Ethiopia plans to restructure a $1 billion debt as the government grapples with ways of freeing up funds to support economic recovery in the midst of a devastating conflict in the north.
Prime Minister Abiy Ahmed’s administration is reeling from a war in the Tigray region, which has so far gobbled up at least $2.3 billion, forcing officials to pursue austerity measures.
But Addis is also pleading with creditors to help it pull through the crisis.
This week, the Finance ministry release a report indicating that the country was seeking to restructure a $1 billion debt to afford “a grace period of as long as six years and extend the maturity by 10 years.”
“Negotiations are underway with creditors for the second external debt restructuring/ reprofiling scheme,” a statement from the ministry said.
In February, Addis requested to rework its debt under the Group of 20 (G-20) Common Framework, an initiative to secure debt relief for poor nations from all creditors, commercial lenders, and China.
“The debt restructuring will help the country buffer its forex reserves by removing immediate forex payment obligations. The debt restructuring includes an extension of grace and maturity periods and improvements in interest rates. So far, $2.5 billion in principal and interest payment has been postponed for five years by commercial creditors under the first external debt restructuring scheme,” the Ministry of Finance said.
Debt service suspension
Addis says that a debt service suspension of close to $125 million under the G-20’s Debt Service Suspension Initiative (DSSI) is under way.
“An MoU is signed with Paris Club countries to suspend debt for May-December 2020, and bilateral negotiations are underway with creditor countries,”the government said. “All central government’s debt service to the Paris Club creditors has been suspended.”
Prime Minister Abiy admitted that the country’s resources had been stretched thin, largely because of the Tigray conflict.
The government has had to pull out its troops from the warzone, with the PM saying, “We have national projects to complete.”
Dr Abiy told parliament on Monday that the withdrawal from the Tigray conflict was the “right decision, driven by economic and Covid-19 pressures.”
But the Tigrayans have said they routed Abiy’s fighters.
The Tigray conflict, which erupted in November 2020, has shaved off over $2.3 billion from the coffers.
PM Abiy has hinted that strict austerity measures were being considered to preserve the much-needed forex reserves.
“With the current situation Ethiopia is in, the country doesn’t need to have as many as 60 or so embassies and consulates,” he said. “Instead of hiring drivers, government ministers will be required to drive themselves.”
Holders of Ethiopia’s $1 billion Eurobonds were quick to react, raising the yields on its 2024 sovereign debt to the highest level in over a year, after rising consistently for the past month after economic sanctions imposed by the US. Yields on the securities climbed 30 basis points to 9.79 percent in London -- the biggest jump in seven weeks.
“The plan to restructure the $1 billion more debt does not include Eurobonds,” State Minister of Finance Eyob Tekalign told Bloomberg.
Ethiopia has also seen its currency slump by over 12 per cent against the dollar since January, with Bloomberg rating it as the worst performer among the 20 African currencies it monitors.
In May, ratings agency Moody’s downgraded Ethiopia’s credit score, following a similar cut by Fitch Ratings three months earlier.
On June 6, the International Monetary Fund (IMF) urged Ethiopia to quickly create a creditor committee to support its debt plans.
G-20 Common Framework.
“Ethiopia requested in February to G-20 and Paris Club creditors to benefit from a debt operation under the G-20 Common Framework. Their aim is to create fiscal space for development spending and lower the risk of debt distress rating to moderate by reprofiling debt service obligations. The formation of the committee will help Ethiopia in this regard,” said Gerry Rice, IMF spokesman..”
In February, the Bretton Woods institution said it backed the plan by Addis to rework its debt under the G-20 programme, “as it would strengthen debt sustainability and boost the nation’s efforts of recovering from the coronavirus pandemic.”
“We have agreed a blueprint for the completion of reviews of Ethiopia’s loan programme, taking account of the impact of the coronavirus and the country’s ‘domestic security situation,’” it said in a statement.
On the domestic front, the country is also restructuring its debt by converting short-term bills to long-term notes and bonds.
Some $4.37 billion of National Bank of Ethiopia direct advance was restructured by converting the 15-year bond repayment period with a 10-year grace period. A further $3.4 billion old treasury bills were converted into long-term treasury notes.
“This arrangement improves the lending terms for the domestic creditors and lessens the immediate debt service burden on the government,” the Finance ministry said.
Last month’s US economic sanctions against Addis seem to have pushed it to retreat from Tigray, as it put at risk the aid it receives from Washington.
Ethiopia is one of the world’s biggest recipients of US aid, benefiting from $1 billion last year. Washington also rallied its allies within the European Union for more sanctions, including further funding cuts to Ethiopia.
The Biden administration also indicated that it would be targeting World Bank and IMF programmes in the country, boxing Addis into a corner.
The political situation in Addis, exacerbated by the Tigray conflict and the coronavirus impact, has already seen a steep decline in the country’s foreign direct investment to $2.41 billion last year, from a high of $4.17 billion in 2017, according to the latest data from the Ethiopian Investment Commission.
Once a growth story, Ethiopia embarked on an infrastructure development drive, modernising its railway and road network and industrial manufacturing capacity, all through debt worth over $30 billion – mostly from China – which is now choking its economy. This year alone, Ethiopia is expected to repay about $2 billion to its creditors and has so far sought -- unsuccessfully -- to defer repayment.