Due to the suspension of Djibouti’s operating oil port, Ethiopia is requesting that the Djibouti administration promptly provide alternate tankers for the incoming petroleum cargo.

The Ethiopian Petroleum Supply Enterprise (EPSE) delegation asked Djibouti authorities to provide alternative discharge ships for oil imports during its visit earlier this week.

On Monday, July 29, the Enterprise delegation, headed by newly appointed EPSE CEO Esmlealem Mihiretu, met with Aboubaker Omar Hadi, Chairman of the Djibouti Ports and Free Zones Authority (DPFZA).

During the meeting, representatives from EPSE asserted that the delay in gasoline supply for trucks departing Horizon and the current unavailability of two storage tanks at Horizon Terminal, which is closed for a year for repairs, are to blame.

The company, which is Ethiopia’s only importer and has a strategic store of petroleum products, is reportedly searching for alternatives, according to information obtained from DPFZA.

DPFZA said, “Several solutions and areas of collaboration were discussed during the meeting.”

During the discussion, the use of the floating vessel M/T Red Sea II, which can store 73,000 cubic meters (CBM), was suggested as a quick fix.

Another option has been to use the oil storage facilities at Djibouti Damerjog Industrial Park (DDIP), a major multi-port complex being built on the border with Somaliland, southeast of the capital Djibouti.

Damerjog Liquid Bulk Port (DLBP) is accommodated by DDIP as part of the enormous project.

The government of Dubai owns all of the shares in the Horizon Djibouti Terminal, which is situated near Doraleh. It was formed in 2003 and started operations in 2005. The 4.5 million tons of annual capacity of the facility is said to be insufficient to meet Ethiopia’s increasing demand.

Ethiopian Investment Holdings (EIH), a sovereign wealth fund (SWF), was negotiating with Djibouti authorities to acquire a thirty percent ownership in an ultra-modern oil port infrastructure that can easily handle boats of the newest generation.

It was reported in late 2022 that the investment holding will acquire the stake through EPSE, one of the 27 enormous public companies under SWF ownership.

The previous CEO of EIH, Mamo Esmlealem Mihretu, and the Chairman of DPFZA, which controls Great Horn Investment Holding, signed a memorandum of understanding (MoU) in May of the same year to investigate potential in the field of oil storage facilities.

The signing of the Memorandum of Understanding (MoU) follows years of intensive talks focused on the cooperative creation of an oil terminal, since the existing facility, Horizon Djibouti Terminal (HDT), is becoming less capable of meeting Ethiopia’s increasing demands for petroleum products.

For example, in late 2017, the transport ministers of the two nations had extensive talks on building a new oil terminal to accommodate Ethiopia’s increasing needs.

As part of the USD 4 billion DDIP, DLBP will have a 13 million tons handling capacity.

During the meeting earlier this week, the EPSE officials also asked the Chairman to install the Djibouti Port Community System (DPCS) platform at the company’s headquarters in Addis Ababa. This will enable the tracking of trucks to be done accurately and on time, as the transactions from Horizon Terminal to Ethiopia will be followed.

Following extensive negotiations with G20 nations, the Ethiopian government has revealed that it has successfully negotiated a debt restructuring worth about USD five billion. Meanwhile, China has pledged to help the government’s economic reform in addition to finalizing the debt reprofiling agreement.

The International Monetary Fund (IMF) has reached an agreement with the government to allocate USD 3.4 billion to support government policy to correct the economic challenges, in addition to introducing a floating exchange rate, since G20 financers assured the IMF that they would restructure Ethiopian debt under the Common Framework (CF).

Senior diplomats at the Chinese Embassy in Ethiopia have given assurances that Ethiopia will continue to receive support from their government at this crucial period.

China and France co-chaired the G20’s CF creditor group, which was tasked with negotiating Ethiopia’s protracted loan restructuring.

On Thursday, August 1st, the Prime Minister Abiy Ahmed administration announced that it had successfully negotiated a debt restructure worth USD 4.9 billion.

According to Abiy, “private lenders will be included in the debt restructuring.” Nonetheless, the nation benefited from a debt servicing standstill for bilateral creditors during the past budget year.

The Chinese Embassy’s Charge d’Affaires ad interim (a.i.), Shen Qinmin, recalled that in 2023, China and Ethiopia had reached agreements on a number of subjects under the direction of President Xi and Prime Minister Abiy.

