ADF STAFF
Ethiopia has joined a growing list of African nations seeking relief from their foreign debt as they struggle to weather a global financial slowdown while caring for their people during the COVID-19 pandemic.
Ethiopia requested debt help in January through the G20’s Debt Service Suspension Initiative (DSSI). It was the second African nation after Zambia to invoke the DSSI.
The Ethiopian Finance Ministry said in a statement that the DSSI agreement would “address the debt vulnerabilities of the country, while preserving long-term access to international financial markets, thus unlocking more growth potential.”
Prime Minister Abiy Ahmed Ali has said debt payment relief through the end of 2022 could save his country up to $3.5 billion — money it could use to respond to the pandemic. The DSSI program expires at the end of 2021.
The initiative helps countries renegotiate their public debts and delay repayments to buffer their economies against the demands of the pandemic. However, a lack of transparency — especially when it comes to Chinese debt — can hinder their ability to use the program.
Some of the transparency issues arise in Chinese loans to state-owned enterprises, such as power stations and ports, that may not be reported among the official national debt.
That raises the possibility that Ethiopia’s debt is larger than officially acknowledged, complicating its DSSI relief plan, according to Irmgard Erasmus, senior financial economist with NKC African Economics.
Ethiopia’s DSSI announcement provoked a sell-off of its foreign debt and caused credit rating agency Fitch to downgrade the country’s standing from B to CCC, making it harder to borrow or refinance government debt.
As a G20 member, China is part of the DSSI project. But so far, it has provided relief only for small, interest-free loans made directly by the government.
The G20 has asked private lenders to go along with the DSSI plan, but it’s unclear whether that will happen. Ethiopia’s single-largest total debt — $7.7 billion — is to China’s Export-Import (Exim) Bank, a state-backed bank the Chinese government considers a private, commercial lender.
The Exim Bank issued 31 loans to Ethiopia between 2007 and 2018. Those loans account for more than half of Ethiopia’s total $13.7 billion debt to China, the bulk of it incurred since 2010.
Most of Ethiopia’s Chinese debt has supported infrastructure projects such as the Addis Ababa-Djibouti Railway and various highway projects, along with state-owned enterprises such as the Ethiopian Electric Power Corp.
China’s banks claim the projects they’re financing as collateral against the debt. So, a default or relief request can prompt the bank to take possession of the highway, port or other project in lieu of repayment.
In December 2019, Ethiopia and the International Monetary Fund signed a $2.9 billion Extended Credit Facility agreement to help Ethiopia put its economy on a more solid footing. That agreement puts Ethiopia in a better position compared to other African nations seeking debt relief.
At the same time, Erasmus said the G20 agreement only delays the inevitable impact of Ethiopia’s debt repayments.
“While the DSSI provided breathing space on the hard currency liquidity front, absent of debt management overhaul, the exercise will be limited to a ‘kicking the (fiscal) can down the road’ event,” Erasmus wrote in an analysis of Ethiopia’s debt.