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Ethiopia asks for debt relief as Covid takes toll

Financial Times | Pandemic adds to pressure on developing economies trying to meet repayments

Ethiopia has asked for debt relief under a G20 programme to help poor countries reeling under the economic impact of coronavirus, making it the second African country to do so in the past week.

Ethiopia has long been seen as one of Africa’s most promising economies but the pressure the pandemic has placed on healthcare systems and economies means many developing nations are struggling to keep up with debt payments.

In a statement on Monday, its finance ministry said that it was “preparing for upcoming discussions with official creditors” as it looks to reduce “debt vulnerabilities and lower the impact of debt distress”.

“We haven’t even inoculated one individual against Covid, so we need to redirect the resources that we have towards that,” a senior official at the ministry of finance told the Financial Times.

Under its state-led development model, Ethiopia’s economy grew at close to 10 per cent a year for much of the past two decades until the arrival of Prime Minister Abiy Ahmed in 2018. He had promised sweeping liberal reforms, including privatisation of the huge telecoms monopoly, to take the economy towards middle-income status. But ethno-political tensions and a conflict in the northern Tigray region have slowed his plans.

Monday’s statement from Addis Ababa follows a statement by the IMF last Wednesday that Chad had also asked for relief under the G20 programme agreed by the world’s biggest economies. In November, Zambia became the first African country to default on its debt since the start of the pandemic.

The Ethiopian move will be an early test of the G20 debt relief initiative, which requires borrowers to reach agreement on their debt with private creditors as well as official lenders.

Under the initiative, agreed last year by the world’s biggest economies, 73 of the world’s poorest countries can ask for debts to be restructured and, in the most extreme cases, written off. This goes beyond the G20’s debt service suspension initiative (DSSI), which allows the same group of countries to defer debt repayments but does not provide any debt reduction.

The DSSI has been criticised by debt campaigners and others for failing to enlist the participation of private sector creditors. This meant that debt relief secured from official lenders could be used to repay other debts. Several countries benefiting from the DSSI have stressed that they do not want relief from private creditors as this would jeopardise their access to commercial credit markets.

Despite the G20 framework’s requirement to seek a deal with private sector creditors, the finance ministry official sought to play down the impact on private sector lenders. “It would be a fair burden-sharing between all our official bilateral creditors and then, based on that, we will look at whether we need to reach out to private creditors, which is very unlikely,” the official told the FT. The official stressed that the adjustment would be “minor”.

Ethiopia had total public foreign debt of $27.8bn at the end of 2019, according to the World Bank, including $8.5bn owed to official bilateral creditors and $6.8bn to commercial creditors, including $1bn to bondholders. Chad has no outstanding foreign bonds but its total debts of $3.5bn include $1.5bn in commercial debt, about half of which is a loan from Glencore, the commodities trader, and associated banks.

“Ethiopia is trying to explore the options for broader debt relief,” said Kevin Daly, investment director at Aberdeen Standard Investments. “This is their way of saying things are difficult, we need further relief. What we don’t know is how this will work in practice. There is a lack of clarity right now.”

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