There is no doubt that Ethiopia’s Ministry of Finance ended 2023 in a challenging place with a missed debt coupon payment of $33m on its Eurobond.
But how exactly did one of the fastest growing economies on the planet, without the tell-tale signs of debt distress, and having just made a debt-standstill agreement with its bilateral creditors, end up defaulting?
And how might Ethiopia be able to turn this around for 2024?
Prior to 2023, there were few tell-tale signs of debt distress in Ethiopia because, for instance, as of 2022, Ethiopia’s external debt-to-GDP ratio was approximately 22.6%, according to the World Bank, a figure which remains well below the 60% GDP threshold set by both the IMF and the World Bank’s Debt Sustainability Analysis (DSA). Indeed, Ethiopia’s external debt-to-GDP ratio has remained broadly under 60% since 2006, down from a peak in 1994 of 151%.
That said, Ethiopia, like most African countries, has been spending very conservatively. Ethiopia needs finance. Our recent analysis shows that in order to build the infrastructure to meet the UN’s Sustainable Development Goals (SDGs), for example just to provide basic needs such as water or the internet to every Ethiopian, the country should ideally be spending $23.6-34.8bn annually, or 17% – 25% of GDP per year. If Ethiopia was to do this with existing types of international loans, the country would quickly get to Japanese levels of debt to GDP ratios, of over 200%!
Breaking Ethiopia’s debt down shows that, as of November 2020, Ethiopia has borrowed around 52% of its loans from multilateral organisations such as the IMF, World Bank and African Development Bank, 29% of its debt from bilateral lenders such as China, France and the US, just under 17% of loans from commercial banks and suppliers for specific projects, and just under 4% from Eurobonds.
However, these ratios are not the same when it comes to debt service payments. In 2021, multilateral institutions made up 14% of total debt servicing while China and bondholders made up 35% and 3% respectively.
So how did the Eurobond become so problematic in 2023?
Although Ethiopia has been spending conservatively compared to its needs, and managing a diverse set of creditors, in the midst of the Covid-19 pandemic response, Ethiopia’s Finance Ministry in 2021 foresaw debt servicing challenges and decided to not only take part in the Debt Service Suspension Initiative (DSSI) designed for low-income countries to put off their debt service payments to bilateral creditors (so, for Ethiopia, 30% of its credit), but also join what has come to be known as the G20 Common Framework (CF). The CF is an evolution of what our CEO has termed an antiquated arrangement for as many creditors as possible to coordinate their debt relief offerings to each borrower, one-by-one.
At the same time, Ethiopia sought “exceptional access” to IMF funding, surpassing 100% of its entitlement, potentially worth $2bn, as well as an extended debt standstill beyond the DSSI, as well as further debt relief/restructuring from as many of its diverse creditors as possible. The CF was pitched to Ethiopia as making the debt standstills and relief/restructurings more plausible, as private sector bondholders as well as bilateral creditors such as China or Turkey would also be at the creditor table.
Nevertheless, a subset of the CF creditors, the Paris Club, stipulated that in order to proceed this time around, Ethiopia must reach a Staff-Level Agreement with the International Monetary Fund (IMF) by March 2024, otherwise further debt service payment suspension may be declared null and void, and further agreement under the CF may not be plausible.
Meanwhile, no suspension was forthcoming from the Eurobond holders, with interest rates on those bonds continuously rising because of what can be interpreted as self-fulfilling prophesies of major credit rating agencies. Fitch downgraded Ethiopia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘RD’ (Restricted Default) from ‘C’, and lowered the issue rating of Ethiopia’s outstanding $1bn Eurobond from ‘C’ to ‘D’. Concurrently, S&P Global downgraded Ethiopia’s debt to default. This not only made Ethiopia’s debt more costly – it perpetuated perceptions of “Africa risk”.
Hence, the Eurobond default simply brought the private sector in line with Ethiopia’s other creditors.
