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NewsIMF delays hold up Ethiopia's debt talks

IMF delays hold up Ethiopia’s debt talks

But China refusing write-offs also a hurdle

External creditors are waiting for the International Monetary Fund (IMF) to conduct a debt sustainability assessment before they can move forward with restructuring Ethiopia’s debt, according to Rémi Maréchaux, the French Ambassador to Ethiopia.

As chair of the Paris Club, a group of major creditor nations, France is co-chairing an Ethiopia creditors committee with China’s Exim Bank. The committee aims to provide Ethiopia debt relief under the Common Framework initiative for heavily indebted middle-income countries.

The initiative involves not just traditional creditors like France but also non-traditional creditors like China.

“We are co-chairing the committee with China and we stand ready to reschedule Ethiopia’s debt under an IMF agreement,” Maréchaux said.

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However, before restructuring can proceed, the IMF must determine how much of Ethiopia’s debt needs to be reduced. “The creditors committee will first wait for the IMF to conduct a debt sustainability assessment,” the Ambassador noted.

Once that is complete, the committee co-chaired by France and China will work to restructure Ethiopia’s debt terms. France and China would then provide financial guarantees to enable the IMF program to be finalized.

“Debt restructuring is part of any IMF agreement, so there will be no IMF agreement without first restructuring Ethiopia’s debt,” Maréchaux said. “We are ready to move forward with the rescheduling. All the necessary preparations have been made; we are simply waiting for the IMF.”

However, senior economist Alisa Strobel of S&P Global says that both the IMF and China are contributing to delays, though for different reasons: the IMF’s policy demands, and China’s opposition to write-offs.

Per Strobel, the IMF is demanding policy changes from Ethiopia around loosening the currency regime and reining in central bank financing – issues Ethiopia is reluctant to tackle.

Strobel concurs with the French Ambassador that the IMF has slowed Ethiopia’s debt restructuring by not yet conducting a debt sustainability analysis and determining the size of needed debt relief. However, Strobel notes the key sticking point in negotiations centers on IMF demands for policy changes in Ethiopia.

In Strobel’s words: “It is likely that a point of discrepancy between the IMF and the Ethiopian government is the liberalization of the exchange rate regime and central bank advances in financing the fiscal deficit that is inflationary.”

Strobel also notes that China has insisted on granting Ethiopia longer repayment periods rather than nominal debt write-offs.

“China has requested repeatedly that ‘preferred creditor’ lenders like the IMF participate in losses, contrary to their status,” she says, a condition the IMF is unlikely to accept, “potentially delaying the restructuring process.”

Ethiopia owes USD 26 billion, mainly to China, and has paid USD 1.7 billion in debt service already in 2022. Bilateral talks with China began in March over USD 13 billion owed to China’s Exim Bank.

Ethiopia is seeking at least USD two billion from the IMF to address a massive USD six billion financing gap through 2026.

The IMF has indicated that credible reassurances from Ethiopia’s creditors regarding substantial debt relief are needed before the Fund will approve a new program to provide financing for Ethiopia.

While responding to questions from lawmakers, Prime Minister Abiy Ahmed (PhD) said he expects headway soon on Ethiopia’s request for debt relief from its massive external debts.

 The upcoming G20 summit in September 2023 could provide an opportunity for progress on debt talks under the G20’s Common Framework initiative, according to him.

Abiy further stated that the Ethiopian government intends to launch the second phase of its homegrown economic reforms.

The administration was hoping the IMF will agree to finance these reforms, which have been delayed due to the absence of the Fund’s financial support so far, according to sources.

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