Great Ideas E01 – I, Pencil

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By Leonard E. Read

I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.

Writing is both my vocation and my avocation; that’s all I do.

You may wonder why I should write a genealogy. Well, to begin with, my story is interesting. And, next, I am a mystery —more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me, as if I were a mere incident and without background. This supercilious attitude relegates me to the level of the commonplace. This is a species of the grievous error in which mankind cannot too long persist without peril. For, the wise G. K. Chesterton observed, “We are perishing for want of wonder, not for want of wonders.”

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.

Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.

Pick me up and look me over. What do you see? Not much meets the eye—there’s some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser.

Innumerable Antecedents

Just as you cannot trace your family tree back very far, so is it impossible for me to name and explain all my antecedents. But I would like to suggest enough of them to impress upon you the richness and complexity of my background.

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.

Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill’s power!

Don’t overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation.

Once in the pencil factory—$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine—each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this “wood-clinched” sandwich.

My “lead” itself—it contains no lead at all—is complex. The graphite is mined in Ceylon [Sri Lanka]. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Even the lighthouse keepers along the way assisted in my birth—and the harbor pilots.

The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? They are. Why, even the processes by which the lacquer is made a beautiful yellow involve the skills of more persons than one can enumerate!

Observe the labeling. That’s a film formed by applying heat to carbon black mixed with resins. How do you make resins and what, pray, is carbon black?

My bit of metal—the ferrule—is brass. Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature. Those black rings on my ferrule are black nickel. What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain.

Then there’s my crowning glory, inelegantly referred to in the trade as “the plug,” the part man uses to erase the errors he makes with me. An ingredient called “factice” is what does the erasing. It is a rubber-like product made by reacting rapeseed oil from the Dutch East Indies [Indonesia] with sulfur chloride. Rubber, contrary to the common notion, is only for binding purposes. Then, too, there are numerous vulcanizing and accelerating agents. The pumice comes from Italy; and the pigment which gives “the plug” its color is cadmium sulfide.

No One Knows

Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?

Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far-off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn’t a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field—paraffin being a by-product of petroleum.

Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

No Master Mind

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

It has been said that “only God can make a tree.” Why do we agree with this? Isn’t it because we realize that we ourselves could not make one? Indeed, can we even describe a tree? We cannot, except in superficial terms. We can say, for instance, that a certain molecular configuration manifests itself as a tree. But what mind is there among men that could even record, let alone direct, the constant changes in molecules that transpire in the life span of a tree? Such a feat is utterly unthinkable!

I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

The above is what I meant when writing, “If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.” For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand— that is, in the absence of governmental or any other coercive master-minding—then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

Once government has had a monopoly of a creative activity such, for instance, as the delivery of the mails, most individuals will believe that the mails could not be efficiently delivered by men acting freely. And here is the reason: Each one acknowledges that he himself doesn’t know how to do all the things incident to mail delivery. He also recognizes that no other individual could do it. These assumptions are correct. No individual possesses enough know-how to perform a nation’s mail delivery any more than any individual possesses enough know-how to make a pencil. Now, in the absence of faith in free people—in the unawareness that millions of tiny know-hows would naturally and miraculously form and cooperate to satisfy this necessity—the individual cannot help but reach the erroneous conclusion that mail can be delivered only by governmental “masterminding.”

Testimony Galore

If I, Pencil, were the only item that could offer testimony on what men and women can accomplish when free to try, then those with little faith would have a fair case. However, there is testimony galore; it’s all about us and on every hand. Mail delivery is exceedingly simple when compared, for instance, to the making of an automobile or a calculating machine or a grain combine or a milling machine or to tens of thousands of other things. Delivery? Why, in this area where men have been left free to try, they deliver the human voice around the world in less than one second; they deliver an event visually and in motion to any person’s home when it is happening; they deliver 150 passengers from Seattle to Baltimore in less than four hours; they deliver gas from Texas to one’s range or furnace in New York at unbelievably low rates and without subsidy; they deliver each four pounds of oil from the Persian Gulf to our Eastern Seaboard—halfway around the world—for less money than the government charges for delivering a one-ounce letter across the street!

