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Ethiopia: Debt Accumulation, Its Sustainability and Impact on the Economy Now and In The Future

Ethiopia: Debt Accumulation, Its Sustainability and Impact on the Economy Now and In The Future Panel Discussion 25th General Assembly of Ethiopian Economic Association Fantahun Belew Addis Ababa 17/11/2018. I. Introduction.

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Ethiopia: Debt Accumulation, Its Sustainability and Impact on the Economy Now and In The Future

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  1. Ethiopia: Debt Accumulation, Its Sustainability and Impact on the Economy Now and In The Future Panel Discussion 25th General Assembly of Ethiopian Economic Association Fantahun Belew Addis Ababa 17/11/2018

  2. I. Introduction • Focused on foreign debt • Foreign debt is classified in to three • Central Government External Debt: refers to all external loans contracted between external creditors and Ministry of Finance; • Government-guaranteed external debt: loans and suppliers credits contracted by public enterprises, and guaranteed by Ministry of Finance as well as the state owned bank- (CBE). • Non-guaranteed external debt: loans contracted by public enterprises, mainly without government or government owned bank guarantee.

  3. Types of foreign loan • Balance of payment support loans: short or long term loans contracted by a country for the purpose of rectifying temporary or persistent unfavorable balance of payments position. • Project tied loans: loans tied to government projects which are expected to be viable. They are self-liquidating since inflows from the project should be sufficient to repay the loans. • Loans for socio-economic purposes: Loans for basic social and economic infrastructure which are expected to move the economy forward in areas like education, health, electricity and rural development.

  4. Sources of Foreign Loan • Multilateral Official Creditors: The World Bank, the International Monetary Fund, European Commission, European Investment Bank; the International Fund for Agricultural Development, etc. • Bilateral Official Creditors: Governments (nations): in organized form such as Paris club (an informal group of creditor countries with no permanent members who meet to negotiate debt rescheduling for borrowing countries), or bilaterally countries; • London club of creditors is a cartel of International Commercial banks who handles private debts and other commercial debts and operates strictly on commercial terms. • Foreign Loans in the form of trade, contract, and finance credit supplies and private investments;

  5. Foreign Debt Outstanding (in mn USD)

  6. Composition of External Debt (%)

  7. Composition of External Debt (%)… 2006/07 2017/18

  8. Foreign Loan by Lenders

  9. Grant Elements …..

  10. Grant Element

  11. Sectors Financed by External loan (%)

  12. Ethiopia’s Debt Sustainability Debt sustainability position is usually measured based on the following: • The total debt outstanding or total public debt outstanding to GDP at current price, • The total debt outstanding to exports of goods and non-factor services; • Total debt service to exports of goods and services; and • The ratio of debt service payments to government revenue,

  13. IMF Debt Sustainaility threshold (2017)

  14. Debt Servicing in Mn Birr…

  15. Debt Service Annual Average Growth (%) (2006/07-2017/18)

  16. Composition of Debt Servicng

  17. External debt Financing /Tax Revenue (%)

  18. Debt Service/Export (%)

  19. External Debt to GDP (%)

  20. Debt Sustainability.. • According to IMF Debt sustainability analysis Ethiopia was rated as • Moderate risk between 2008/09-2009/10; • Low risk between 2010/11-2014/15; • Moderate risk between 2015/16-2016/17 and • High risk 2017/18

  21. Debt Sustainability… Why Ethiopia’s Debt developed into High risk ? • Increased non concessional and government guaranteed borrowing; • Delays in completing key export-oriented projects, • maturing of non-concessional borrowing contracted in the last decade; • Low export performance; • Erratic growth in FDI and other Foreign currency sources, • Low-return projects prioritization; • Absence of strict debt management guideline and legal framework;

  22. Debt Sustainability…. Impact on the economy • Unable to access further foreign finance; • Negatively affects investors trust; • Cost of high debt financing; • Weaken the economic growth;

  23. The Way Forward • Refrain from NCB by government and state-owned enterprises; • Stocktaking public investments and taking the following actions • Identify delayed projects and their reasons; • Delay low-performing projects; • Focus on more productive and export-oriented projects; • Negotiate non-concessional loans (e.g Chinese loans); • Speed up the privatization process; • Reduce import-intensive public projects;

  24. The Way Forward … • Keep on concessional borrowing ; • Undertake prudent prioritize resource allocation across projects and borrow for high lucrative investments (export –oriented); • Speed up the implementation of PPP; • Promote FDI, remittance, tourism and other non-traditional foreign currency sources; • Strengthen governance, leadership, and institutions; • Improve domestic resource mobilization and management of public expenditure, investment and debt;(Strictly adhere to the debt management legal framework); • Provide an enabling environment for private sector development and encourage increased domestic savings;

  25. Thank you

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