UNCTAD’s The Least Developed Countries Report 2019 recently revealed that Ethiopia is at high risk of falling into debt distress if it cannot expand its export capacity and earn reasonable foreign currency.
Ethiopia is one of the 13 countries designated as at high risk of debt in the report. The Ministry of Finance has also recently depicted that Ethiopia’s debt burden remains at high-risk over the past fiscal year exceeding the 55 percent threshold. Ethiopia’s internal and external debt until last March 2019 amounts 52.57 billion USD, out of which 26.93 billion USD is external debt said UNCTAD’s report adding that the country’s external debt sustainability remains at high risk of debt distress, which is currently exceeding 60 percent beyond the threshold of the debt ceiling.
Dr. Tadele Frede, an economist at Addis Ababa University, tells The Ethiopian Herald that the figure implies huge and accumulated debt burden and has a great impact on the overall economy. “The debt is repaid using the foreign currency that the country generates. In other words, instead of financing other development sectors, the country is forced to utilize it to repay its debt. This poses huge challenges for the country’s investment activities,” Tadele says.
If the country is unable to pay the debt, it will have negative consequences on its image. It will also make loan providers reluctant to release additional loans. “Hence, the loan has to be reimbursed,” he adds. The economy is dependent on imports to meet the demand for consumer goods. If the country spends its foreign currency on these goods, it will face difficulties in funding the importation of capital goods, he says.
One of the major reasons for him that led the the country into this kind of situation is the delay in the construction of mega projects such as sugar and fertilizer factories. “It is obvious that most of the projects have been constructed through external loans. Had the projects been finalized on time, they would have saved a large amount of foreign currency.”
The other reason is the decline in export both in terms of quantity and quality. “Since the start of the first Growth and Transformation Plan, the export sector has not performed well and the government has not yet come up with remedies.” Besides improving the quality and quantity of exports, it is imperative to give due emphasis to finalizing the ongoing mega projects. Import substitution has to also be a priority.
The effort to receive debt cancellation should not be taken as a viable option to address debt burden, Dr. Tadele stresses adding but budget rescheduling can be taken as a short term plan to minimize debt. Dr. Berihu Aseffa, senior expert at Ethiopia Policy Study Institute on his part says the country can take various economic measures to minimize the debt burden.
Seconding Tadele, Berihu says the measures have to focus on boosting the economy as a whole and the export sector in particular. As the debt is not to be reimbursed at once, ensuring sustainable economic growth is a means to reduce the debt burden. Otherwise, debt restructuring can be taken as another option. But for Dr. Berihu, the current debt is not that huge as compared to the economy. “The main thing is, do we have the capacity to repay our debt?” he asks.
But the challenge that the country faces is that it has a weak export sector. Being a country of 100 million people, the country earns close to four billion USD annually. There are countries whose debts are close to 90 percent of their GDP. Ethiopia’s debt, including that of Ethio-telecom and Ethiopian Airlines, is close to 60 percent of the GDP, adds Berihu. In addition, if the country is able to attract a huge amount of FDI, the debt by itself would not be a problem.
“We borrowed a lot of money but we have been unable to repay on the given time… We have borrowed significantly for infrastructure projects which really failed to achieve the desired result,” said Eyob Tekalign, Ethiopia’s State Minister of Finance presenting the Ministry’s performance to parliament during the previous budget year.
As a the result, Ethiopia is forced to restructure the debt repayment schedule negotiating with the major leading country – China as well as by avoiding new debts and new public investment projects. “We have already avoided commercial loans because these loans when they have matured have really created a challenge of accumulated debt,” he said explaining some of the actions undertaken by the ministry as a result of the ongoing reform.
“…We have prioritized the supply side of economic growth which means working on productive sectors including mining, tourism, manufacturing, and even agriculture. We are still importing wheat and edible oil which in an economy like Ethiopia is really unacceptable” the Minister said.
The Ethiopian Herald, November 28/2019
BY GIRMACHEW GASHAW
