UPBEAT BUT IN DEBT!

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By  Tamrat G. Giorgis

A few weeks ago, the governments of Ethiopia and Turkey signed a bilateral agreement for the latter to guarantee loans of 1.7 billion dollars to finance the construction of a railway line in Ethiopia. A Swiss bank, Credit Suisse, has agreed to provide the loans for Ethiopia’s Railway Corporation (ERC), while a Turkish company has been contracted by Ethiopia to build the railway line – stretching from Weledya, up in the north, to Awash.

The railway line is just one of many state-financed national projects, which administration officials say are designed to enhance the nation’s economic competitiveness under the Growth & Transformation Plan (GTP), due to be completed in around a year’s time. From mobile network expansion to road constructions, and from the erection of sugar mills and fertiliser factories to building mega dams and public housing, the GTP aspires to accomplish in five years what Ethiopia has not been able to do in centuries.

Faced with a financing gap of 10pc of gross domestic product (GDP) a year, the administration of Prime Minister Hailemariam Desalegn is burdened with the task of sourcing financing from creditors around the world. China has proven to be an indispensable source of finance in realising what experts see rather as a “political commitment” in the GTP. Since 2012, the Chinese have made non-concessional loans worth over five billion dollars available to Ethiopia, where their contractors have bagged contracts to build railway lines, sugar mills and power transmission infrastructure.

“But they are kind of wary about their overwhelming presence,” said a senior administration official. “They would like us to have a diversified pool of resources.”

Diversified Ethiopia is trying hard to convince the Indian’s to get onboard and, equally so, the Turks. Subsequent to a recent meeting between Prime Ministers Hailemariam and Recep T. Erdogan, the Turkish government has agreed to guarantee loans worth 700 million dollars intended to finance the railway line.

These developments in the international finance landscape appear to be part of the reason why Hailemariam appears so upbeat about Ethiopia’s macroeconomic prospects for 2014. Speaking to the media last Monday, he portrayed a national economy inching towards a decade with annual economic growth of double digits, yet historic in the uninterrupted expansion in gross domestic products (GDP).

He projected double digit growth for yet another year, hoping to see further enhancement in agricultural productivity, expansion in industrial investment and a consequent growth in services.

Responding to myriads of questions from reporters on issues as wide as the controversy with Egypt over the Nile to Ethiopia’s role in South Sudan and Somalia; scenarios for the upcoming national elections and allegations of border concessions with Sudan to policies towards telecom and Eritrea, Hailemariam outlined his administration’s positions.

He was soft and accommodative over the issue of Nile, as he chose to echo his predecessor’s mantra that he is a foot soldier of the party. Lucid when discussing regional politics and matters of military operations, he was candid in conceding to difficulties of cash flow in the economy. Yet, he pledges to correct the hiccups and gives hope that the ever increasing national debt stock is well managed.

“Our debt sustainability ratio is very good,” he told the media during the press conference. “We’re on the safe side of the problem.”

Largely fuelled by the state’s overbearing involvement in the economy and an administration under a political force determined to rebuild the physical infrastructure of a nation, the country is now carrying a mounting debt owed to foreign creditors. Estimated to have reached close to 11.1 billion dollars, the piling up of external debts, and the way its sustainability can be maintained, is raising eyebrows of those following the matter.

The debt sustainability analysis (DSA), jointly carried out by experts from the IMF and the World Bank, is what nations use as an instrument to gauge their status in external debt stock vulnerability. The last one for Ethiopia was conducted in 2013, with the report stating that – “Ethiopia is at a low risk of external debt distress.”

It was a reaffirmation of what the report had said in the previous year, according to Abraham Tekeste (PhD), state minister for Finance & Economic Development (MoFED).

“There is no reason for alarm at all,” Abraham told Fortune.

However, critics of the administration see these views of the Prime Minister and the State Minister as complacent. This is especially in light of a recent development, whereby the country signed a series of contracts to enable it to access loans worth six billion dollars. This represents over half of the total external debt stock, which they fear may affect the country’s standing with the World Bank’s International Development Agency (IDA).

Contrary to commercial creditors, Ethiopia gets close to one billion dollars worth of cheap, long term and concessional loans through the IDA. Nonetheless, in April 2013, the World Bank introduced a ceiling to non-concessional loans coming from commercial creditors at one billion dollars, which will remain in place for the subsequent two years.

“The decision was informed by the 2012 DSA analysis, which demonstrates that such a ceiling is consistent with the maintenance of low risk in external debt distress,” says a report the IMF issued last year. “The 2013 DSA is consistent with the new ceiling.”

A combination of revenues from exports, flow of foreign direct investment (FDI) and an increase in remittances have contributed to lifting Ethiopia off the list of “moderate” to “low” risk countries in 2012. This is bound to change very soon, according to people informed in the subject.

The nation’s stock of public debt is hovering above the 20 billion dollar mark, claiming 45pc of the GDP. With more finance coming to pay for the various state-owned projects, keen observers of the debt stock see the risk factor increasing at a much faster pace than anticipated last year, where the annual non-concessional loans were close to 730 million dollars.

There appears to be a difference in interpretation, between Ethiopian authorities and those at the World Bank and the IMF, over what constitutes a ceiling of non-concessional loans. This is an issue of divergent views between those at the World Bank and the IMF. While officials at the World Bank appear to share the view of the Ethiopian authorities that non-concessional loans should only be counted on the bases of the amount of disbursement, as opposed to the whole value of contracts signed, those at the IMF appear to disagree.

“In the non-concessional borrowing policy, a loan counts at the point of signing the loan contract, regardless of the disbursement profile,” says a DSA report for 2013.

It warns of – “the importance for Ethiopia of monitoring debt closely and remaining vigilant regarding new debt accumulation, particularly with commercial loans.”

With short term, expensive and non-concessional loans coming fast to the country of late, there is a review of the DSA being conducted, with a draft having been submitted to officials of the MoFED, according to sources at the Ministry. It will determine whether the administration of Prime Minister Hailemariam is in breach of its commitment.

Despite the difference of opinion over the interpretations of the annual debt ceiling, Ethiopia’s passing of the one billion dollar credit threshold may compel the Bank to reconsider its privilege of receiving soft loans with nominal interest rates, which could get paid in two or three decades. Such matters would be left to the discretion of the board of directors of the World Bank.

“There is a big question as to whether the IDA will continue to hold,” said a person knowledgeable in the matter.

A senior World Bank official, based in Addis Abeba, who was approached for an interview late last week, has declined to comment.

Others, however, see nothing more than a little commotion in the highest echelons of the Bank, which will soon disperse and business will continue as before.

Regardless of the response from international finance institutions, critics warn that the administration is heading towards a rude awakening. Overreliance on foreign debt to finance national projects of all types by the state is diverting resources from the domestic private sector, thus raising questions on who should have these resources and where they could better be deployed.

While they acknowledge the state’s investments in power, transport, health and education infrastructure, its involvement in building sugar mills and fertiliser manufacturing plants, as well as acquiring vessels and investing in creating a wholesale company are signs of difficult years ahead. They view, for instance, the rate of return in railway investment coming very late to the game.

They would rather see it focus its efforts in addressing major constraints put on national competitiveness in logistics, bureaucracy and services provision.

The administration sees little in the way of practical advice in such a debate, as it believes these criticisms are motivated by ideological considerations. Hailemariam argued last week at the press conference that loans and advances made available to the private sector has increased by 17pc compared to last year.

“We’ve no understanding that there is currently a liquidity holdup in the economy,” the Prime Minister told the media.

Sourced  here

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