The Federal Democratic Republic of Ethiopia: Staff Report for the 2018 Article IV Consultation—Debt Sustainability Analysis
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International Monetary Fund. African Dept.
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Publication Date:
04 Dec 2018
eISBN:
9781484388600
ISBN:
9781484388600
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English
Keywords:
ISCR; CR; IMF staff; authority; private sector; NBE bill; economic reform; debt dynamics; present value; debt sustainability outlook; debt stress episode; Public and publicly-guaranteed external debt; Exports; Debt sustainability analysis; Global
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2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia

Abstract

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia

DEBT COVERAGE2

Text Table 1.

Ethiopia: Coverage of Public and Publicly Guaranteed Debt and Parameters for Contingent Liability Shocks for the Tailored Stress Test

article image

If government-guaranteed debt is already captured under the public debt definition and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, the default shock of 2% of GDP may be reduce to 0%.

Source: Ethiopian authorities.

1. Statistical coverage of debt datain Ethiopia is comprehensive (Text Table 1). The Ministry of Finance and Economic Cooperation (MOFEC) publishes data, on a quarterly basis, on domestic and external debt of the central government and the non-financial public sector, including debt of state-owned enterprises (SOEs) both guaranteed and not guaranteed by the government. Data provided include debt outstanding by type of creditor, disbursements, debt service payments during the fiscal year, currency composition, and details on new debt contracts during the fiscal year. In addition, staffs have included debt from two foreign official bilateral lenders in the form of deposits with the National Bank of Ethiopia (NBE), amounting to US$2 billion in total. Ethiopia recently passed a law governing public-private partnerships (PPPs) and set up a PPP Unit in the MOFEC to administer future agreements. At this stage, some 13 possible projects have been reviewed but no substantial PPPs have been concluded. While the data coverage of potential contingent liabilities is comprehensive, staffs have used a 4-percent shock for contingent liabilities arising from SOEs, larger than the standard 2-percent shock, to cover for other potential liabilities. These include potential losses arising from the operations of the Development Bank of Ethiopia, which is not a deposit-taking institution but a public financial company that supports long-term private sector projects.

BACKGROUND AND RECENT DEVELOPMENTS

2. Ethiopia reached the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative in 2004 and benefited from debt relief under the Multilateral Debt Relief Initiative (MDRI) in 2006.3 Since then, public and publicly guaranteed (PPG) external debt reached a low of 18 percent of GDP in mid-2012, before rising steadily again to 33½ percent of GDP4 by 2017/185, while total (including domestic) public debt stood at 61½ percent. In FY13-FY156, IDA set non-concessional borrowing (NCB) ceilings for Ethiopia in cooperation with the authorities at US$ 1billion. In response to a shift in the risk of debt distress rating from “low” to “moderate,” the NCB ceiling was reduced to US$750 million for FY16 and further down to US$400 million for FY17. The US$400 million NCB ceiling was maintained for FY18 when the risk of debt distress rating was increased to “high”. Following consecutive breaches of NCB ceilings for FY17 and FY18, IDA decided that the IDA’s country allocation to Ethiopia for FY19 will be on a 50-percent grant and 50-percent credit basis. The NCB ceiling for FY19 has been set at zero.

3. The current change in political leadership is prompting an update of the authorities’ development strategy. Following the election of Abiy Ahmed as Prime Minister in March 2018, the authorities have announced policies aimed at strengthening the role of the private sector in driving growth. The underlying policy goals are broadly in line with the government’s Second Growth and Transformation Plan (GTP II)—which envisaged the continuation of an important role for the public sector but with greater private participation in the economy through measures to encourage private investment, including foreign direct investment (FDI) and public-private partnerships (PPPs). Since the political transition, the authorities have indicated they intend to move more rapidly and have since announced their intention to partially privatize key SOEs.

