Ethiopia Mortgaging Future with External Debt

The Ethiopian Parliament recently debated the issue of the high external debt of the country. This is welcome news as the debt of the nation is growing, reaching upwards of almost 16 billion dollars. A large portion of this is borrowed from multilateral institutions, such as the World Bank and the African Development Bank, while bilateral creditors are owed about four billion dollars. This comes as the country is rushing to be an industralised nation and is investing heavily in its political and national priorities.

In the shadow of a slowing economy, where a shortage of foreign currencies is still a pressing issue to the local economy, Ethiopia, a member of the group of Heavily Indebted Poor Countries (HIPC), is more than ever relying heavily on external debt to sustain its ambitious development agenda.

The option to borrow has become a viable and attractive one in the country’s ambition to become middle income by 2025. Ethiopia’s credit rating is recorded as a B by Moody’s and Fitch, and supporters of the value of external loans see it as a virtue, considering it vital to the development of the country.

The construction of a number of mega projects and industrial parks has been a major part of the country’s plans to become a manufacturing powerhouse. Heavy investments have been made in energy, roads and transportation. As the projects progress, Ethiopia’s option to borrow for its infrastructure and industrial projects, from external and internal sources, is seen as an investment that will ultimately produce dividends and not become a burden to society.

There are ample valid reasons why an emerging disadvantaged nation, such as Ethiopia, needs to borrow. Many nations borrow huge sums of money from external sources to sustain their economy; the United States is a prime example.

What should be a concern to Ethiopia is its ability to pay back the loans it has signed up for as it continues to borrow and build. Smart borrowers use external loans to curb a sharp declining economy, or when the need to provide immediate services to citizens, because of emergency or natural disaster, arises.

Historically, debt has crippled the development of Ethiopia. Debt limited economic growth and corruption and destruction became the norm. During Ethiopia’s era of military rule under Mengistu Haliemariam, Ethiopia borrowed around 11 billion dollars and nine billion was spent on acquiring arms, while a small portion was spent to facilitate the response to the famine epidemic the country was facing. These loans, used to destroy, not build and partially forgiven, are still outstanding today.

As export is falling in the country, the country is still taking on debt for infrastructure development. Countries such as China, India and institutions such as the World Bank have been in a rush to lend much needed financial resources. What should be concerning the government is whether the loans will turn into unsustainable debt, which will need to be paid back at the cost of the country’s economic stability and sovereignty.

As one of the world’s fastest growing economies, Ethiopia has seen its economy grow at a rate of about 9.8pc each year. This growth was instrumental in producing the development successes that are visible in the country. However, there hasn’t seemed to be any plans to shore up economic revenues to eventually pay back the debt. The way loans are viewed in government policies, as ratios of Growth Domestic Product (GDP) risks fostering complacency in the government. Looking at loan as as ratio of exports gives a much clearer picture of how much a country actually owes with respect to how much money it makes.

Some of the country’s external loans, both bilateral and multilateral, have been spent on a slew of investments, from sugar factories (some of which have been cancelled), to roads, courtesy of Chinese contractors. Loans being spent on investments, rather than consumption (like the army and oil) traditionally have a much better chance of being paid back. While the loan to export ratio has not yet pushed into the realm of unsustainable debt (150pc), Ethiopia is surely headed that way. While its loans are pegged at 23pc, considered “low risk,” the volume of loans is increasing, and its external debt is at 31pc GDP, as noted by institutions such as the IMF.

Ethiopia’s high debt has not been matched by a better utilised export industry. If the debt to export ratio is not balanced, this can cause a defect that can lead to a financial crisis, which in return can lead the country to extreme measures to pay back the loans. This includes the pressure to print more money which leads to inflation, as seen in countries such as Argentina and Nigeria. Once these loans mature, there is a risk of a bailout, where governments will be forced to cut essential services to the populations and lose its ability to enact sovereign financial policies. It will be forced to pay high interests of a loan, taking away resources from citizens’ social safety nets.

Taxpayers (citizens) will become the ultimate footers of the debt.

Even as the IMF and the World Bank draw a framework, where countries will not borrow more than they are able to pay, the willingness for Ethiopia to sign on to external loans at every opportunity should be concerning.

The best option for Ethiopia is to slow down its economical and infrastructure growth, prioritise its many projects, and be wary of being too ambitious at the expense of its economical framework and private entrepreneurships. It should focus on the vital priorities of the country. It should not make decisions to appease political concerns and constituents, but act in areas where the national interest is a priority.

While the Ethiopian society has a slew of government institutions, to run and monitor almost all actions of the government, it has yet to have an institution to monitor the consequences of all the debt the country is eager to sign on for. There needs to be a specific unit that takes charge of this area and monitors the country’s loan: export ratio, which is a vital information.

Unless Ethiopia remains aware of the actual state of external loans and shores up the ailing export sector, it risks becoming what Greek became to Europe – mismanaged and unable to meet the basic social needs of its vulnerable citizens let alone become the respected voice within the region.

Published on Dec 27,2016 [ Vol 17 ,No 869]



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