Ethiopia owed about $27 billion in mid-2019, $13.7 billion of it to Chinese lenders, consultant Getachew T. Alemu wrote in Addis Standard, arguing that its state-led finance model cannot quickly be replaced.
New buildings and construction cranes on the Addis Ababa skyline, January 2015 (Jean Rebiffé, Wikimedia Commons, CC BY 2.0) [file photo]
The model paid for one of Africa’s biggest public-investment drives. Growth averaged about 10.1 percent over 15 years, according to the World Bank, and 63 percent of the latest budget went to education, health and infrastructure. Tax and non-tax revenue quadrupled over the same period, growing 23 percent a year on average.
Spending still outran revenue. The 2019/20 budget carried a deficit of 97 billion birr ($3.4 billion). Deficits were financed mainly by direct advances from the National Bank of Ethiopia and by borrowing from local institutions, which expanded the money supply and kept inflation high. The rest came from concessional loans from multilateral lenders and commercial loans from export-import banks, foreign commercial banks and state-backed creditors. Direct budget support from donors had fallen to almost nothing.
The result, Getachew wrote, was rapid growth, falling poverty, new infrastructure and better access to schools and clinics, but also widening deficits, inflation, currency depreciation, growing inequality and shortages of basics such as edible oil and sugar.
He saw “a grain of truth” in Prime Minister Abiy Ahmed’s view that the macroeconomic problems stem from the development finance model, but said poor countries have few options. African tax revenue averages about 24 percent of GDP, so much of the money must come from outside, on terms shaped by global interest rates, politics and lenders’ conditions. Many problems, he argued, lay in how state-owned enterprises used commercial loans, not in where the money came from.
The government’s planned shift, toward private capital, public-private partnerships, foreign direct investment, concessional borrowing, budget support and debt rescheduling alongside a wider tax base, does not change the model’s anchor, he wrote. He warned that international private capital is short-term, tends to avoid productive sectors and brings lobbying power, that attracting it takes time, and that pulling back public investment would hurt growth. He called for a flexible, inclusive finance framework that balances tax revenue, borrowing and partnerships.
Sources: Addis Standard