4. Ethiopia was assessed to be at high risk of external debt distress in the 2017 DSA due to a deterioration in export-related indicators; the authorities have undertaken policies to mitigate these risks. Export concentration (agricultural commodities, air passenger transportation) and low total export revenue from goods and services (about 8.7 percent of GDP) renders Ethiopia especially vulnerable to export shocks. While total public sector external debt is not comparatively high, it represents a high proportion of exports (351 percent in 2017/18). In response to heightened risks, which were flagged in the 2015 and 2016 DSAs, the authorities reined in public sector borrowing, particularly by state-owned enterprises (Text Figure 1). Since then, a new Public Debt Management and Guarantee Issuance Directive has come into effect, which should further strengthen debt management and buttress the authorities’ efforts to control the contracting of new debt. Public sector import restraint has substantially reduced the current account deficit—from 8.1 percent of GDP in 2016/17 to 6.4 percent in 2017/18—despite adverse terms-of-trade dynamics. Aiming to enhance competitiveness, the National Bank of Ethiopia (NBE) devalued the birr by 13.4 percent against the US dollar7 in October 2017 and tightened the monetary stance to mitigate the exchange rate passthrough.

Text Figure 1.
Text Figure 1.

Ethiopia: Net Financing Flows to the Non-Financial Public Sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 354; 10.5089/9781484388600.002.A002

Source: Ethiopian authorities, IMF staff estimates. Includes the debt of Ethiopian Airlines.

5. Ethiopia continues to enjoy robust growth. Real GDP increased by 7.7 percent in 2017/18 on the back of sustained growth in the agriculture sector, export-oriented manufacturing and services. Preliminary data shows a strong uptick in the growth in nominal exports of goods and services (to 13.2 percent) in 2017/18, driven mainly by service exports. Volumes of some traditional exports also grew, and new export lines—mainly manufactures—have started to pick up from a low base.

6. The external deficit was mainly financed by foreign direct investment (FDI) and net borrowing by the public sector. Net FDI was US$3.7 billion (4.5 percent of GDP), a decline from 2016/17, partly due to political uncertainty, while net disbursements to the public sector rose to US$2.3 billion (3.8 percent of GDP). The authorities transferred the majority ownership of the National Tobacco Company to a foreign investor in 2017/18. New public external loans committed in 2017/18 (including loans not guaranteed by the government) amounted to US$3.5 billion. Around two-thirds were concessional loans from multilateral development agencies and institutions. Of the US$883 million in new loan commitments from commercial banks, around half was from Uni Credit for the Koysha Hydroelectric Project, while the remainder was used for the purchase of planes by Ethiopian Airlines.

Text Table 2.

Ethiopia: Public and Publicly-Guaranteed External Debt by Creditor

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Sources: Ethiopian authorities and IMF staff calculations.

Includes long-term external liabilities of the National Bank of Ethiopia.

Text Figure 2
Text Figure 2

Ethiopia: Composition of Public and Publicly-Guaranteed External Debt

(As at June 30, 2018)

Citation: IMF Staff Country Reports 2018, 354; 10.5089/9781484388600.002.A002

1 Includes external liabilities of the National Bank of Ethiopia.Source: Ethiopian authorities, IMF staff calculations.

OUTLOOK AND KEY ASSUMPTIONS

7. The revised macroeconomic assumptions incorporate updated macroeconomic projections (Box 1 and Text Table 3), which show external vulnerabilities persisting in the near term. The projections are based on current and announced policies, and do not incorporate faster and more ambitious reforms under consideration by the authorities and supported by a series of budget support operations by the World Bank (2018-2020). The main fiscal assumptions assume a continuation of the government’s record of prudent budget implementation. The near-term export outlook reflects the positive impact of earlier infrastructure investments including the Hawassa Industrial Park, the new railway line to Djibouti, and hydropower facilities and electricity transmission lines that have come online. The projection envisages the completion of ongoing upgrades to the power generation and transmission infrastructure (particularly to Kenya) and ramp-up of exports from existing and planned industrial parks. External vulnerabilities, arising from low reserve coverage, significant external imbalances and an overvaluation in the real exchange rate, are expected to decline only gradually.

