Ethiopia: Holistic Approach Key to Easing Ethiopia’s External Debt Stress

by MMC
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Despite the propensity of Prime Minister Abiy Ahmed’s (PhD) administration to paint a rosy picture of Ethiopia’s situation, the hard truth is that it remains in a precarious position and will need a lot of time to fend for yourself. feet. The impressive growth claimed to have been recorded since the Prime Minister came to power more than five and a half years ago has not translated into a dividend for the poor majority who are still mired in the clutches of a abject poverty. For a nation endowed with vast expanses of arable land, the largest livestock population in Africa, a significant surface and underground water resource, climatic conditions conducive to varied agricultural activities, numerous tourist destinations, a wealth considerable mineral content and productive youth. strength, it is paradoxical and even embarrassing that she is the model of aid dependence.

The cost of servicing Ethiopia’s high external debt, which was valued at $28.2 billion at the end of March, has been one of the headwinds that the Ethiopian economy has been suffering for some time now. For most of the last half-century, the government’s ongoing budget deficit has been covered, among other things, by external borrowing. The burden this places on the economy has started to become grueling following the global economic slowdown induced by the COVID-19 outbreak. Coupled with the two-year civil war in northern Ethiopia as well as the series of conflicts ravaging various regions of the country, the unprecedented level of foreign currency crisis and inflationary pressures has exacerbated debt risk total and external debt overhang. Therefore, it was forced to go hand in hand to seek debt relief under the G20 Common Framework, an agreement of the G20 and the Paris Club that aims to streamline countries’ debt restructuring efforts low-income eligible for the Debt Service Suspension Initiative. (DSSI).

The seriousness of the growing external debt problem facing Ethiopia was highlighted when it failed to pay a $33 million coupon on its $1 Eurobond which was due to due December 11. Renegotiation of bond terms with a core of bondholders before the Dec. 11 deadline failed. The message from the Ministry of Finance on the reasons for its inability to meet the payment target, however, seems confused. While it was quoted last week as saying it was “unable to pay” the $33 million coupon due to the country’s “fragile external position”, a statement released this week said that “Ethiopia’s decision to suspend the December coupon payment on its Eurobond… stems from the intention to treat all its external creditors fairly”, implying that it deliberately refused to insure payment of the coupon. If Ethiopia does not reach an agreement with bondholders before the two-week grace period it enjoys under the agreement’s bond terms, it is set to join countries like Zambia and Ghana among the African countries that have failed to repay their Eurobonds in recent years.

If Ethiopia were to default on its external debt, the consequences would inevitably be disastrous. First, it could lead to a further downgrade of its creditworthiness by rating agencies. In fact, that’s exactly what Fitch did this week, citing an increased likelihood of default. Such a move makes it more difficult for the country to access international capital markets in the future and borrow at affordable rates. A debt default would signal to foreign investors that Ethiopia may not be able to meet its financial commitments, leading to a decrease in foreign direct investment and a loss of investor confidence. Additionally, if international lenders perceive Ethiopia as having a higher credit risk, borrowing costs for Ethiopia are likely to increase. This could lead to reduced public spending, austerity measures and possible social unrest, which would have an even greater impact on citizens’ livelihoods and hinder progress in poverty reduction efforts. However, it is important to note that the impacts of default on external debt may vary depending on the specific circumstances, the results of negotiations and the response of international financial actors.