Mereja Forum

[Abdisa]

Ethiopia’s debt: an economic and political liability



10 May, 2021
by Federico Rogai

The efforts to restructure repayments come amid increasing challenges.


Since mass protests began in 2015, a lot of analysis has focused on Ethiopia’s security challenges, with sustained unrest followed by momentous change and now a relapse into civil war in Tigray.

But the economic headwinds are equally strong—and they have the potential to compound political dilemmas.

As part of the state-led developmental project pursued by the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF), most intensively after 2010, the government invested big, both directly and through state-owned enterprises (SOEs).

While the injected capital—mainly to finance infrastructure— produced impressive economic growth, the model was heavily reliant on debt. The sustainability of this formula depends both on realizing returns that are higher than the contracted interest rates and securing foreign exchange with which to repay interest and principal.

Unfortunately, the first condition for success was undermined, as the implementation of many projects was riddled by waste and a lag in producing profits.

On the former, for example, the Ethiopian Sugar Corporation borrowed from mostly Chinese banks to invest approximately $4.6 billion in new plantations and processors, but bungled projects meant cane production has actually dropped over the period—a far cry from ambitions to become one of the world’s top ten exporters.

For the latter, the multitude of hydropower stations built over the past decade not only failed to attain full cost recovery, but problems such as high losses, frequent outages, and lack of access persist. Investments in both the Addis Ababa light rail and the Ethio-Djibouti railways, flagship projects by Ethiopian Railways Corporation, have similarly been loss-making.

Consequently, industrial production meant to reduce imports and increase exports did not take off and the manufacturing sector still represents only around six percent of economic output.

After taking office, as in most areas, Prime Minister Abiy Ahmed’s government has taken a different direction, cutting through the EPRDF’s dithering on whether to give up on key elements of the state-led model and embrace a more free-market approach.

The shift heralded by the “Homegrown Economic Reform” had to do as much with ideological re-alignments and critical evaluations of the state’s spending effectiveness as with practical necessities.

Among these, the steadily worsening public debt situation was identified as one of the most critical issues—and rightly so.

Total public debt had ballooned from $13.7 billion in 2011 to $54.7 billion in 2020, which represents a four-fold increase. Figure 1 illustrates this rise and highlights its structural form. SOEs and the central government have been responsible in equal measure for the increasing debt level and have tapped both domestic and international resources.

Read more... https://www.ethiopia-insight.com/2021/0 ... liability/

[Abdisa]

While the injected capital—mainly to finance infrastructure— produced impressive economic growth, the model was heavily reliant on debt. The sustainability of this formula depends both on realizing returns that are higher than the contracted interest rates and securing foreign exchange with which to repay interest and principal.

Unfortunately, the first condition for success was undermined, as the implementation of many projects was riddled by waste and a lag in producing profits.

"የሰው ጌጥ አያደምቅ"። The following quote describes the last 27 years very accurately.
"We buy things we don't need with money we don't have to impress people we don't like." — Dave Ramsey

Erecting high rise buildings the Ethiopian people don't need with money you don't have to impress the Ethiopian people you don't like who will ultimately be left carrying the debt...........

The TPLF terrorists borrowed billions of dollars in the name of the Ethiopian people, and today they are spending the money on Washington lobbyists and on bribes to international media cartels to demonize Ethiopia and smear its armed forces.

[Abdisa]

When the G-20 countries introduced debt relief initiative for the world's lowest-income countries, one of the conditions they put forth was:

• If the money borrowed by a former regime was used to buy military hardware, then the debt can be forgiven. (Apparently the regime bought the weapons from the G-20 countries)
  
  But if the money was stolen by a former regime and stashed in offshore bank accounts, it's an outstanding debt that must be paid back in full, with interest and late fees. (The stolen money is always stashed in banks at G-20 countries)

I know that doesn't make any sense, but that's the reality every new government faces in the developing world.