8. Over the medium term, risks are broadly balanced. Downside risks include increases in the price of key imports, particularly oil; delays in the completion of export-supporting infrastructure; and external adverse shocks from lower-than-envisaged growth in global trade or in key trade and investment partners, or in investors sentiment. Ethiopia will also remain vulnerable to the vagaries of coffee prices. The main upside risks stem from implementation of a scaled-up program of reforms to crowd in private sector activity, including privatizations, PPPs, and opening new economic sectors to domestic investors and FDI. Other upside risks include a faster-than-projected ramp-up of exports—driven by industrial parks production; early completion of power transmission lines to export electricity to Kenya (now expected by mid-2019); and commercial exploitation of recently-discovered oil reserves in the Ogaden Valley.

9. The DSA assumes increased support from bilateral and multilateral development partners in the near term. The DSA includes a US$1 billion deposit with the NBE by the Abu Dhabi Fund for Development (ADFD), placed in early 2018/19 in an arrangement similar to the operation with another official bilateral donor described in the 2016 DSA. The ADFD has also agreed to invest a further US$2 billion in Ethiopia, which is assumed to be disbursed as foreign direct investment. Ethiopia is seeking the reprofiling of non-concessional debt to increase its concessionality. Pending conclusion of these negotiations, the revised terms are not included in DSA projections. However, if negotiations were completed successfully, this would improve the debt dynamics—although would not likely change the main results. The DSA also incorporates budget support operations by the World Bank over the coming three years amounting to US$2.2 billion, starting with a US$1.2 billion Development Policy Financing (DPF) in 2018/19. The DPF is envisaged to comprise of 50 percent grants, and the remainder on IDA terms. The NCB ceiling has been set at zero for 2018/19, and NCB disbursements from previously contracted loans will remain moderate until 2022/23 before prospectively picking up again at the end of the projection period. The grant element of new financing will remain high, reflecting Ethiopia’s current level of development and extended need for concessional financial support over the longer term (Table 1).

Key Macroeconomic and Debt Assumptions

Real GDP growth, at 7.7 percent in 2017/18, is expected to strengthen to 8.5 percent in 2018/19 before stabilizing at 7 over the medium term. Continuing investment in infrastructure, with an emphasis on private sector involvement, and improving productivity, as FDI and export-oriented industries expand, should ensure the growth momentum is maintained going forward. However only gradual alleviation of the forex shortages and continuing restraint on public investment underpins a moderate mark-down in medium-term growth projections. Growth in the very long term is expected to converge to 5-6 percent as Ethiopia becomes a middle-income country. CPI inflation, which is expected to be elevated in the near term, is projected to converge to the 8 percent target of the NBE by end-2019 and remain at that rate in the long run. The general government overall deficit is projected to decline to about 2.7 percent of GDP, with gradual progress in tax collection offsetting increased investment and social spending. In particular, revenue mobilization continues to lag expectations, led by shortfalls in tax collections. The projections therefore have been revised to take into account the reduced revenue ratio, which will only improve gradually as tax policy and administration reforms bear fruit.

The external current account deficit (including official transfers) is estimated at 6.4 percent of GDP in 2017/18. Gradual improvement of export performance, a moderate pick-up in capital goods imports, and steady inflows of remittances (although slowly declining as a ratio to GDP) will lead to a gradual reduction of the deficit over the longer term. Economic transformation is expected to ameliorate external imbalances, with more dynamic and diversified exports and a phase-down in public imports of capital goods.

Exports of goods and services in dollar terms are estimated to have grown by 13.2 percent in 2017/18 driven by a strong performance of service exports. Coffee export revenue declined due to adverse price dynamics. The improvement in volumes and rising manufacture exports from new industrial parks are expected to be supported by continued public investment in energy and transport infrastructure and private investment (including FDI). In addition, services exports should be sustained by growth in air transport on the back of sustained investment and route expansion by EAL over the medium term. As a result, exports of goods and services are envisaged to rise to 13.5 percent of GDP by 2038/39.

Imports of goods and services remained flat in 2017/18 after declining by 4.8 percent in 2016/17. Over the longer term, imports should expand at an annual average rate of 6.3 percent while their share to GDP will decline from 23.5 percent in 2017/18 to 19.4 percent by 2038/39.