The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.

Source: Anything That’s Peaceful: The Case for the Free Market (1964)

World Bank concerns about ‘unrest in Ethiopia’

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Anadolu Agency | It would engage with relevant officials ‘to safeguard the rights and interests of all Ethiopians,’ says World Bank Group-

The World Bank Group (WBG) on Friday expressed “great concern” about unrest in Ethiopia, saying the situation would undermine economic and social development outcomes achieved in the African nation in recent years.

“Ethiopia is currently facing challenging times and the World Bank Group is keenly following the latest developments in the country. The unrest in Ethiopia is unfortunate and of great concern,” it said in a statement. “The World Bank does not have the mandate to get involved in the internal governance issues of its member states. However, human rights principles are prominently embedded in our Environmental and Social Framework through explicit requirements for nondiscrimination, meaningful consultation, effective public participation, property rights, accountability, transparency and good governance.”

It said as a member of the Development Assistance Group, it would keep engaging in dialogue with relevant Ethiopian authorities “to safeguard the rights and interests of all Ethiopians.”

The Tigray region has been the scene of fighting since November when Ethiopian Prime Minister Abiy Ahmed announced military operations against the Tigray People’s Liberation Front (TPLF), who he accused of attacking federal army camps.

Government troops took control of the regional capital, Mekele, in late November, but the TPLF vowed to fight, and clashes have persisted in the Horn of Africa country, hampering efforts to deliver humanitarian aid.

UN High Commissioner for Human Rights Michelle Bachelet said on Thursday that her office received information about ongoing fighting across the region, particularly in the center of Tigray region, as well as incidents of looting by “various armed actors.”

Bachelet’s office said it has information about the killing of eight protestors by security forces on Feb. 9-10 in Adigrat, Mekelle, Shire and Wukro.

More than 136 cases of rape have also been reported in hospitals in Mekelle, Ayder, Adigrat and Wukro in the eastern Tigray region between December and January, said the office.

Washington’s United Nations Ambassador Linda Thomas-Greenfield, said on Thursday that the US has deployed a disaster assistance response team to Ethiopia to bolster the humanitarian response, “and our hope is that others will join us in this urgent, necessary life-saving effort.”

Uganda, Ethiopia, Egypt… the hidden cost of internet blackouts

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African Report | Communication technology is a double-edged sword. It can empower people to access and share information globally, or be used as an instrument of political and economic control. While hopes were raised by the Arab Spring a decade ago, the years since have seen multiple internet blackouts in many African countries.

In the past ten years, the practice of jamming cyber communication has become a new tool by certain nations and governments.

Perhaps the most famous example of all is Egypt during the Arab Spring in 2011. For five days, the Egyptian government shut down all internet communication, to disrupt the 2011 protests.

Eventually, this cost the Egyptian economy $90m, according to the Organisation for Economic Co-operation and Development (OECD). Had the blackout gone for a whole year, it would have put a dent in Egypt’s GDP of around 3-4%.

“Most of the blackouts were across the entire [country] so it affected every person, business, and organisation. They were not targeted on particular institutions but affected everyone in that place,” says Darrell M. West, the vice president and director of governance studies at the Brookings Institute.

Mohamed Basiouny, an owner of a cyber cafe confirms what West says, adding that the shutdown did trickle down to impact everyone: “Cyber cafes [were] playing a central role at the time so, it was not just kids fooling around on the internet. ” Like many others, Basiouny’s business relied on internet communications. “No internet, no money – it’s as simple as that,” he adds.

Ethiopia’s blackout history

In the same vein, the Ethiopian government cut off internet across most of the country after the fatal shooting of musician and activist Hachalu Hundessa.

The singer is affiliated with the Oromo movement that took down the previous prime minister.

The blackout took place on 30 June 2020 and went on for 23 straight days, interfering with Ethiopians’ rights to access information and muzzling any vestige of freedom of expression.

As for the country’s economy, NetBlocks estimated the losses to surpass Br3bn ($102m). Later in the year, the northern region of Tigray witnessed another blackout as Ethiopia’s prime minister and Nobel peace prize laureate Abiy Ahmed announced a “red line” had been crossed by the TPLF leadership.

