.

The return on investment for the majority of public projects is still uncertain, and the burden of debt associated with their financing is putting pressure on the economy. There is an exception to this norm, and that is the case of the projects that are administered by certain state-owned enterprises, which account for 21.5 percent of Ethiopia’s debt.

At the moment, total public and publicly guaranteed debt accounts for half of GDP.

Railways, sugar factories, industrial parks, energy projects, and a variety of other development projects will take years, if not decades, to recover their initial costs. When combined with an unrestrained borrowing trend in the past and poor project delivery, the importance of the projects pales in comparison to the debt load holding down the economy.

Industrial parks, in particular, are a clear example of how risky it is in Ethiopia to finance public projects using loans.

The USD one billion Eurobond Ethiopia issued in 2014 with a 6.6 percent interest rate and a 10-year maturity was used to build industrial parks in Hawassa, Dire Dawa, Adama, Debre Birhan, Bahir Dar, and Jimma. The Eurobond will mature in December 2024, with interest approaching USD 500 million by then.

However, the World Bank predicts that industrial parks will be profitable between 2022 and 2026.

“Much broadly, this also shows government weakness in public investment management in terms of efficient resource allocation, appropriate accounting, and the analysis of opportunity cost of investment decisions,” according to the bank’s most recent policy report on the state of industrial parks in Ethiopia.

Dozens of industrial parks are being constructed across the country, primarily in response to regional state requests rather than economic feasibility, raw material availability, or logistical viability.

“We know that industrial parks are constructed in lieu of the government’s intention to implement quota-based distribution in regional states. This must come to an end,” Ahmed Shide, the state minister of finance, stated this while analyzing the Industrial Parks Development Corporation’s (IPDC) performance last year at the Hilton hotel a few months ago. At the time, Ahmed instructed the corporation’s executives that building a new industrial park should be delayed and existing IPs should be sold if buyers could be found.

His ministry is also attempting to sell eight sugar enterprises that have proven unsuccessful and unprofitable in the hands of the state. The Ministry of Finance issued an expression of interest (EoI) in mid-August, but investor reaction has been disappointing.

“The EoI is still open,” an official at the ministry said. “Only a few investors have expressed interest and submitted documentation.”

Poor or nonexistent feasibility assessments, slow project implementation, corruption, and other problems all contribute to Ethiopia’s nascent performance of public projects. COVID-19, the conflict between the central government and the TPLF, and global economic shocks since the Ukraine war are all reasons that have contributed to the current drop.

Kiflu Godefe (PhD), Policy Study Institute’s senior research director, stated that price adjustments rise when a project is overrun. “Delaying projects is extremely costly, especially given Ethiopia’s high inflation rate. A project that is delayed cannot also pay its debt. Every public project must be efficient, completed on schedule, and be able to pay its debt.”

The government must learn to conduct genuine feasibility assessments and use loans efficiently, according to Kiflu. “The maturity date of public loans must occur after the project’s return is realized.”

Currently, the venues for launching new projects are restricted as Ethiopia’s sources of finance, particularly loans, dwindle and the government switches its focus from growth to reconstruction and recovery of war-torn areas.

“The recurring budget has grown substantially faster than the capital budget since last year. We are not make investments in development projects. This is because the Ethiopian crisis necessitates more resources for humanitarian assistance and other non-productive expenses,” Kiflu stated.

He says that the government did not change policy but was compelled to allocate more cash to recurring expenditures as a result of COVID-19 and the conflict.

“However, I expect that the government will now shift resources to long-term development projects. The administration is currently confident about debt restructuring and the new IMF program,” Kiflu explained.

Aside from the impending external debt obligations, total internal public debt stood at 1.6 trillion birr, 42 percent of which is owed to the central government. The government was able to absorb half a trillion birr in domestic loans from state-owned firms through the Liability and Asset Management Company (LAMC).

The country’s external debt amounts to USD 27.1 billion and Ethiopia has so far paid an average of USD two billion in debt payments per year. This comprises both the principal and the interest.

This year, however, interest loan payments alone are estimated to surpass USD 1.6 billion, with the majority of Ethiopia’s external debt obligations are due to mature between 2023 and 2026. Due to maturing sovereign bonds, external debt service is likely to climb steadily over the next two years, from roughly USD 2.1 billion in 2022–23 to USD 2.2 billion in 2023–24, and then to around USD 3.4 billion in 2024–25.

Assuming that the committed and undisbursed sums are released over the next few years, the total expected external debt service (principal plus interest) will grow from USD 2.3 billion in 2022–23 to USD 4.1 billion in 2024–25 due to maturing sovereign bonds, according to the MoF’s debt report.

“The federal government is owed around USD 19 billion in total external debt. SOEs have no problems repaying their loans. However, the central government is under pressure. Debt restructuring, rescheduling the deadline, canceling interest payments, and a new IMF program are the only options,” Sewale Abate (PhD), a financial expert and lecturer at Addis Ababa University, said.

Sewale expects a favorable response from the G20, IFIs, and creditors in light of the Ethiopian peace accord. The expert emphasized that the government should prioritize project efficiency while also working hard to acquire funding.

“Ethiopia has taken loans aggressively, yet the majority of the projects backed by debt have failed,” Kiflu stated. He claims debt burdens and government expenditure deficits are testing the government to the limit.

The government has centralized the approval procedure for public projects, entrusting it to the Ministry of Planning and Development (MoPD). According to the newly adopted proclamation titled ‘Public Projects Administration and Management System,’ all federal projects must have feasibility studies approved by the ministry.

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