Net FDI inflows, while remaining high, declined to US$3.7 billion (4.5 percent of GDP) in 2017/18. Net FDI inflows are projected to recover to US$5.6 billion by 2022/23. This reflects improved competitiveness and ongoing policies to attract foreign investment. Private transfers increased by 10.7 percent in 2017/18, as inflows from individuals, mainly remittances, grew sharply by 15.7 percent. Transfers from non-governmental organizations continued to decline following the improvement in drought conditions. Projections assume remittances will amount to about 2.1 percent of GDP by 2038/39.

Text Table 3.

Ethiopia: Key Macroeconomic and Debt Assumptions—Comparison with the Previous Debt Sustainability Analysis

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Sources: Ethiopian authorities; IMF and World Bank staff estimates and projections.

10. Ethiopia’s debt carrying capacity is assessed as “medium”. The Composite Index (CI) for Ethiopia, which measures the debt carry capacity in the current LIC-DSF, stands at 2.72, within the 2.69 to 3.05 range for medium capacity countries. Underlying inputs for the calculation of the CI were sourced from the IMF’s October 2018 WEO, and an update of the Country Policy and Institutional Assessment to 2017 levels. With this assessment, the DSA uses the following thresholds to assess risk of external debt distress:

  • Present value of PPG external debt-to-GDP: 40 percent

  • Present value of PPG external debt-to-exports: 180 percent

  • External debt service-to-exports: 15 percent

  • External debt service-to-revenue: 18 percent

Ethiopia qualifies for the market financing risk module by virtue of the US$1 billion Eurobond, which matures in 2024.

EXTERNAL DEBT SUSTAINABILITY ANALYSIS

A. Baseline Scenario

11. The baseline shows the stock of external public and publicly guaranteed debt remaining relatively stable through 2019/20, then declining gradually thereafter (Table 1). The present value (PV) of debt-to GDP (PVDY) remains well below its threshold8 throughout the projection period (Figure 1), while a second stock indicator—the PV of debt-to-exports (PVDE)— exhibits large and persistent breaches of its threshold. The threshold breach observed for the PVDE is greatest in 2018/19 (56 percentage points above the threshold) and will not fall below the threshold until 2021/22 (3 years), similar to the results in the last DSA.

12. The profiles of two debt service indicators reflects the maturity profile of NCB. As in the 2017 DSA, debt service-to-exports (DSE) shows a breach, which is now significantly larger and more persistent than in the 2017 assessment. The ratio exceeds its threshold in 2018/19 and peaks in 2019/20 (22 percent, a 7-percentage point breach above the 15-percent threshold) before declining to below the threshold in 2023/24. The indicator then breaches the threshold again in 2025/26 (2.5 percentage points). The deterioration in the DSE indicator reflects the lowering of the threshold used in assessing debt sustainability (previously: 20 percent) based on updated estimates of debt distress probabilities, and the accumulation of new liabilities amounting to US$1 billion by the NBE from a bilateral donor that increase amortization payments from 2020/21.

B. Stress Tests and Additional Analysis

13. The standard stress tests confirm that the key risks are related to the two indicators flagged in the baseline (Figure 1 and Table 3). The PVDY remains below the baseline under all stress test scenarios throughout the projection period. For both the PVDE and DSE ratios, the most significant shock is that to exports: a one-standard deviation shock to export growth9 leads to a 7-year breach for the PVDE indicator, and an 8-year breach for the DSE indicator. The debt service-to-revenue indicator is most significantly affected by a one-time 30 percent nominal depreciation of the currency. Under this scenario, the indicator exceeds the 18-percent threshold in 2019/2020-20/21.

14. A shock to the terms of market financing worsens indicators related to debt service (Figure 5). Ethiopia’s only marketable debt is the Eurobond, which matures in 2024. Under the baseline, both the near-term gross financing need and market perception of risk (the spread between the yield of the debt and the EMBI) remain below the thresholds that signal heightened risk. A shock to the financing terms would substantially worsen the debt service indicators, particularly the debt service-to-export ratio.