The ensuing internet blockage curtailed media coverage of the Tigray region that saw thousands killed or displaced. Businesses largely reliant on internet connections and communication also suffered the financial consequences of being shutdown during the conflict.

“These shutdowns are not, and will never be, haphazard. They are well planned and specifically targeting the people in question. In this instance, it is the people of Tigray and their businesses,” says IT consultant and former employee at the Ethiopian Chamber of Commerce and Sectorial Associations (ECCSA), Samuel Maasho*.

According to Maasho, Abiy was intentionally targeting the region’s gold producer and a huge textile factory, both of which funnel funds to the Tigray People’s Liberation Front. “This alone can paralyse a whole country, let alone a region like Tigray,” he says.

New tactical response

The scale of such practices is a much bigger problem today than it was a few years ago says West. According to his research in 2016: “Many of the shutdowns are occurring on a nationwide level as opposed to what used to be in local communities. Shutdowns are being put in place to quell political protests, stop coverage of human rights abuses, and to limit some economic activities.”

Similarly, Ramy Raoof, a privacy and digital security researcher and tactical technologist at Amnesty International, sees internet shutdowns more as a tactical response, than a tool itself, to have instant control-impact.

“Internet shutdowns are by design unsustainable, technically speaking, and it’s meant as a temporary response with either gradual shutdown or gradual restoration. And even during blackouts the states sometimes only apply 80-90 % of shutdowns because they might want to keep national institutions online to avoid financial disasters,” he tells The Africa Report.

Alternatives for businesses?

Beyond building a reliable system based on offline practices or returning to old habits from phone calls to fax machines, one has to wonder, is there a more sustainable alternative?

“All the tips and approaches the activists would engage with, such as international sim cards, satellite phones and connections, are highly dependent on the context,” says Raoof. “The telecommunication infrastructure works differently [de]pending on the ownership. So infrastructure ownership determines how surveillance and controls take place. In many scenarios these tips are valid momentarily for a limited amount of time until those frequencies are also targeted/shutdown.” He points to the example of Egypt in 2011 when the internet crackdown targeted different parts of the communications infrastructure at different times.

“The whole point of internet shutdowns by governments is to keep individuals and organisations from communicating,” says West. He echos Raoof’s concerns, adding such alternative tools would need to be available to all, otherwise they would be futile.

One example to spark answers are how bigger companies can manage to avoid the worst of the crackdowns.

“We were never impacted,” says *Ahmed Bayoumi, operations manager at one of Egypt’s towering outsourcing call centres, in reference to the internet blackout in 2011. “The government cut off the internet for networks and domestic internet providers. But big corporations like ours that are based on leased lines or direct cables were not impacted,” recalls Byoumi.

Following from that experience, one of the projects he set up in 2015 involves using a microwave tower that is fed directly from the mother source. “This tower is linked to a Synchronous Transport Module 1 (STM1),” he explains. It allows companies to remain connected despite any government-imposed blockage, but it comes with a price tag. STM1 is a network transmission of around 155.5Mbit/s and costs about LE12m ($768,296).

For those companies that cannot afford such access, it’s a lose-lose situation: “It’s very costly for small enterprises. Imagine paying for a marketing campaign via Facebook. And suddenly the internet stops. You can’t possibly retrieve that money,” he adds.

World Bank questions Ethiopia’s stance in telecoms competition

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Capacity | The World Bank has warned the government of Ethiopia not to take measures that hinder the development of telecoms in the country.

It is criticising the restriction of digital financial services to Ethiopian firms and nationals and a ruling limiting investment by independent cell tower companies, obliging the new entrants to use the infrastructure provided by Ethio Telecom.

This “may slow down network roll out, particularly in rural areas”, warns Ousmane Dione (pictured), the World Bank’s country director for Eritrea, Ethiopia, South Sudan and Sudan in a hard-hitting blog published by the bank.

Dione, who has been with the bank for more than 16 years, took on his present role in August 2020, just as the present government of Ethiopia was advancing its plans to licence new operators in the country and to sell a stake in Ethio Telecom.

