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Debt treatment under the G20 Common Framework will depend on
the outcome of the International Monetary Fund (IMF)'s upcoming
Debt Sustainability Analysis (DSA) for Ethiopia.
Ethiopia is likely to strengthened commitment to adhering to
the IMF Extended Credit Facility (ECF) program requirements.
A short-term devaluation of the birr has so far faced strong
political opposition. However, we see that in the interest of
obtaining a supportive DSA and thus adhering to IMF requirements,
policy revisions could now be speeded up.
The Ethiopian government has already shown gradual steps in
addressing foreign-exchange regulations since the IMF expects
foreign exchange regulations to lay the groundwork for achieving
single-digit and sustainable inflation.
The Ethiopian finance ministry stated on 1 February that the
inclusion of private creditors in any debt restructuring deal was
"very unlikely" and that any potential adjustment would be "minor".
Nevertheless, IHS Markit believes that the extent of debt treatment
will be based on the outcome of the IMF's upcoming DSA for
Ethiopia. A supportive IMF DSA would be imperative for Ethiopia to
preserve long-term access to international financial markets and
limit private creditor inclusion in debt restructuring. Therefore,
liability management exercises to preserve market access remain
crucial as an outcome of Ethiopia's engagement with the G20 Common Framework.
Furthermore, for the IMF DSA to be favorable, IHS Markit believes
Ethiopia must provide a strengthened commitment to adhering to the
IMF ECF program requirements, such as adopting a more-flexible
exchange rate regime.
On 23 February, the IMF reached a staff-level agreement on
policy measures for the completion of the first and second reviews
under the ECF-Extended Fund Facility (EFF) arrangements. At that
time, the IMF highlighted that it welcomed Ethiopia's plan to tap
into the G20 Common Framework to rework its debt situation, as it
would strengthen the country's debt sustainability, such as through
the restructuring of debt service obligations, thus potentially
lowering debt distress. Ethiopia's call to participate in the G20
Common Framework comes as no surprise. IHS Markit reported on 26
March 2020 that the Office of the Prime Minister of Ethiopia, Abiy
Ahmed, released on 24 March 2020 an official appeal in which Ahmed
highlighted the urgent need for a debt resolution and restructuring
package. The proposal was that all interest payments on government
loans should be written off under such a package. Additionally,
low-income countries' part of the debt was to be written off, with
the remaining debt to be converted into long-term low-interest
loans with a 10-year grace period. Thereby, debt repayments would
be limited to 10% of the value of exports.
Ethiopia's economy was hit hard
by various factors in 2020, starting with the severe locust
infestation outbreak early in the year affecting the agriculture's
sector growth performance. The coronavirus disease 2019
(COVID-19)-pandemic-induced weak global demand drove down
investment and exports growth overall. While Ethiopia's real GDP is
expected to recover this year, downside risks are on the upscale
with no signs of tourism picking up swiftly amid the global
pandemic and conflict in the northern region of Tigray. Reaching
government revenue targets will remain very challenging for
Ethiopia without further debt accumulation and support from the
global community. To adhere fully to IMF program, Ethiopia needs to
move, in the long run, towards a market-clearing exchange rate.
However, such a move, including a short-term devaluation of the
birr, has so far faced strong political opposition to the resulting
inflationary pressures, among other challenges. While such a policy
change remains less likely to be considered before the summer
legislative elections, we see that in the interest of obtaining a
supportive DSA and thus adhering to IMF requirements, policy
revisions could now be speeded up.
Additionally, we expect to see alignment by the government with
the IMF to show greater prudence in borrowing by state-owned
enterprises (SOEs), combined with reforms to improve governance and
oversight of SOEs that will provide better transparency on SOE debt
to support the sustainability of public finances. Besides reforming
its monetary policy framework, the Ethiopian government has already
shown gradual steps in addressing foreign-exchange regulations
since the IMF expects foreign exchange regulations to lay the
groundwork for achieving single-digit and sustainable inflation. On
9 March, the National Bank of Ethiopia announced its revision of
directive FXD/70/2021 for the retention and utilization of export
earnings and inward remittances, which includes a greater
percentage of foreign-exchange holdings to be retrained ultimately,
boding well for exporters.
Posted 25 March 2021 by Alisa Strobel, Senior Economist