Intensified Oversight of SOEs Crucial for Debt Control

When the commencement of the project was announced way back in 2006, the Tendaho Sugar Factory envisioned cultivating 50,000ha of land and conducting a dual-phased factory construction, which would have a capacity of 26,000 tonnes of cane a day (TCD) when fully operational. It aimed to create job opportunities for no less than 50,000 people. But ten years down the line and after hundreds of millions of birr in public funds, the Ethiopian Sugar Corporation’s largest programme is one of its worst performers.

The Corporation, one of several state-owned enterprises (SOEs) engaged in large-scale development programmes, oversees various sugar projects that have a similar pattern of disappointing performance. The Corporation, like other state-owned enterprises, such as Ethiopian Electric Power and the Ethiopian Railways Corporation, is behind some of the government’s most sizeable public spending schemes on infrastructure.

With the government’s policy of prioritising the utilisation of its scarce resources on infrastructure development, SOEs are expected to continue with their approach of ambitious programmes that cost billions of birr. In their quest to fulfil these ambitious goals, SOEs make use of extensive borrowing to finance their projects. Though small in number, more than seven percent of the government’s budget was used by these enterprises last year alone.

While the ongoing extensive investment on developing the country’s poor infrastructure is expected to have growth pay-offs, with enhanced competitiveness, increased export earnings, the promotion of economic transformation and improved tax revenue, it puts a heavy burden on the country’s debt stress level.

As reports by international financial organisations indicate, the utilisation of external loans – primarily for financing growth and enhancing infrastructure, and not for consumption – helps reduce the risk of debt distress.

However, when considered in a context where most of the SOEs’ expensive development projects are underperforming or delayed, there is real concern of a worsening debt burden. Given the low efficiency of the enterprises, crippled by horrendous bureaucratic hurdles and poor implementing capacity, the large sums of money invested are often mismanaged or misappropriated. More than 6.3 billion Br was misappropriated from budgetary expenditure last year, highlighting the lingering inefficiency shortfalls of government institutions.

Though sustainable, Ethiopia’s total public sector debt (domestic and external), which stood at 36.36 billion dollars as of September 2015, is vulnerable to risks. This is particularly true in light of a rather weak export performance last year, which has contributed in causing increased pressure on the country’s debt stress level. The country’s main export commodities are susceptible to global market shocks and engender a debt stress level prone to risks. The rise in the appetite of SOEs to borrow more needs to be understood in a context where falling export performance and a relatively slower GDP growth have defined the stance of Ethiopia’s economy during the past fiscal year.

Mindful of development objectives set out in the government’s second phase growth and transformation plan, heavy investment is expected to continue over the coming years. As the spending continues, debt is also expected to rise. Primarily driven by SOE borrowing, which amounted to 4.1 billion dollars between 2013 and 2015, the country’s external debt is projected to continue rising. It is expected to peak in 2017/18 where it will account for 24.5pc of the country’s gross domestic product (GDP).

Massive publicly funded projects that continue to rely heavily on borrowing coupled with temporal shocks in global markets have raised worries about the sustainability of the country’s debt. Such concerns of a rising risk of external debt distress did in fact lead the International Development Association (IDA) to reduce Ethiopia’s ceiling for non-concessional borrowing to 750 million dollars in late 2015.

Debt sustainability is an integral element of macroeconomic stability. While the Revolutionary Democrats ponder on reversing last year’s poor export earnings to boost their revenue this time around – mainly by hoping the markets will be kind – they should focus their energy on addressing fundamental supply chain bottlenecks that continue to drain the competitive advantage out of the country on the global market. Holistic structural transformation informed by frameworks of economies of scale should be adopted to promote the expansion and diversification of Ethiopia’s export sector, which will serve a critical role in maintaining the country’s debt at sustainable levels.

In the particular case of SOE spending, it is high time the government intensifies its oversight of these enterprises to ensure the effective and efficient utilisation of finances. In cases where the government’s capacity is limited, it should actively seek the financial and technical expertise of the private sector through private public partnership schemes. Such approaches to development have many benefits, including lowering debt distress levels, since they serve as sources of finance.

Moreover, the government should take full advantage of remittances and foreign direct investment (FDI) to keep its debt level sustainable. Stringent regulatory mechanisms to combat illicit financial transactions and outflows should be given due attention. The role of remittances should not be underestimated in this regard, as it accounted for 7.4pc of the nation’s GDP in 2014/15, highlighting its potential as an alternative and ample source of financing for the government’s ambitious development goals.

The tension between accumulating debts borrowed to finance developmental goals can only be addressed with the right balancing act of policymakers that enhances stronger partnerships with the private sector and explore mechanisms that will boost SOEs’ capacity to deliver in accordance to the huge amount of public money they have disbursed. Public investment should not undermine debt sustainability.


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