The World Bank has a key role in this process, points out Dione. The International Finance Corporation (IFC), the private sector arm of the bank, is assisting the Ethiopian Communications Authority (ECA) with the licence awards. “The World Bank itself is supporting the partial privatisation of Ethio Telecom and the strengthening of ECA as an independent sector regulator.”

The ECA has set 5 April as its deadline for bids for the two new licences. A number of companies have said they are interested in either new licences or in stakes in Ethio Telecom. Airtel has said it will not bid.

“The two new operators would compete with Ethio Telecom in mobile communications, internet and other telecom services,” says Dione in his blog.

“Ethiopia is one of the last countries in the world to have retained a state-owned monopoly provider of telecom network and services, a market which is dominated by the private sector in most countries.”

He says: “Opening the market to private sector competition, and foreign investment, is expected to bring lower prices, higher quality of service and more choice for consumers. It will also lay the foundations for Ethiopia’s future digital transformation.”

But while Ethio Telecom has the most to gain from the expansion of the digital economy, “it is also at risk from losing market share if it fails to compete effectively”, he says. The government of Ethiopia appears to be trying to shelter Ethio Telecom from competition, he notes. “This seems to be the motivation behind policy announcements that seek to restrict the operation of digital financial services to Ethiopian firms and nationals. But this may slow down innovation and investment in the market and may actually hinder Ethio Telecom’s own ambitions to attract a strategic investment partner from abroad.”

He suggests that “a better strategy would be to encourage Ethio Telecom to compete on equal terms with the new market entrants in providing mobile money services, without ownership restrictions”.

In the cell tower market, he advises that “Ethio Telecom will need to collaborate as well as compete with the new entrants. But this is best done by allowing for open commercial negotiations in which the new entrants can make rational decisions whether to build their own infrastructure or buy capacity from Ethio Telecom.”

The government’s policies will allow the state company to charge high prices, and that “will end up harming the company”, he says.

“The new operators will be Ethio Telecom’s biggest customers if prices are set fairly, through market competition,” says Dione. “Ethio Telecom has the potential to become a regional powerhouse, but only if it is well-prepared for the competitive environment.

EU development chief calls for united response on Ethiopia

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DevEx | The European Union’s top representative for development aid said Tuesday that the bloc needs to “plan very carefully” when it comes to Ethiopia, as Brussels continues to withhold funding from the government over the conflict in the country’s North.

In December, the European Commission postponed €88 million in planned budget support payments, with officials saying they could not give one euro to the government of Prime Minister Abiy Ahmed until unimpeded humanitarian access is granted to the Tigray region, among other conditions.

Jutta Urpilainen, EU commissioner for international partnerships, told reporters Tuesday that another five budget support payments, together worth €100 million ($120 million), are due in 2021.

“So of course we need to plan very carefully,” the former Finnish finance minister said, adding that coordination with EU member states would be necessary to decide “what are we going to do with those disbursements and payments and then, of course, have this kind of a broader strategy towards Ethiopia.” The commission will also program its 2021-2027 development budget this year, with Ethiopia among the largest recipients for the 2014-2020 period.

“What we need is this kind of international approach including all different actors in order to leverage and really make a difference.” — Jutta Urpilainen, EU commissioner for international partnerships

A spokesperson for the commission did not immediately clarify when the 2021 budget support payments are due nor which government departments they are destined for.

Brussels’ initial move in December drew an angry response from Ethiopia, with its EU ambassador urging donors not to be distracted by “transient challenges” and reiterating the country’s strategic importance as the “beacon of stability in the Horn of Africa.” Other donors appear to be heeding those warnings, with the commission struggling to get even its own member states to freeze their bilateral support.

Urpilainen acknowledged as much Tuesday, also calling on the International Monetary Fund, World Bank, United Kingdom, United States, and Canada to tell Abiy that without full humanitarian access to Tigray, financial support for the government will be shut off. “What we need is this kind of international approach including all different actors in order to leverage and really make a difference,” she said.