PUBLIC DEBT SUSTAINABILITY ANALYSIS

15. External debt accounts for about 56 percent of total public and publicly guaranteed (PPG) debt (Text Table 4). As at end-June 2018, total PPG debt amounted to 61.8 percent of GDP,10 an increase of 4 percentage points compared to June 2017, largely due to an increase in the domestic currency value of external debt outstanding. This mainly reflected the devaluation of the birr in October 2017. Domestic debt made up 44 percent of total debt, with domestic debt of the central government accounting for 21.4 percent of this, and the remainder corresponding to SOEs. The bulk of the domestic debt of the central government is owed to banks, primarily the NBE, largely reflecting advances to finance the budget. The remainder mainly comprises Treasury bills held by commercial banks. Domestic borrowing by the SOEs, whether through loans or bond issuance, was entirely from domestic banks.

Text Table 4.

Ethiopia: Composition of Public and Publicly-Guaranteed Debt

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Source: Ethiopian authorities, IMF staff calculations.

Includes external liabilties of the National Bank of Ethiopia.

16. Overall public debt does not flag additional risks to those stemming from the external debt (Figure 2). The present value of total public debt stays well below the threshold of 55 percent of GDP in the baseline and under all scenarios considered throughout the projection period. This baseline assumes a gradual increase in domestic interest rates, achieving positive real interest rates by 2030/31, and a gradual shift away from external financing towards domestic financing as domestic financial markets develop. This development assumes a gradual phasing out of monetary financing of the government by the NBE. The debt service burden is expected to reach 4.4 percent of GDP in 2028/29 as the lower annual amortization arising from a gradual shift to domestic debt of longer maturities offsets the increase in domestic interest rates due to a shift to market-determined interest rates and greater use of debt of longer maturities.11 Looking at the stress-tests to public debt, the combined contingent liabilities shock results in the largest impact on all the ratios.

C. Decomposing Debt Developments and Realism of Projections

17. The debt and macroeconomic projections underpinning this 2018 DSA are not significantly different from the previous 2017 vintage (Figure 3). The accumulation of debt in Ethiopia over the last 5 years has been primarily driven by the investment activity of SOEs. Going forward, the DSA assumes that the authorities will continue their policy of strictly limiting external borrowing, especially NCB, and as such debt accumulation will be lower than in the last 5 years for which data is available. The projected rate of debt accumulation is significantly below the median observed for other low-income countries (LICs), but the authorities’ disciplined implementation of policies since 2015/16 accords with the projected path. The current account deficit was the main factor behind the worsened external debt dynamics in the most recent 5-year period—which was partly offset by favorable contributions from growth. Looking forward, GDP gains and a narrowing current account deficit should underpin improvement in external debt. Higher domestic interest rates will likely weigh on future domestic (and hence overall) debt dynamics.

18. The macroeconomic projections are consistent with historical patterns and those observed in other LICs (Figure 4). In particular, the amount of fiscal adjustment assumed is close to the median observed for LICs historically and would bring Ethiopia’s fiscal deficit close to its historical average. The key component of the policy adjustment falls on the larger public sector, mainly the SOEs, which has been ongoing since 2016/17. This also accounts for the markdown in public investment projections in the near term relative to earlier DSAs, while over the medium term, private investment, including FDI, is expected to play an increasingly larger role in driving growth. While plausible, the macroeconomic and debt assumptions underscore the ambitious scope of the adjustment policies. Slippages could therefore further affect debt sustainability.

ASSESSMENT

19. The external DSA confirms that Ethiopia remains at high risk of debt distress. While export revenue and volumes in 2017/18 strengthened, declining commodity prices caused overall export performance to fall below expectations, keeping the two indicators related to exports above their respective thresholds in the baseline. The main vulnerabilities remain those that arise from Ethiopia’s narrow export base—concentrated in primary commodities and air transportation—and volatility of export prices. While the export mix has diversified in recent years and manufactured exports are growing at double-digit rates, the levels of most new export lines remain still low. Thus, while external debt is not comparatively high as a percent of GDP (33 percent), it represents a high proportion of exports.

