Ethiopia is stepping up efforts to restructure its $1 billion in international debt as part of a broader debt overhaul. Investors have dismissed suggestions that the government is seeking to cut the value of the bonds, setting the stage for tense negotiations.
Pressured by severe foreign exchange shortages and sluggish government revenues, the government said in early 2021 that it would restructure its debt under the G20 Common Framework initiative.
Chad, Zambia and Ghana have sought, with immense difficulty, to restructure their debts under the G20 program designed to provide rapid debt relief to developing countries.
Ethiopia’s process has been prolonged by the Tigray conflict, which ended in late 2022, and slow progress in meeting International Monetary Fund demands to abandon its currency peg, lift capital controls and introduce an interest-rate-based monetary policy framework.
Ethiopia launched a new birr currency on July 29, helping it secure a four-year, $3.4 billion loan program from the IMF. The deal with the IMF unlocked more financing from creditors, including the World Bank, and paved the way for a new debt restructuring initiative.
Ethiopia’s external debt stood at $28.9 billion in March, according to the government. The IMF has identified a $3.5 billion financing gap during the lending program. Ethiopia needs to plug that through debt restructuring, but how that will be achieved depends on restructuring negotiations.
The government said it expected the restructuring to generate €4.9 billion in debt relief, citing official proposals from creditors, although without a specified timeframe.
To achieve comparability of treatment, a principle of the G20 Common Framework that requires commercial creditors to be treated similarly to official counterparties, Ethiopian authorities have indicated they will seek a 20% reduction in the principal of their 1 billion bond.
This angered private creditors, who said last week that it did not reflect Ethiopia’s economic fundamentals and added that the government was not following a “good faith” approach to debt restructuring.
The dispute centers on whether Ethiopia has a liquidity problem – a short-term problem – or whether it faces a long-term solvency crisis.
Export and tax revenues are under pressure and foreign exchange reserves are dwindling, hurting Ethiopia’s ability to repay debt, say those who see this as a long-term solvency problem, even though debt is relatively low at 40.3 percent of GDP.
The IMF’s debt sustainability analysis shows that Ethiopia has seen prolonged violations of a number of indicators that the fund typically uses to identify a solvency crisis, such as the external debt-to-exports ratio.
Divergent assessments can set the stage for tense negotiations.
The birr currency has nearly halved in value this year, trading at 103.97 to the dollar, according to data from the Commercial Bank of Ethiopia, the country’s biggest lender, approaching the parallel market rate of 115-120.
However, progress on the main goal of unifying the two rates was initially hampered by commercial banks’ hesitation to do so quickly. Traders also raised prices on basic necessities such as cooking oil.
Authorities responded by closing thousands of businesses deemed to have raised prices unjustifiably, and the federal government attempted to increase supplies of essential goods by increasing imports.
The IMF says the government will need to take further steps, perhaps tightening monetary policy, to contain inflationary pressures. The fund has scheduled an unusually fast pace of reviews to closely monitor the impact of the reforms.
The next reviews are scheduled for late September and December, when both the IMF and the government expect Ethiopia to have reached a restructuring deal.
2024-08-19 20:57:49