Urpilainen said Ethiopia, along with Chad and Zambia, has requested debt relief through the G-20 group of nations and Paris Club’s new Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative. However, she said, “I would say that it is not a political decision whether to give any kind of debt relief or debt restructuring for Ethiopia,” instead citing the need for technical analysis by the World Bank and IMF.

Finnish Foreign Minister Pekka Haavisto will report to EU foreign ministers Monday on the outcome of his recent visit to Ethiopia. “Our concern of course is: Is humanitarian aid really reaching the people in Tigray?” Urpilainen said. “What is the real situation concerning the human rights violations and so forth? So I think now everybody is waiting for his report.”

S&P joins Fitch in downgrade of Ethiopia on potential debt restructuring

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(Reuters) – S&P Global Ratings on Friday downgraded Ethiopia’s long-term foreign and local currency sovereign credit ratings to ‘B-’ from ‘B’ on potential debt restructuring, announcing the move days after Fitch Ratings downgraded the country.

“Exacerbated by the effects of the COVID-19 pandemic, Ethiopia’s structurally weak external balance sheet has deteriorated further, in our view”, S&P Global Ratings said.

On Tuesday, Ethiopia’s sovereign dollar bonds dropped nearly 2 cents as Fitch chopped Ethiopia’s credit score by two notches after Addis Ababa signaled it could be the first with an international government bond to use a new G20 ‘Common Framework’ plan.

The scheme, which is open to over 70 of the world’s poorest countries, encourages their governments to defer or negotiate down their external debt as part of a wider debt relief program.

S&P said it estimated Ethiopia’s public debt repayment needs at about $5.5 billion over 2021-2024, including a $1 billion Eurobond due in 2024.

The ratings agency added that the economic effects of the COVID-19 pandemic have slowed Ethiopia’s economic activity in the services and industry sectors, including retail trade, hospitality, transportation, and construction.

S&P described the Tigray conflict in November 2020 that followed increased tensions between the federal and local authorities as “the most significant (conflict) since Prime Minister Abby Ahmed took office in 2018.”

“Another outbreak of armed conflict could spur wider ethnic tensions, weakening Ethiopia’s political and institutional framework and threatening the government’s transformative reform agenda”, it added.

Read more

Fitch Downgrades Ethiopia To ‘CCC’ – Rating Action Commentary

The downgrade reflects the government’s announcement that it is looking to make use of the G20 “Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI)” (G20 CF), which although still an untested mechanism, explicitly raises the risk of a default event.

Ethiopia In Debt Restructuring, Downgrade After Printing Money, Despite Low Deficit

Ethiopia had been downgraded to ‘CCC’ from ‘B’ by Fitch Ratings after it applied for ‘Paris Club’ debt relief having printing money through central bank advances, despite relatively low government debt and a budget deficit of only 2.8 percent of gross domestic product.

Ethiopia Dollar Bonds Drop After Fitch Downgrade

Ethiopia’s sovereign dollar bonds dropped nearly 2 cents after Fitch downgraded the country to CCC, citing the government’s plan to make use of the new G20 common framework to overhaul its debt burden.

Exclusive: Ethiopia To Seek Debt Relief Under G20 Debt Framework – Ministry

Ethiopia plans to seek a restructuring of its sovereign debt under a new G20 common framework and is looking at all the available options, the country’s finance ministry told Reuters on Friday.

Ethiopia Debt Restructuring Plan Faces Hurdles Of Transparency

Ethiopia’s plan to seek debt restructuring under a G20 common framework agreed in November triggered a sell-off in African debt at the end of January on fears of a contagion effect.

All about debt (restructuring)

Why is the Grand Ethiopian Renaissance Dam contentious?

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The Economist | The project has been a source of disputes in north-east Africa for a decade

DAMS HAVE several uses. They generate electricity, store water for crop irrigation and help to prevent floods. They can also cause dispute and heartache—for example, over damage to the environment or the displacement of people whose homes are lost beneath dammed waters. The construction of one on the Nile has sparked a quarrel between Egypt, Ethiopia and Sudan. The Grand Ethiopian Renaissance Dam (GERD), costing $5bn, will be Africa’s largest hydroelectric-power project once fully operational later this decade. Located on the Blue Nile in northern Ethiopia, upstream from Egypt and Sudan, it will produce 6,000 megawatts of electricity, twice as much as Ethiopia’s entire current output. Even though the dam could give the region a big economic boost, officials from the three countries have failed to strike a deal on how it will be operated. And the Egyptian government has even considered bombing it. In January yet another round of virtual talks failed. So why is the GERD so controversial?