“The nations elevated our all-weather strategic alliance from a comprehensive strategic and cooperative collaboration, which will undoubtedly strengthen our practical cooperation. The Senior Diplomat recalled that China “supported Ethiopia’s admission into the BRICS family, demonstrating our sincerity and determination for pursuing common prosperity with Ethiopia and other emerging markets.”

China has fully executed the G20’s Debt Service Suspension Initiative (DSSI), with the greatest overall debt suspension among the G20 countries, according to the Charge d’Affaires a.i., who also informed Capital that China, together with relevant members, has contributed to Ethiopia’s debt treatment.

“Going forward, we will maintain our close collaboration with Ethiopia to investigate debt relief strategies through both bilateral and multilateral avenues, and endeavor to mitigate Ethiopia’s debt challenges to the best of our abilities,” he added.

According to Yang Yihang, Minister Counsellor of the Chinese Embassy, the Export-Import Bank of China, the China Development Bank, and Ethiopia have just achieved an agreement on a debt suspension plan, which is being progressively carried out.

He told Capital that the discussions between Ethiopia and the Industrial and Commercial Bank of China had also advanced.

“China believes that Ethiopia, as an active partner, would finish the necessary processes as soon as possible to ensure an early delivery of the agreement, thereby easing the burden on liquidity and advancing our cooperation into a new phase. These results will also set a positive example for other creditors,” he continued.

The two senior diplomats anticipate deeper and more comprehensive policy connectivity. They said that there will be a closer alignment between the Belt and Road Initiative and Ethiopia’s ‘The second phase Homegrown Economic Reform Plan from 2024 to 2026.’

The further deepening of reform comprehensively to advance Chinese modernization, put forward at the 3rd Plenary Session of the 20th CPC Central Committee, will offer another golden opportunity that is even better coordinated with Ethiopia’s economic reform and development.

“We will have even more promising prospects for cooperation in traditional and new-type infrastructure projects,” they said.

They stated that China will support Chinese companies to actively participate in Ethiopian transportation infrastructure, renewable energy power generation facilities, and other projects through various financing channels, “We will continue to guide enterprises to contribute to the sustainable development of the railway with their technology and service.”

According to the diplomatic mission leaders, there will be enhanced financial connectivity, “New progress will be gained in local currency swaps and cross-border settlement cooperation. Cooperation in financial supervision will be further strengthened.”

Despite claims from Western allies that China is responsible for a third of Ethiopia’s over USD 28 billion in external debt, the Far Eastern country was not taken seriously.

According to the most recent Macro-Economic Reform Program Policy, which the government agreed to implement with international partners, a number of reform measures at the state financial behemoth, Commercial Bank of Ethiopia (CBE), aim to ensure that the bank functions as a fully capitalized and commercially oriented bank, including ownership policy is expected.

The International Monetary Fund (IMF) projects that government spending in this budget year will be twice as high as the amount approved last month, totaling 1.8 trillion birr.

One of the main negotiating issues, according to reliable sources involved with the reform negotiations with foreign partners, was the need to implement significant reform at the financial behemoth, which is in crisis because of a significant quantity of non-performing loans (NPL).

In accordance with requests from foreign partners, the bank should file for bankruptcy in order to obtain extra funding from these sources, in addition to government capitalization.

Prime Minister Abiy Ahmed said during his meeting with stakeholders on Thursday, August 1, that CBE will implement changes; he made no mention of bankruptcy. According to him, “If this huge bank fails, others will collapse,” and the CBE reform is essential for the overall health of the financial sector and the transformation of the economy.

The World Bank will give the bank USD 700 million for the financial company transformation under the Financial Sector Strengthening Project (FSSP), in addition to the government’s 870 billion birr capital injection.

Key macro-financial vulnerabilities are intended to be addressed, following the agreement between the government and international partners, including the IMF, under the Memorandum of Economic and Financial Policies (MRPP), by bolstering CBE’s balance sheet and the financial situation of state-owned businesses (SOEs).

The recapitalization of CBE, Ethiopia’s largest state-owned policy bank, is a crucial step in tackling key macro-financial vulnerabilities in the country, according to the IMF.

Under the IMF-backed reform agenda, known as the Homegrown Economic Reform (HGER) program, strengthening the financial position of state-owned enterprises like CBE is a critical component.

According to the IMF, SOE reform will remove a key structural driver of balance of payments (BOP) debt and fiscal vulnerabilities and strengthen long-term growth prospects.

The financial strengthening of CBE has addressed a key macro-financial vulnerability, while governance reforms underpin longer-term financial stability and benefits from financial sector opening.

