By CHIMPREPORTS
Ethiopia has joined Zambia and Ghana as Africa’s latest debt defaulters after failing to make an interest payment to its external creditors following the end of the grace period on December 25, 2023.
Addis Ababa’s financial challenges hit the limelight on December 11 when a USD 33 million coupon payment on Ethiopia’s single outstanding USD1 billion Eurobond, maturing in 2024, was not made by the due date on 11 December 2023.
The government announced on 8 December that Ethiopia was not in a position to make the coupon payment.
Ethiopia also failed to make a payment within the stipulated two-week grace period which ended on December 25.
Fitch Ratings has since downgraded Ethiopia’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) as well as the issue rating on Ethiopia’s single outstanding Eurobond to ‘C’ from ‘CC’.
The development underscores the challenges faced by African countries in servicing external debt.
Ghana defaulted on its external debts in December and has since sealed a domestic debt swap and requested a restructuring of its bilateral debts via the G20’s Common Framework vehicle.
Zambia meanwhile has been stuck in default since it became the first COVID-era African nation to do so in November 2020.
Ethiopia has been grappling with material decline in external liquidity, significant external financing gaps, and the government’s participation in the G20 Common Framework (CF) debt relief initiative.
In November, the government reached an agreement in principle with its official bilateral creditors on a suspension of debt service due from 1 January 2023 to 31 December 2024.
The debt treatment applies to direct obligations or explicitly guaranteed debt of the Ethiopian government to all Official Credit Committee (OCC) members except for China. Ethiopia reached an agreement with China earlier.
The OCC retains the right to suspend the agreement if Ethiopia does not secure an IMF programme by end-March 2024.
However, Ethiopia failed to reach an agreement on debt suspension with Eurobond holders in meetings before the 8 December announcement.
Worku Aberra (PhD), a professor of economics at Dawson College, Montreal, says during the tenure of the TPLF-controlled government, Ethiopia, with the approval and encouragement of the IMF and the World Bank, borrowed excessively.
“The much-touted ‘double-digit’ economic growth was largely financed through external borrowing. Furthermore, it is evident that a portion of the borrowed funds was embezzled and illegally moved out of the country,” said Aberra.
“It has been estimated that, during the TPLF’s rule, approximately $12 billion was illegally taken out of Ethiopia between 2000 and 2009 alone. Consequently, Ethiopian taxpayers are now burdened with the aftermath of these financial undertakings,” he added.
Crisis
Abbera said the current debt crisis in developing countries, as did the debt crises of the 1970s, 1980s, and 1990s, started in advanced nations during the mid-2000s and 2010s.
Excess liquidity flooded the advanced countries due to the expansionary monetary policies of central banks, including quantitative easing by the Federal Reserve Bank of the US, the European Central Bank, and others. The abundance of liquidity resulted in very low, and sometimes negative, interest rates in these nations.
The excess liquidity and low interest rates in the advanced countries encouraged commercial banks and other institutions to seek higher interest rates elsewhere, in developing countries. The pursuit of higher returns led to easy lending to African nations, including Ethiopia, in the mid-2010s by private lenders in developed countries.
As expected, when the industrial countries experienced a recession during the pandemic, it had a profound impact on the ability of developing nations to pay their debt. The combination of stimulus spending, disruptions in supply chains, and later the war in Ukraine resulted in a global inflationary situation with adverse consequences for many developing countries, especially those heavily reliant on importing food and oil.
Ethiopia’s Dilemma
Ethiopia is now grappling with significant debt obligations in the next two years.
According to Fitch, the country faces a payment of $1 billion in interest and principal in July 2024, another $1 billion on the Eurobond in December 2024, and an additional $2 billion in 2025.
State-owned companies are obligated to pay an annual sum of $1 billion.
Aberra said the current government, under the leadership of the unstable Abiy Ahmed, has exacerbated Ethiopia’s economic problems by intentionally fostering political instability and armed conflict throughout the nation.
Fitch reports that Ethiopia’s foreign exchange reserves can only cover less than one month of the country’s external payments.
About half of Ethiopia’s debt is external debt. According to IMF data, Ethiopia’s external debt as a percentage of its GDP is 23%, lower than Kenya’s 31.2%. Yet, despite these comparatively favourable figures, Ethiopia has defaulted.
The problem Ethiopia faces is one of liquidity — the problem of not having sufficient foreign currency to meet its debt obligations.
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