Egypt frets that the dam will choke off the life-giving waters of the Nile. It has good reason to worry. Some 95% of the water consumed by the country’s 115m people is drawn from the river. Previous dams on the Nile have altered the floods and flow of sediments that the country relies on to grow food. The Nile Waters Agreements of 1929 and 1959 granted Egypt and Sudan the right to use all of the water between them, and gave Egypt the right of veto over upstream construction projects. Ethiopia, which was left out of the agreements, does not recognise them, prompting the disagreement over the impact of the GERD.

It is difficult to assess the exact impact of the new dam on downstream countries. Some studies suggest that Egypt could lose nearly half of its share of the water if Ethiopia filled the reservoir over a three-year period. Ethiopia has said it plans to raise the water level more slowly than that. Even so, the dam will undoubtedly give Ethiopia greater control over the river’s waters.

Egypt wants a legally binding agreement over river flows and demands that Ethiopia release certain amounts of water to top up the Nile, especially in the event of a drought, once the dam is operational. Ethiopia says it would prefer to agree on guidelines which carry no such legal compulsion. Until recently, Sudan had sided with its southern neighbour. But its attitude has shifted of late. In late November Sudanese officials noted an “abrupt” change in the amount of sediment in the water reaching their own Roseires dam, which sits downstream from the GERD. An exchange of letters between the two countries confirmed that Ethiopia had released some water from the GERD without prior warning. Sudanese officials fear that large releases of water could overwhelm their dam, which has a storage capacity less than a tenth of that of Ethiopia’s megaproject.

With or without Sudan, Egypt is not ready to concede defeat. Moreover, Abiy Ahmed, Ethiopia’s prime minister, may well be too distracted with problems at home to solve the dispute with his neighbours. In November the country fell back into civil war between the federal government and the region of Tigray. In recent weeks tensions have erupted between Sudanese forces and militias from Amhara, a region of Ethiopia, over contested farmland. The military clashes will surely delay talks about the dam even further. The African Union has already tried to mediate over the GERD. In September America suspended some aid to Ethiopia in an attempt to nudge it towards an agreement. International pressure could be the key to restarting the talks. But do not expect an agreement soon.

Ethiopia in debt restructuring, downgrade after printing money, despite low deficit

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ECONOMYNEXT – Ethiopia had been downgraded to ‘CCC’ from ‘B’ by Fitch Ratings after it applied for ‘Paris Club’ debt relief having printing money through central bank advances, despite relatively low government debt and a budget deficit of only 2.8 percent of gross domestic product.

The “Common Framework for Debt Treatments (G20 CF) goes beyond a May 2020 announced Debt Service Suspension Initiative for sovereign debt and “explicitly raises the risk’ of extending capital payments or interest for private debt under its conditions, Fitch said.

Ethiopia’s government has maintained “considerable budgetary discipline” with what Fitch said was a “moderate” increase in the budget deficit to 2.8 percent of GDP.

Government debt to GDP was 31.5 percent while total state enterprise debt to GDP was 25.6 percent. There could be pressure on state finances due to Coronavirus, Fitch said.

Central Bank Credit

An International Monetary Fund program has been attempting to wean Ethiopia’s central bank away from money printing, and starting Treasury bill auctions, after the currency fell and inflation rose.

“Government financing has continued its transition towards market-based T-bill auctions and away from the long-standing system of direct advances from the National Bank of Ethiopia (NBE, the central bank),” Fitch said.

This is a core part of the IMF programme, which seeks to promote monetary policy reforms to help gradually tackle inflation that has remained extremely high at close to 20 percent.”

In Sri Lanka despite having a well-functioning Treasury bill market, bids are now rejected and large volumes of cash are injected to trigger forex losses amid high deficit.