Beyond the recapitalization, the reform agenda for CBE is also expected to enhance the bank’s operational independence, risk management practices, and overall governance structure.These measures are aimed at transforming CBE into a more efficient, resilient, and commercially-oriented institution that can better support Ethiopia’s private sector-led economic development.

The state giant, CBE, which owns 58 percent of the banking system assets, is heavily exposed to non-performing SOE debt.

On the reform with World Bank support, the government will take decisive steps to financially strengthen CBE and address legacy issues related to its role in SOE lending, including foreign exchange (FX) exposures.

Under the IMF Extended Credit Facility (ECF) arrangement, a capital injection of 870 billion birr has enabled CBE to write off all claims on Liability and Asset Management Corporation (LAMC), fully provision claims on Ethiopian Electric Power (EEP), and bring CBE’s capital adequacy ratio up to the regulatory minimum, which is a prior action.

“The World Bank’s FSSP USD 700 million will be used for recapitalization and continued support of the reform and restructuring of the bank,” it added.

This will include a focus on governance and risk management, including CBE’s ownership policy, mandate, and business plan to ensure CBE can compete as a sound, viable, and commercially-oriented bank at arm’s length from the government as the financial sector is opened.

The FSSP also includes conditionality on strengthening banking supervision and key regulations, including asset classification, the treatment of non-performing government-guaranteed claims, and foreign exchange exposures.

The proposal calls for the issuance of 10-year government securities by the government to raise the 870 billion birr.

The government securities consist of a bond that amortizes over ten years with a grace period of three years. The bond pays 9% in the first year, 10% in the second year, and 10.5% in the third year. After that, the bond will be repaid yearly at the current monetary policy rate.

According to the IMF document, the recapitalization bonds are tradable securities that can be used as collateral for transactions in the interbank market and with the National Bank of Ethiopia (NBE).

In order to guarantee that CBE can function sustainably as a fully commercially-oriented bank operating independently of the rest of the public sector, the government should undertake a reform program for the bank under the MEFP of the ECF framework.

Tight limits on SOE borrowing reinforced by stronger prudential regulations and enhanced transparency (including audits) will be important to prevent the reemergence of SOE-driven financial fragilities.

“Recapitalization of CBE eliminates a significant macro-financial vulnerability, while reform of the SOEs and CBE’s governance will avoid a similar practice reemerging, as will strengthened banking supervision and regulation,” the MEFP said.”We commit to reforming the governance of CBE by ensuring arm’s-length dealings with the public sector on commercial terms and appointing directors independent of the government for at least one-third of positions on the board of directors,” the government says in the MEFP signed by Ahmed Shide, Minister of Finance (MoF), and Mamo Esmelealem Mihretu, Governor of NBE. Additionally, we will ensure a robust risk governance framework and enforce, through the NBE as an independent supervisor, strict adherence to prudential regulations and directives.”

The MEFP added that MoF and CBE will revise the memorandum of understanding on guaranteed lending to ensure that the restructuring of guaranteed debts follows the regulations on debt restructuring by the second review.

LAMC was founded in 2021 with the goal of assuming the majority of indebted SOEs’ domestic debt to strengthen their balance sheets: Initially, 9.3 percent of the GDP for 2020–2021 was transferred to LAMC.

In May 2023, an additional one percent of the GDP was transferred to LAMC in the form of loans and accrued interest from financially troubled SOEs (EEP, Ethiopian Sugar Corporation, Ethiopian Railways Corporation, Ethio Engineering Group, and Ethiopian Construction Works Corporation).

LAMC has not made any further payments to CBE since using the privatization earnings from the sale of Safaricom’s telecom licenses (0.6 percent of GDP in the 2021/22 budget year) and a mobile payments license (0.1 percent of GDP in the 2022/23 budget year) to pay debt service.

Even after LAMC completed repayments, as of the end of June 2023, the agency’s outstanding debt amounted to 540.2 billion birr.

This was because, in May 2023, 94 billion birr of additional SOE domestic debt was transferred to LAMC, and interest arrears were capitalized.

In order to adequately provision nonperforming SOE exposures (240 billion birr) and reduce CBE’s capital adequacy ratio to the required level, all of the bank’s claims on LAMC total 580 billion birr.

According to the IMF document, CBE’s claims on LAMC and SOEs were previously included in the Debt Sustainability Analysis (DSA) of domestic public and publicly guaranteed (PPG) debt. Therefore, this has no material impact on the level of domestic debt.

The government will include the privatization of sugar mills as part of a move to prevent the accumulation of new debt risks.

