– Currency reunification, a prerequisite to restructure debt
– Delayed G20 debt restructuring is costing Ethiopia, officials say
Ethiopian macroeconomic policy makers are discussing with the International Monetary Fund (IMF) and World Bank (WB) in a bid to fundamentally reform the exchange regime that leads to the unification of the official and parallel markets.
During a panel discussion held on April 11, 2023, at the ongoing spring meeting in Washington, the issue of debt restructuring and the unification of the dual exchange rate regime sparked heated debates between Ethiopian officials and the Bretton Woods institutions. While the Minister of Finance, Ahmed Shide, repeatedly stated the G20 debt restructuring is very late, David Malpass, president of the World Bank, lamented the need to end the dual exchange regime in Ethiopia.
“Ethiopia is trying to correct the macro imbalance. Particularly, the exchange rate reform is very important,” Ahmed said. “The current exchange rate regime is not sustainable and it is distorting the economy. We need to boldly address it. But we will continue discussing with the IMF team and the World Bank on how to boldly move forward.”
During a separate session, Malpass stated that the official exchange market serves a small segment of the population. “The parallel market, which is very expensive, also serves a limited number of people. The dual system is affecting the majority of Ethiopia’s 120 million population.”
The IMF and WB experts have been pressuring the Ethiopian government to unify the markets, according to insiders.
“They have been asking the government to undertake a one-time massive devaluation and equate the official market with the black market. This is critical because the government cannot control the black market. The IMF and WB say the black market premium cannot go higher than the current premium once it is equalized with the official market,” an expert close to the matter said.
The IMF and WB experts believe that if the two are unified more forex could come to banks, according to the expert. The expert asserts that the IMF and WB are unconcerned with the significant inflation that a devaluation could cause.
The IMF experts, who concluded their Ethiopia visit on April 7, 2023, stated they have agreed to support Ethiopia’s second Homegrown Economic Reform (HGER 2.0). The HGER 2.0, which was recently drafted, states the exchange market will be liberalized gradually. It will be implemented over the next three years.
“Currency liberalization is impossible at this point since the government has no sufficient forex reserves,” the insider said. “Of course, the government can bridge the import and supply gaps by liberalizing the retail market at the same time and ushering in foreign wholesalers and suppliers who can import commodities to Ethiopia with their own hard currencies.”
The insider believes that the government will soon devalue the birr so that the official and parallel market rates become equal. He also says that the IMF and WB requested the exchange rate regime as a precondition to approving Ethiopia’s request for debt restructuring.
During the session on April 11, Ahmed bemoaned the long-overdue process to restructure the debt.
“The G20 framework is very commendable. But the process took much longer, and we have been penalized as a result of applying for it. We pay the cost. Our Eurobond price speed has increased. We have been downgraded by rating agencies. This has been a huge cost to the economy. The benefit of the G20 framework is yet to come. Flexibility for the country is very important. One size does not fit all,” said Ahmed.
A significant portion of Ethiopia’s external debt will mature between 2023 and 2026. Ethiopia’s annual external debt service, which stands at two billion on average so far, will almost double in the coming few years. Especially the one billion Eurobond, which will fully mature by December 2024, is among the headaches, as Ethiopia’s forex reserve remains below USD 1.6 billion. Ethiopia’s total external debt stood at USD 27.8 billion.
“In the coming few years, we need to pay a significant amount of debt. So, that is going to put us under significant pressure given the export level, which has yet to grow,” Ahmed stated.
He says that the rise in commodity prices in the global market has exacerbated the situation, with conflict, drought, and external challenges exacerbating the situation. “The situation could have been worse without the reforms we implemented,” said Ahmed.
Ethiopia requested the debt restructuring under the G20 framework in early 2021. Chad, Ghana, and Zambia also requested the restructuring, but Ethiopia’s case has just been reactivated in the past few months after the two-year war in northern Ethiopia ended following the Pretoria agreement.
However, Ahmed says the debt restructuring is severely delayed because of a lack of coordination between creditors, the Breton Woods institutions, and debtors. Ahmed particularly accused the IMF and World Bank of failing to share the Debt Sustainability Analysis (DSA) with the creditors.
The IMF and WB conduct a DSA analysis to ascertain how much of the developing economy’s external debt is sustainable and how much funding is necessary to restructure the unsustainable debt. Creditors base their decisions on the DSA.
“Our debt is transparent. We have a few major creditors. The DSA calculation should not take more time. It is very easy,” Ahmed argued. He says Ethiopia’s problem is much different from other countries like Ghana and Zambia.
“The treatment we need in terms of debt is not complicated. What we need is for the decision to come through quickly. Real-time coordination between the IMF, the WB, creditors, the G20 framework secretariat, and the creditors committee are very important,” Ahmed stated.
Malpass admitted that “the DSA has been kept privately at the WB and IMF for all these years. We are trying to accelerate as much as possible in Ethiopia during that confidence-building period.”
Ethiopia has more of a liquidity problem, according to Malpass. However, Ahmed claims Ethiopia has only “a short-term liquidity challenge.” Inflation, deteriorating reserve positions, rising debt risk, macro-economic distortion, and the forex challenge remain binding constraints in Ethiopia’s economy, according to Ahmed.
“Ethiopia’s macroeconomic imbalance has been widening recently due to internal and external pressures and shocks that have challenged us. That is why debt treatment and additional reform measures are fundamental to closing the gap in terms of macroeconomic imbalance and moving to a sustainable trajectory,” Ahmed explained, adding the government has never borrowed non-concessional loans since the new administration has been in place for the past four years and is downsizing wasteful subsidies.
“Post-conflict reconstruction also needs a significant amount of financing. Our partnership with the WB and IMF is very critical at this time in our history, where we are moving toward bold reform but more expenditure is required,” Ahmed stated.
Christina Giorgieva, managing director of the IMF, and Malpass stated that a positive outcome is expected from the spring meeting, as creditors and debtors are slated to meet and discuss during the meeting between April 10 and 16, 2023.