In 2015 and 2018 the central bank triggered currency crises, mostly with aggressive open market operations and ‘operations twist’ style activity, critics have said.

Despite low debt and low deficits, money printing has pushed the Ethiopian Birr from 29.11 to the US dollar in November 2019 to 39.3 to the US dollar by February 2021.

Analysts have also warned that IMF programs usually encourage a ‘flexible exchange rate’, a highly inconsistent money regime with money exchange rate and money policy which are at loggerheads with each other.

It involves neither a fully floating rate (no interventions, no sterilization) nor a consistent peg (unsterilized interventions), leading to rapid depreciation as the monetary authority switches rapidly back and forth rapidly from a peg to a float and back within the same trading session.

The extent of how debt will be affected will be decided by an IMF debt sustainability analysis of Ethiopia which is currently being done, Fitch said.

Ethiopia Debt

The bulk of Ethiopia’s public external debt is official multilateral and bilateral debt.

Government and government-guaranteed external debt was 25 billion US dollars in fiscal year to June 2020.

Of this, 3.3 billion dollar was owed to private creditors. There was a billion dollar Eurobond (1 percent of GDP) due in December 2024, with minimal annual debt service of 66 million dollar until the maturity.

There were 2.3 billion dollars of government-guaranteed debt owed to foreign commercial banks and suppliers.

State enterprise debt owed to private creditors came from Ethio Telecom and Ethiopian Airlines was 3.3 billion dollars.

“While this is not guaranteed by the government, it represents a potential contingent liability,” Fitch said.

Ethiopian Airlines is one of the most profitable airlines in the world.

Ethiopia’s external financing requirements were more than 5 billion on average from financial years to 2021 to 2022 including federal government and state enterprise amortization.

Foreign reserves are expected to remain around 3.0 billion dollars or two months of current external payments.

Debt Re-profiling

The extent of debt treatment required will be based upon the outcome of an International Monetary Fund Debt Sustainability Analysis for Ethiopia, which is currently being updated, Fitch said.

“The G20 CF, agreed in November 2020 by the G20 and Paris Club, goes beyond the DSSI that took effect in May 2020, in that it requires countries to seek debt treatment by private creditors and that this should be comparable with the debt treatment provided by official bilateral creditors,” the rating agency said.

“This could mean that Ethiopia’s one outstanding Eurobond and other commercial debt would need to be restructured, potentially representing a distressed debt exchange under Fitch’s sovereign rating criteria.

“There remains uncertainty over how the G20 CF will be implemented in practice, including the requirement for private sector participation and comparable treatment.

“Fitch’s sovereign ratings apply to borrowing from the private sector, so official bilateral debt relief does not constitute a default, although it can point to increasing credit stress.”

“Within the context of Paris Club agreements, comparable treatment requirements are not always enforced and the scope of debt included can vary.

“The Paris Club states that the requirement for comparable treatment by other creditors can be waived in some circumstances, including when the debt represents only a small proportion of the country’s debt burden.

The focus will instead be on some combination of lowering coupons and lengthening grace periods and maturities.

However, any material change of terms for private creditors, including the lowering of coupons or the extension of maturities, would be consistent with the definition of default in Fitch’s criteria.

There was also a conflict in Tigray region.

Ethiopia dollar bonds drop after Fitch downgrade

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NASDAQ | Ethiopia’s sovereign dollar bonds dropped nearly 2 cents after Fitch downgraded the country to CCC, citing the government’s plan to make use of the new G20 common framework to overhaul its debt burden.

The country’s outstanding 2024 bond XS1151974877=TE dropped to as low as 92.06 cents in the dollar, according to Tradeweb data, trading close to record lows hit in late January when Ethiopia surprised markets with its announcement to seek debt relief.

“(This is) the first negative spillover from last week’s decision to go for the G20 Common Framework, a process that no eurobond issuer has been though yet, and one that could take some time, especially as private sector creditors have to be included,” said Simon Quijano-Evans, chief economist at Gemcorp Capital.

Fitch said earlier that the downgrade reflects the government’s announcement that it is looking to make use of the G20 framework, “which although still an untested mechanism, explicitly raises the risk of a default event.”