Wednesday, June 12, 2024

Ethiopia’s foreign debt servicing exceeds healthcare spending

By Muluken Yewondwossen


IMF discussion progressing

A quarter of government revenue goes toward paying off foreign debt, yet debt servicing exceeds healthcare spending by a factor of two. The International Monetary Fund revealed that there have been significant advancements in the ongoing discussions with Ethiopia.

The Ethiopian government’s external debt payments were less than 5% of government revenue on average between 2002 and 2012 but climbed to more than 10% starting in 2015 and reached 18% by 2019, according to a recent analysis that examined the continent’s debt.

According to the Christian Aid estimate, the government’s foreign debt obligations would represent 25 percent of its earnings this year and 25.3 percent in 2023. The report emphasized that Ethiopia is in arrears on its bilateral and private foreign debt and that the projections for 2024 reflect the nonpayment of scheduled installments.

Ethiopia received more foreign loans in 2009 as a result of the global financial crisis and the decline in interest rates. Between 2014 and 2018, Western private lenders, Chinese entities, and multilateral organizations made particularly big loans.

Ethiopia owes a USD 1 billion bond with an interest rate of more than 6.6% that is subject to English law among the obligations payable to non-Chinese private lenders.

Debt Justice has discovered that Franklin Advisors, BlackRock, and Capital Group are the three biggest known holders of Ethiopian bonds.

Ten bondholders, Franklin Advisors, BlackRock, Capital Group, Eaton Vance, Wellington Management Company, ABN, UBS, Vontobel, Newton Investment Management, and Azimut Capital Management, own USD 304 million of the bond’s $1 billion total, according to the most recent Debt Justice report.

Five US firms, two each from the UK and Switzerland, and one from Italy comprise the declared holders.

A further USD 3.1 billion is owing to other non-Chinese private lenders, according to the Christian Aid report published this month. Of these, USD 1.2 billion is owed to US financiers, USD 470 million to Switzerland, USD 360 million to Italy, USD 310 million to Japan, and USD 260 million to UK institutions.

It is recalled that Ethiopia submitted an application to be included in the G20’s debt service suspension program at the onset of the Covid epidemic.

However, only some of Ethiopia’s payments to Chinese entities were suspended in 2020 and 2021, and none to Western private lenders and multilateral institutions, other than payments due to the IMF during 2020 and 2021 being canceled. Ethiopia submitted an application in February 2021 for the G20’s Common Framework for Debt Treatments, which aims to bring debt down to a manageable level. It continued, however, to make full payments to all other creditors, including bondholders and Western banks, with the exception of those with state debtors where suspension agreements were already in effect. “There was no onus on creditors to act because they were continuing to be paid, so no progress took place on Ethiopia’s debt relief negotiations,” the report said.

In August 2023, Ethiopia reached a new agreement to suspend debt payments to China that was followed by a similar agreement with the Paris Club group of Western governments in November 2023. In December 2023, Ethiopia defaulted on its USD 1 billion foreign currency bond.

Ethiopia’s external debt servicing ratio is 219 percent for hospital spending and 95 percent for school spending, according to data by Christian Aid. The report ‘Between Aid and Debt’ states that the debt service for all African nations in 2023 was estimated to be USD 85 billion, and by 2024, it would rise to USD 104 billion. The entire amount of foreign debt serviced to private creditors in 2023 was estimated to be 39 billion; by 2024, it will rise to 47 billion.

“This report highlights the depth of a crisis that is beyond debt. It is a development and human crisis when the government opts to service a creditor rather than its citizens. The findings are clear: governments are working for creditors and not people. This must change if Africa is to be a rule-maker,” said Jason Rosario Braganza, Executive Director of AFRODAD.

The report shines a light on the debt crisis across Africa, showcasing five African countries: Kenya, Nigeria, Ethiopia, Zambia, and Malawi.

In related development, during her most recent press conference, Julie Kozack, the IMF’s head of communications, stated that the IMF and the Ethiopian government are still virtually discussing Ethiopia’s request for assistance.

In order to discuss the government’s request for IMF support for their program, the IMF mission traveled to Addis Ababa from March 19 to April 2. As she noted, “discussions then continued during our Spring Meetings, which were held here in Washington in April, and have been continuing virtually since then.”

“We have made substantial progress towards establishing how the IMF can support the authority’s economic program, and we will continue to work closely with the authorities in these virtual discussions,” she added.

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