Other measures that the government will implement include limiting new external borrowing to concessional debt and guaranteeing only concessional debt, with no cap on contracting or guaranteeing new non-concessional debt. Additionally, the rate at which new PPG concessional debt is contracted will be governed by a ceiling on the present value of new external borrowing (indicative target).

To complete the USD 950 million last phase of the Koysha Hydroelectric Dam project, for which concessional funding is not available, the government has sought an exception from the zero-limit on new non-concessional borrowing.

The project is essential to the government’s development policy since it has the ability to reduce climate change, promote rural electricity, and provide income from exports.

Almost all domestic SOE debt, including debt that was transferred to LAMC, is held by the policy bank.

Three financially problematic State-Owned enterprises (SOEs) account for almost 90% of total debt; they have not been paying back their publicly guaranteed loans on time. “These loans have been systematically renewed, and guarantees have not been made effective,” the IMF document said.

The ECF program aims to address Ethiopia’s longstanding macroeconomic imbalances, restore debt sustainability, and lay the foundations for higher, more inclusive, and private sector-led economic growth. Reforming state-owned enterprises like CBE is a crucial part of this broader reform agenda.

CBE has faced financial strains in recent years due to factors such as NPLs and political interference in its operations. The recapitalization is expected to bolster the bank’s balance sheet and improve its ability to support private sector credit growth – a key priority under the HGER program.

The successful recapitalization of CBE, coupled with the IMF’s seal of approval through the ECF arrangement, is seen as a significant milestone in Ethiopia’s journey towards a more vibrant, stable, and inclusive economy – a key aspiration of the government’s HGER program.

In a landmark move, the IMF has approved a 4-year, USD 3.4 billion ECF arrangement to support Ethiopia’s ambitious HGER agenda. This critical financial assistance aims to address the country’s daunting macroeconomic challenges and lay the foundations for stronger, more inclusive economic growth.

The core elements of Ethiopia’s reform program, as outlined in the MEFP, include exchange rate reforms, monetary policy modernization, fiscal consolidation to create fiscal space for priority public spending by mobilizing domestic revenues, and restoring debt sustainability, including through securing timely debt restructuring agreements with external creditors, SOEs reform, and social protection.

The ECF arrangement is also expected to catalyze additional external financing from development partners and provide a framework for the successful completion of Ethiopia’s ongoing debt restructuring process.

This multilateral support comes at a critical juncture as the country grapples with the lingering effects of the COVID-19 pandemic, high inflation, and unsustainable debt levels.

As part of the four-year ECF arrangement approved by the IMF Executive Board for Ethiopia in July 2024, the IMF and Ethiopian government have agreed on a detailed Technical Memorandum of Understanding (TMU) that outlines the quantitative targets and structural benchmarks for the program.

The TMU provides a clear framework for monitoring the implementation of Ethiopia’s economic reform program.

A ceiling on the overall fiscal deficit of the central government, a ceiling on net domestic assets of NBE, a ceiling on the stock of external debt contracted or guaranteed by the public sector, and meeting a minimum level of net international reserves that is 3.5 months of prospective import coverage by the end of the program period.

Regarding structural benchmarks, the TMU includes the following: adopting a market-determined exchange rate system and eliminating current account restrictions, modernizing the monetary policy framework, including establishing an interest rate corridor, approving a comprehensive Medium-Term Revenue Mobilization Strategy to increase domestic revenue collection, and undertaking a comprehensive asset and liability management exercise to support debt restructuring efforts.

The TMU also outlines the reporting requirements and data provision obligations of the Ethiopian government to the IMF to facilitate effective program monitoring.

As a result of the most recent decision made by the government, the country may receive a grant of 214 billion birr in the current budget year, up from 43 billion birr in the 2023/24 budget year.

The local revenue is projected to be 1.3 trillion birr, with 1.15 trillion coming from taxes and 159 billion from non-tax sources.

Total expenses are expected to reach 1.8 trillion birr, while total revenue and grants are projected to be 1.52 trillion birr. The gross borrowing for the year, which includes potential donor finance to cover the financial gap, will be 303.7 billion birr, with net external financing amounting to 204 billion birr.

The reserve amount will increase by 140% this year to 1.2 months (USD 2.8 billion) of imports, up from 0.5 months (one billion dollars) last year, and is expected to reach 3.5 months by the end of the reform term.

“The residual external financing gap, anchored on bringing reserve adequacy to 3.5 months of import coverage by the end of the program period, is estimated at USD 10.7 billion until 2027/28,” the IMF document said.