When a country borrows from the International Monetary Fund (IMF), it has to meet the conditionality of adjusting its economic policies to overcome the problems that led it to seek financial assistance. These policy adjustments help to ensure that the country adopts strong and effective policies. These conditionality helps countries, including Ethiopia, solve balance of payments problems without resorting to measures that harm national or international prosperity.
In addition, these measures aim to safeguard IMF resources. This is done through guarantees that the country’s finances will be strong enough to repay the loan. Such repayment allows other countries to use the resources if needed in the future. Conditionality is also designed in financing IMF programs with the aim of achieving the agreed policy goals. Member countries, including Ethiopia, that borrow from the IMF have a major responsibility for selecting, designing, and implementing policies that make their economic program perform well. The fulfillment of the objectives of the program depends on situations and circumstances of the country.
The IMF imposes conditions on developing countries when they request loans for financing their economic development programs. These programs comprise projects that are prepared to meet the needs of people in these countries, including Ethiopia. People may need employment to earn income for satisfying their basic requirements. These include food, health, education, housing, clothing, and other basic necessities. These needs are not easy to meet considering the size of the Ethiopian population living below poverty line.
The IMF has to consider such real needs the countries are striving to meet and ease imposes that add more burden to the countries. It should back their struggle against poverty and value the efforts they exert to become food self sufficient. Of course, it is essential to check the way countries use the fund they obtain from international financial institutions in order to fight corruption. Ethiopia has designed homegrown economic reform agenda aiming to make poverty history. To this end, it has taken various measures such as accelerating production and productivity that includes export standard products.
In the decades of economic development efforts, the proportion of those living below poverty line is being reduced through targeted development activities. This achievement is partially attributed to external assistance provided by international financial institutions, including the IMF. Of course, these institutions set their conditionality for providing aid, external assistance or loans to the country. Poverty reduction is one indicator of the effective use of external resources in Ethiopia.
Experts have noted serious changes on conditions that have been made on restructuring the Ethiopian external debt. One of these conditions has been the signing of peace agreement between the Federal Government of Ethiopia and the TPLF forces in 2022. This agreement has ended the civil war lasted for two years in the northern part of the country. It paved the way for resuming negotiations, compromise and conciliation with international financial institutions. As a result, after requesting a debt restructuring under the G20 Common Framework, Ethiopia has been able to reach an agreement.
This agreement was made on an “interim suspension” of its bilateral debt service. This was only a temporary relief which would be reinstituted at a later stage. Yet, it was only the first step in the direction of debt settlement. Thus, the Ethiopian government must reach agreements with all of its external creditors. This is a major requirement to fully restructure the debt of the country. Before this, it must negotiate with the IMF in order to access its financial support.
The negotiation is done on condition of undertaking strong reforms. These reforms will initially lead to strengthening the country’s external financial standing. This takes place on condition of settling conflicts in the country. These conflicts have been putting in danger the country’s relations with its international collaborators. All these tended to slow the restructuring process. In fact, forecasts have been made on the highly likely default which forced the Ethiopian government to request a debt restructuring.
At the time, external liquidity was declining to seriously low levels. Added to this was the ongoing extensive drought in the Horn of Africa. Despite these eventualities, the civil war that broke out in Ethiopia in 2020 disrupted and upset the negotiation process. It cut off its relations with foreign donors. Official Development Assistance (ODA), on which the country has been dependent, tremendously declined. Consequently, the foreign exchange scarcity intensified causing a fall in foreign exchange reserves.
The signing of the peace agreements between the Federal Government and TPLF was critical for Ethiopia to reach interim agreements on suspending its bilateral debt service. This resulted in interest payments deferred until 2025, with the payment of the principal postponed further. Apart from the short-term external liquidity relief, these agreements enabled the G20 Common Framework to be launched again after a long period of inactivity. For the purpose of complying with this system, the Ethiopian government did not pay money on its outstanding debts. This was done to maintain the principle of “comparability of treatment” between creditors.
The MOF has informed the public that the public debt has been reliably contained, compared to the two countries when they defaulted. Also, one fourth of the external debt was owed to “private” creditors. This situation has, therefore, made the negotiations faster. First and foremost, the extent of the restructuring will not include domestic debt, as was the case for other African countries. Moreover, the restructuring is expected to be limited to extending maturities or repayment, with the aim of spreading repayments.
Experts think that its spread over time reduces periods of liquidity pressure. They also believe that any such agreement should be relatively easier to negotiate with bilateral creditors which have traditionally been reluctant to accept debt write-offs. However, Eurobond debt will be more difficult to restructure. This has been indicated by the failure of the government and private bondholders to reach an initial agreement. Fortunately, Ethiopia has issued only one Eurobond with the scope of the debt to be restructured.
It is reported that any further progress under the G20 Common Framework depends on securing USD 3.5 Billion from IMF funding program. This measure would help release a similar amount from the WB. This, however, does not give chance to the Ethiopian government for maneuvering during negotiation on the conditions for funding. Without an agreement with the IMF by the end of the first quarter of 2024, bilateral creditors “reserve the right” to cancel their debt service suspension. However, the IMF indicated that it will demand tough reforms from the Ethiopian authorities. It is of the opinion that the government has delayed the reforms for many years.
The major point in the negotiations is the gradual devaluation of the exchange rate. This was a reform launched under the previous IMF program, but abandoned later on. The National Bank of Ethiopia (NBE) has been managing the exchange rate, and the Birr has been largely overvalued for decades. Due to the foreign exchange shortage, the disparity between the official rate and the parallel market rate has gradually widened to nearly double.
Currently, Ethiopia is facing a strong inflationary pressure. Devaluation of the Birr with the aim of bringing the official and parallel rates back together will be needed for the NBE to end the restricted access to the dollar. Experts think that one-third of currency transactions are thought to be carried out on the parallel market. This indicated the need for liberalizing the foreign exchange regime. The scale of the devaluation is being discussed by the Ethiopian government and the IMF. This was due to the need for a full correction of the overvaluation. This would obviously have a significant impact on inflation, which is already very high. This is corroborated by the continuous rise in consumer prices.
Experts are of the opinion that if the foreign exchange market were to be liberalized, this would need to go with a reform of monetary policy. Such a reform would help control inflation through the interest rate channel. At the present time, the NBE’s main measures to tackle inflation involve capping bank credit growth for the current fiscal year. Also, reducing its direct advances to the government, the NBE will be reducing the fiscal deficit.
Considering the considerable and significant short-term financing needs of the Ethiopian government, direct advances by the IMF would be difficult to terminate. Moreover, the fiscal revenue of the government has gradually declined, as indicated by its ratio to the GDP in the previous years. But, spending increased widening the budget deficit. The government will, therefore, have to undertake fiscal reforms aiming to increase its revenue while “reducing” subsidies and social transfers. It is noted that these subsidies and transfers accounted for more than half of budgetary expenditure in previous years.
Experts have noted that such measures may satisfy the requirements of the IMF, but they call for disasters on those poor people who are beneficiaries of these subsidies. Yet, further reforms will be needed in order to attract foreign direct investment (FDI) and strengthen external accounts. Furthermore, other actions that may be required to secure the IMF financing include developing and liberalizing the financial sector. Added to this measure is the continuation of the program to privatize public enterprises, which call for the improvement of the business environment. Whatever measures are taken by the government to meet the IMF conditionality, they are bound to be the Task of Tantalus, hard to shoulder for all Ethiopians.
Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The Ethiopian Herald
BY GETACHEW MINAS
The Ethiopian herald May 4/2024
