Will China & France’s bilateral initiative manage Ethiopia’s debt?

The G20 Debt Service Suspension Initiative (DSSI) aims to ‘temporarily ease the financing constraints’, with the IMF and World Bank providing technical assistance. Ethiopia, like many African countries, is facing two debt management structures: the Paris Club (IMF and World Bank (WB) included) and China’s frameworks. The establishment of a Creditor’s Committee headed by France and China signals a step towards a bilateral management of debt.

“It is a good omen and we can hope for a restructuring that is tailored to the particular situation of each country, with more transparency on the amount of debt owed. Mid-term results (3 to 5 years) will also be decisive. If this approach is effective in stabilising public finances, it will also be in the interest of Paris Club members and China to maintain it,” Estelle Prin, China analyst and lecturer in geopolitics at Sciences Po Lyon, tells The Africa Report.

[…] the ratings of international credit agencies should be taken with caution, especially since they have no real foothold in Ethiopia or Africa to set their ratings.”

In his address to the UN General Assembly on 21 September, China’s President Xi Jinping stated: “We must improve global governance and practice true multilateralism”, a statement that seems to have several origins.

“China currently has more of a realistic diplomatic and economic approach. It could be linked to the fact it has a lot of investment overseas amidst a crisis. Additionally, though economic growth is recovering, we are far from the previous average 12% rate. A more hypothetical factor is Paris members’ difficulty to restructure, given the lack of transparency on the debt owed to China. As Covid-19 is highly affecting the continent, requests for a bilateral approach have also come from indebted countries,” says Prin.

Transparency and framework

There is work ahead however, as the exact amount of debt to restructure is still to be determined. “It is estimated that a significant portion (around 50%) of loans by some African countries from China is not published in countries’ reports to the IMF or the World Bank. China’s participation in the initiative is therefore essential, and will improve the transparency of Ethiopia’s public debt,” Arthur Minsat, senior economist and head of Unit for Africa and Middle East at the OECD Development Centre, tells The Africa Report.

[…] there is currently an important chunk of the government’s budget that is allocated to military spending. War is what depletes wealth the most.”

A bilateral approach also poses the question of which principles will prevail as China and Paris Club members have different approaches to loans and reimbursement.

There is a grey zone at this time as “the Paris Club principles and debt management structure thus far were in favour of funding important public spending [infrastructure for example] in the hopes it would drive economic growth. When that did not happen for a number of countries in the 90s, part of the debt was cancelled,” says Prin.

“Though it may be an option, especially for highly indebted countries,  I doubt Paris Club members would support that. China’s position, on the other hand, is unknown – it could struggle to justify such a decision to its population,” she says.

Deficit and servicing debt

Parallel to the international context, Ethiopia’s internal situation greatly affects the evolution of the restructuring process. According to the African Development Bank (AfDB) “as of June 2020, total public debt was about 57% of GDP, slightly more than half of which was external.”

Debt servicing therefore takes up a significant portion of government spending, while less money is coming in despite reforms, such as the Homegrown Economic Agenda showing early results, with Ethiopia’s export earnings increasing by 12% in 2019 as per the International Trade Administration.

Much like the rest of the world, the Covid-19 pandemic has brought about a significant challenge, with the trade imbalance reaching $2690.8m in the first quarter of 2021. Additionally, the ongoing conflict in Tigray means “there is currently an important chunk of the government’s budget that is allocated to military spending. War is what depletes wealth the most,” says Prin. The combination of these events has led to a deficit amounting to 2.7% of the GDP. 

It would be morally indefensible if resources freed up from a moratorium in bilateral debt collections were to be used to pay private creditors instead of [save] lives.”

These indicators in turn affect international markets’ trust, with S&P Global downgrading Ethiopia’s sovereign rating to a CCC+ from a B-.

“There will be multiple consequences and [this] will risk causing an increase in the debt ratio for Ethiopia […] However, the ratings of international credit agencies should be taken with caution, especially since they have no real foothold in Ethiopia or Africa to set their ratings,” says Minsat.

International markets and private creditors

“Ethiopia has a Eurobond [and a dollar bond]. It has thus issued debt it is financing from international markets. Information is very crucial, and any lack of transparency or negative outlook means the country can have difficulty selling its bonds and therefore difficulty financing its debt,” says Prin.

Furthermore, it is not yet clear how private creditors will fit in the restructuring process, and how it will affect market confidence. Though “the G20 has […] called on private creditors such as investment funds to participate in the DSSI initiative on comparable terms”, Prime Minister Abiy Ahmed said: “It would be morally indefensible if resources freed up from a moratorium in bilateral debt collections were to be used to pay private creditors instead of [save] lives”, in an opinion piece he wrote for The New York Times. 

Bottom line

While Ethiopia’s debt restructuring process may be a new step towards a consensual creditors’ approach, many unknowns still pave the way ahead. The country’s upcoming and highly-awaited IMF Debt Sustainability Analysis could perhaps shed light on the economic prospects and solutions.

Meanwhile, “the creditor committee for Ethiopia will convene the second meeting in a timely manner to pursue its work to find an appropriate solution to external debt issues of Ethiopia”.