Ethiopia: Bankrolling the reform

World Bank reaffirms commitment to Ethiopia in spite of debt concerns

Holding its second IDA19 replenishment meeting in Addis Ababa this week, the World Bank Group and one of its major lending arms dedicated to providing favorable credit facilities to middle and low income countries—the International Development Association—has reaffirmed commitment of support to Ethiopia’s ongoing market reform process, while recognizing the concern of rising external debt levels across half of IDA borrower countries.

Targeting an ambitious replenishment size of USD 80 billion for the nineteenth round of IDA stretching from 2021-2013, the Group’s Chief Executive Officer (CEO), Kristalina Georgieva, negotiated the replenishment of resources and the direction of IDA’s credit policy for the upcoming three years with over two hundred participants representing IDA donor countries a.k.a Deputies and IDA borrowers (beneficiaries) from June 17 to 20, 2019, in Addis Ababa.

Prime Minister Abiy Ahmed (PhD), who lost his father this week and attending his funeral ceremony on Wednesday, made it in time to speak briefly at the closing of the IDA meeting with Finance Minister, Ahmed Shide, and Chief Trade negotiator and policy advisor to the PM, Mamo Mihiretu, on his side. Reassuring the participants of the real and material gains of IDA’s support to Ethiopia by recounting economic and social improvements his country has registered in the past 15 years, Abiy stated that most of the development that happened in Ethiopia would not have been possible if it was not for the support of development partners like IDA.

“I would like to tell you that IDA is effective, innovative and transformative,” Abiy told the gathering adding that Ethiopia is a clear case study that shows “IDA indeed delivers”.  The Prime Minister who also held a brief sideline consultation with the CEO was mindful of his country’s debt and macroeconomic challenges. In that, Abiy acknowledged rising indebtedness in sub-Saharan Africa including Ethiopia and conceded to the fact that the responsibility of controlling rising debt levels lies squarely on the borrowing countries. Nevertheless, Abiy argued that huge gap in development financing in these countries cannot go without reliable and affordable development assistance from donors like IDA. “We are still counting on you,” he underscored.

On the economic front, Abiy revealed to IDA Deputies and borrowers that his administration has embarked up on a major market reform process that involves the opening up of key service sectors like telecom, energy, logistic and the like. As Ethiopia moves out of a growth paradigm which is “driven by public investment” and into an approach that “emphasizes productivity and job creation”, Abiy said, the introduction of competition to sectors which remained closed to private capital in the past will be the primary policy objective.

“We recognize the reforms are very bold and that they do take time,” PM said, while also admitting that the process is “politically complex and costly” to the country. Nevertheless, “it [the reform] promises big paybacks for tomorrow although it appears costly today.”

The Group’s CEO also agrees that the reform is a critical factor in the economic prospect of Ethiopia. “Really, the scale of the reform conceived is remarkable,” she said in an exclusive interview with The Reporter. And that introducing competition to sectors like telecom, power and logistic will contribute to overall growth and development of the country by bringing the price of these useful services down and inducing quality improvement, Kristalina argued.

Unlike the other World Bank lending branch the International Bank for Reconstruction and Development (IBDR), which provides credit to mostly middle income and credit worthy low income nations at reasonable interest rates that are still below market rates, IDA, which provides lending facilities to low-income countries at zero or near to zero interest rates, needs periodical replenishment of its lending resources from donor countries to continue its funding.

In addition to discussing the needed replenishment of funds, IDA meetings would also host debates about the lending policy framework that needs to be adopted for the upcoming IDA cycle. Accordingly, the overall rising external debt levels in 34 out of 68 IDA borrower countries was the highlight of this year’s debate. It is not only about the overall debt levels, Group’s CEO underscores, but the Bank has also noticed a subtle shift in the composition of the debt portfolio of borrows to more non-concessional credits.

Drawing on Ethiopia’s experience, Abiy also noted that rising debt levels in the IDA beneficiary countries has also played its role to restrict this nation’s access to non-concessional financing in the global financial markets.  As part of the debt conversation that the Bank is having with Ethiopian authorities, recent moves to restrict non-concessional borrowing is taken as a move to the right direction, according to Kristalina, and says that the Bank remains bullish to the reform direction Ethiopia is heading.

According to World Bank’s International Debt Statistic 2019, as of 2017, Ethiopia’s external debt stock stood at USD 26.56 billion with IDA contributing USD 7.039 billion over the years. This entailed a total debt servicing cost of USD 1.38 billion in the specific year (2017); with 946.1 million principal and 442 million interest dues. Furthermore, Ethiopia’s external debt profile shows that it is in high external debt stress level with external debt to export ratio of 397.6 percent. On the positive side, around 81 percent of the nation’s debt stock is composed of concessional loans, and in which IDA’s credit is significant, and hence having an average interest rate and maturity date of 2.2 percent and 23.9 years, respectively. 

Asrat Seyoum