Bringing all this together, then, while the Ethiopian government was right to identify risks in debt service management early on, it was clear that the global response to Ethiopia created some complex problems.
Instead, the global response should have been informed by three other key facts.
First, despite domestic challenges and a low starting point in terms of GDP, Ethiopia maintains a robust economic outlook with a projected growth rate of 6.2% for 2024. These figures surpass not only the anticipated global growth rate of 2.9%, it also outpaces the expected growth rate for the African continent at 4% for 2024. Indeed, much of the country’s past growth has come from spending debt on new infrastructure, as well as concurrent investment in value-addition manufacturing and processing – for instance of textiles and agricultural products – which has been made all the more productive with better infrastructure.
This demonstrates Ethiopia’s considerable growth potential, which should be accounted for by all creditors – and even within the IMF’s own assessment of Ethiopia’s “Debt Sustainability” – also because Ethiopia proves that debt can yield productive assets.
Second, Ethiopia has successfully negotiated debt relief with several creditors in the past, both as a group (e.g. the Paris Club) and bilaterally (e.g. China). For instance, our records indicate that Ethiopia has negotiated $7m, $46m and $141m of debt relief from the UK, US and China respectively at various points over the period 1990-2019, as well as a total $1.9bn of debt relief from the multilateral institutions over the same period, the latter in particular due to the Highly Indebted Poor Countries’ Initiative (HIPC).
Third, and last but not least, the proven inadequacies of the CF did not bode well for Ethiopia. The framework faces criticism for it’s slow pace, lack of clear guidelines and rules, as well as the limited fiscal relief combined with austerity measures. The extended timeframe of almost three years for Zambia’s restructuring exemplifies the protracted nature of these procedures.
How can Ethiopia and its lenders do better in 2024?
So, learning lessons from 2023, what can Ethiopia – and the international community – do better in 2024? We have four key suggestions.
First, for Ethiopia, exchanging notes with other African countries – especially with those who have also experienced the CF such as Zambia, Chad, Ghana – is both imperative and a no-brainer. These countries should collaborate for mutual learning and information exchange on both processes and outcomes of the CF, to work out how they can get more from creditors, including Eurobond holders who have been very difficult to engage to date. The international community should be advocating, and creating spaces, for this borrower coordination to take place.
Second, alongside finalising its negotiation with the IMF, Ethiopia should initiate its own debt sustainability analysis, as countries such as Argentina have done, while also pushing internationally for a critical overhaul of the IMF and World Bank’s DSA framework. Ethiopia has the opportunity to set the precedent for a better, more complete and fair debt assessment process.
Third, in any negotiation with creditors, Ethiopia should reject any push for reducing borrowing or spending. Austerity measures often prescribed by the IMF can lead to domestic backlash and poverty increasing rather than decreasing. This is why countries such as Tunisia have recently rejected IMF deals, and will be crucial for Ethiopia to manage as well.
Fourth, and last but not least, at the end of 2023, Ethiopia supported the creation of a new global instrument, the Common Leveraging Union of Borrowers (CLUB), in Addis Ababa, through the Organization for Southern Cooperation (OSC). This was a major historic moment, as CLUB is uniquely designed as a “pooled” mechanism for countries to seek cheap loans from creditors and potentially negotiate collective debt relief. In 2024, Ethiopia has the opportunity not only to work with other OSC member state finance ministries to seek new finance for CLUB that they can use to continue to meet the SDGs, but also consider whether CLUB might be a useful route to pursue for better debt relief, alongside or instead of the CF.
It is certainly possible that 2024 will be a better year for Ethiopia’s Finance Ministry than 2023, but it will likely require continued hard decisions, not always in line with the orthodoxy promoted by most financial advisors. Instead, it requires bold, innovative and precedent-setting decisions that can help bring about a badly-needed reformed global debt and financing system.
Dennis Severin is a Development Finance Intern at Development Reimagined.
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