It is the misfortune after the war: the bloody conflict in Tigray imposes austerity on the administration of Abiy
Ethiopia plans to restructure a billion dollar debt as the government searches for ways to free up funds to support economic recovery amid devastating conflict in the north.
Prime Minister Abiy Ahmed’s administration is reeling from a war in the Tigray region, which has so far swallowed up at least $ 2.3 billion, forcing authorities to continue with austerity measures.
But Addis is also begging creditors to help him get through the crisis.
This week, the finance ministry released a report saying the country was seeking to restructure a billion dollar debt to give itself “a grace period of up to six years and extend the maturity by 10 years.” .
“Negotiations are underway with creditors for the second external debt restructuring / reprofiling program,” said a statement from the ministry.
In February, Addis called for reworking its debt under the Group of 20 (G-20) common framework, an initiative to secure poor country debt relief to all creditors, commercial lenders and China.
“Debt restructuring will help the country write off its foreign exchange reserves by removing immediate payment obligations. Debt restructuring includes an extension of grace and maturity periods and improvements in interest rates. So far, $ 2.5 billion in principal and interest payments have been deferred for five years by commercial creditors as part of the first external debt restructuring plan, ”the finance ministry said.
Suspension of debt service
Addis says a debt service suspension of nearly $ 125 million under the G-20 Debt Service Suspension Initiative (DSSI) is underway.
“A memorandum of understanding is signed with the Paris Club countries to suspend the debt for May-December 2020, and bilateral negotiations are underway with the creditor countries,” the government said. “All central government debt service to Paris Club creditors has been suspended.”
Prime Minister Abiy admitted that the country’s resources had been strained, in large part because of the conflict in Tigray.
The government had to withdraw its troops from the war zone, with the prime minister declaring: “We have national projects to complete. “
Dr Abiy told parliament on Monday that withdrawing from the Tigray conflict was the “right decision, driven by economic and Covid-19 pressures”.
But the Tigrayans said they routed Abiy fighters.
The Tigray conflict, which erupted in November 2020, has pulled more than $ 2.3 billion from the coffers.
Prime Minister Abiy hinted that tough austerity measures were being considered to preserve much-needed foreign exchange reserves.
“With the current situation Ethiopia finds itself in, the country does not need to have around 60 embassies and consulates,” he said. “Instead of hiring drivers, government ministers will be required to drive themselves.”
Ethiopian billion dollar Eurobond holders were quick to respond, pushing its 2024 sovereign debt yields to the highest level in more than a year, after rising steadily last month after the economic sanctions imposed by the United States. Yields on securities climbed 30 basis points to 9.79% in London, the biggest jump in seven weeks.
“The $ 1 billion additional debt restructuring plan does not include Eurobonds,” Finance Minister Eyob Tekalign told Bloomberg.
Ethiopia has also seen its currency collapse by more than 12% against the dollar since January, with Bloomberg ranking it as the worst performing among the 20 African currencies it monitors.
In May, the Moody’s rating agency downgraded Ethiopia’s credit rating after a similar cut by Fitch Ratings three months earlier.
On June 6, the International Monetary Fund (IMF) urged Ethiopia to quickly establish a creditors committee to support its debt plans.
Common framework of the G-20.
“Ethiopia in February asked the creditors of the G-20 and the Paris Club to benefit from a debt operation within the common framework of the G-20. Their aim is to create fiscal space for development spending and reduce the risk of over-indebtedness to moderate by reshaping debt service obligations. The formation of the committee will help Ethiopia in this regard, ”said Gerry Rice, IMF spokesperson.
In February, the Bretton Woods institution said it supported Addis’ plan to rework its debt under the G-20 agenda, “as it would strengthen debt sustainability and boost the country’s efforts to recovering from the coronavirus pandemic “.
“We have agreed on a plan for the completion of reviews of Ethiopia’s lending program, taking into account the impact of the coronavirus and the country’s ‘internal security situation’,” he said. stated in a press release.
Domestically, the country is also restructuring its debt by converting short-term bills into long-term notes and bonds.
Some $ 4.37 billion in direct advances from the National Bank of Ethiopia were restructured by converting the 15-year bond repayment period into a 10-year grace period. In addition, $ 3.4 billion of old treasury bills were converted into long-term treasury bills.
“This arrangement improves lending conditions for domestic creditors and reduces the immediate debt service burden on the government,” the finance ministry said.
Last month’s US economic sanctions against Addis appear to have prompted him to withdraw from Tigray because it jeopardized the aid he is receiving from Washington.
Ethiopia is one of the world’s largest recipients of US aid, boasting $ 1 billion last year. Washington has also rallied its allies in the European Union for more sanctions, including further cuts to Ethiopia’s funding.
The Biden administration has also indicated that it will target World Bank and IMF programs in the country, pushing Addis into a corner.
The political situation in Addis, exacerbated by the Tigray conflict and the impact of the coronavirus, has already seen a sharp drop in the country’s foreign direct investment to $ 2.41 billion last year, from $ 4.17 billion in 2017, according to the latest data from the Ethiopian Investment Commission.
Once a story of growth, Ethiopia has embarked on a campaign of infrastructure development, upgrading its rail and road network and industrial manufacturing capacity, all with over $ 30 billion in debt – mostly from China – which is now stifling its economy. This year alone, Ethiopia is expected to repay around $ 2 billion to its creditors and has so far sought – unsuccessfully – to defer repayment.