Sunday, June 23, 2024
Google search engine
HomeTechnologyEthiopia: Holistic Approach Vital to Ease Ethiopia's External Debt Stress

Ethiopia: Holistic Approach Vital to Ease Ethiopia’s External Debt Stress

Despite the propensity of the administration of Prime Minister Abiy Ahmed (PhD) to paint a rosy picture about the state of the Ethiopian, the hard truth is it continues to be in a precarious position and will take a long time to stand on its own two feet. The impressive growth it’s touted to have registered since the premier came to power over five-and-half-years ago has not translated into a dividend for the majority poor who are still mired in the clutches of abject poverty. For a nation endowed with vast tracts of arable land, the largest number of livestock in Africa, a substantial surface and sub-surface water resource, climatic conditions suitable to varied agricultural activities, numerous tourist destinations, a considerable mineral wealth, and a youthful productive force, it’s paradoxical and indeed an embarrassment for it to be the poster child for aid dependence.

The cost of servicing Ethiopia’s high levels of external debt, which was valued to stand at USD 28.2 billion at the end of March, has been one of the headwinds the Ethiopian economy has suffered from for quite a while now. For the best part of the last half century or so the perennial budget deficit of the government has been made up for through, among others, external borrowing. The burden this placed on the economy particularly began to be backbreaking following the global economic downturn induced by the COVID-19 outbreak. Coupled with the two-year civil war in northern Ethiopia as well as the raft of conflicts ravaging various parts of the country, the unprecedented level of foreign exchange crunch and inflationary pressure has exacerbated the risk of both total debt and external debt distress. Consequently, it was forced to go hand in cap to ask for debt relief under the G20 Common Framework, an agreement of the G20 and Paris Club of countries that aims to streamline debt restructuring efforts of low-income countries eligible for the Debt Service Suspension Initiative (DSSI).

The gravity of the mounting external debt stress that Ethiopia is facing was laid bare when it failed to make a USD 33 million coupon payment on its USD 1 Eurobond that was due December 11. The failure to honor the interest payment came after the Ethiopian government’s efforts to renegotiate the bond terms with a core group of bondholders prior to the December 11 deadline fell through. The Ministry of Finance’s messaging on the reason behind its inability to meet the payment target seems to be muddled, however. While it was quoted last week as indicating that it was “not in a position to pay” the $33 million coupon because of the nation’s “fragile external position, a statement it issued this said week said “Ethiopia’s decision to withhold the December coupon payment on its Eurobond… stems from the intention to treat all its external creditors equitably,” implying that it deliberately declined to service the coupon payment. If Ethiopia does not conclude a deal with the bondholders before the two-week grace period it enjoys under the bond terms, it is set to join the likes of Zambia and Ghana among African nations to default on their Eurobond repayment in recent years.

If Ethiopia were to default on its external debt, the ensuing consequences are bound to be dire. First, it could result in a further downgrading of its credit worthiness by credit-rating agencies. In fact, Fitch did exactly that just this week citing an increased likelihood of default. Such move makes it more difficult for the country to access international capital markets in the future and borrow at affordable rates. Defaulting on debt obligations would signal to foreign investors that Ethiopia may not be able to meet its financial commitments, prompting a decrease in foreign direct investment and a loss of investor confidence. Moreover, if international lenders perceive Ethiopia as a higher credit risk, the borrowing costs for Ethiopia are liable to go up. This could lead to reduced government spending, austerity measures, and potential social unrest, further impacting the livelihoods of citizens and hindering progress in poverty reduction efforts. However, it’s important to note that the impacts of defaulting on external debt can vary depending on specific circumstances, negotiation outcomes, and the response of international financial actors.

Ethiopia’s mounting external debt stress requires a holistic approach. First and foremost, the country’s creditors need to work constructively with government officials on how to go about forging a mutually beneficial deal that alleviates its debt stress. This helps secure an outcome that protects the interest of all parties, which a default most certainly does not. On the domestic front, the government and all other stakeholders must do whatever is necessary to ensure that peace and stability prevail in Ethiopia given it’s impossible to engage in any meaningful effort aimed at addressing the debt stress in the absence of law and order. This should be complemented by an inclusive endeavor to craft and execute different policy frameworks whose objectives is anchored in exercising fiscal discipline, instituting an effective external debt management system as well as enhancing export revenue and foreign direct investment. These measures, among many, can help ease Ethiopia’s external debt stress and thereby prevent its calamitous toll for Ethiopia and its people.




Please enter your comment!
Please enter your name here

- Advertisment -
Google search engine

Most Popular

Recent Comments