20. While liquidity risks are elevated, the public debt remains sustainable. The level of debt is moderate—61.8 and 33.3 percent of GDP respectively for total and external debt (Tables 3 and 4). The debt level and debt service profiles stabilize and decline in the medium term both under the baseline and alternative scenarios. This stabilization and decline is achieved with a projected fiscal adjustment that is within the three lower quartiles of the cross-country historical distribution (Figure 4)—indicating the fiscal adjustment assumption in the baseline is realistic. In addition, the authorities could undertake stronger consolidation if extreme circumstances required it, since budget control is strong as evidenced by a track record of budget expenditure under-execution when required to meet budgetary targets. The debt structure also reduces rollover risks and hence argues for its sustainability: About 74 percent of external debt is owed to official multilateral and bilateral creditors (Text Figure 2) and a large proportion of it is concessional. A US$ 1 billion Eurobond (with remaining maturity of six years) is the only outstanding external marketable security.

21. Domestic debt dynamics do not pose additional risks; but highlight the need to mobilize domestic savings and expand financial intermediation. The projected path and composition of public debt is predicated on gradually shifting the public financing burden increasingly towards domestic markets. This assumes the development of deeper and more efficient domestic debt markets, with higher remuneration of savers and interest rates increasingly determined supply and demand. In turn, increasingly market-driven public financing costs will require efforts to generate savings in the broader public sector.

22. Adverse shocks to exports would lead to a worsening of debt sustainability prospects. The projected export growth is based on identified projects with positive spillovers and is starting to materialize. However, the large share of commodity exports, subject to volatile prices, and low NBE reserves remain sources of vulnerability. Should reforms stall, particularly regarding promotion of FDI and private sector development, fiscal and SOE savings, and financial markets development, the associated worsening of the external balance of payments could prompt debt stress episodes and adversely affect growth.

23. The authorities have implemented policies to address these risks, broadly in line with staffs’ advice, but these policies need to be stepped up. NCB by SOEs is being reined in. As a result, imports and the current account deficit have declined. The exchange rate was devalued by 13.4 percent in October 2017, and the NBE also adopted a tight monetary policy stance, though credit growth and inflation remain high. The real overvaluation of the birr is estimated to have declined to a range of 12-18 percent from about 20 percent one year prior. However, gaining competitiveness and rebuilding reserves will necessitate a more flexible exchange rate policy and a continuation of measures to further restrict the fiscal and monetary policy stances. The acquisition of non-concessional liabilities by the NBE in recent years to alleviate balance-of-payments financing stress is not sustainable, as debt servicing obligations are posing increasing and substantial risks. Policies to reduce external vulnerabilities should retain their medium-term focus on competitiveness and export diversification. But, in the short term, there is a need to step up efforts at mobilizing domestic savings, curbing debt- and import-intensive public projects, and seeking instead private sector-based funding sources for the provision of public goods and external financing such as concessions to private investors, PPPs (with adequate fiscal safeguards), and privatization proceeds. The fiscal governance framework could be further improved by strengthening transparency and oversight of SOEs, improved communication on the budget preparation and monitoring process, and over extra-budgetary funds maintained by the government.12

Authorities’ Views

24. The authorities agreed that the external position remains vulnerable but consider the conditions for a sustained export take-off are now in place, which would reduce risks and improve the debt sustainability outlook. In addition, the normalization of the political environment should see an increase in FDI and remittance flows from the diaspora, further reducing risks. Medium-term prospects are strong as implementation of announced reforms should sustain growth and narrow external imbalances. Thus, they continue to view the DSA as overstating risks, and considered there was a strong case for the use of judgment to override the mechanical signal. The authorities argued for the exclusion of the debts of Ethiopian Telecom from the DSA, citing the company’s profitability and strong balance sheet position as the basis. Staffs noted the lack of audited financial statements since 2014/15, which the authorities are currently working to rectify, and look forward to examining more recent information in future missions.

Table 1.

Ethiopia: External Debt Sustainability Framework, Baseline Scenario, 2017/18-2038/39

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Assumes that PV of private sector debt is equivalent to its face value.

Includes MLT private sector debt.

Historical averages are generally derived over the past 10 years, subject to data availability. Projections averages is the first year of projection and the next 10 years.

Table 2.

Ethiopia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017/18-2038/39

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

The entire public sector, including SOEs. Definition of external debt is Currency-based.

Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability. Projections averages is the first year of projection and the next 10 years.

Figure 1.
Figure 1.

Ethiopia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–291/

Citation: IMF Staff Country Reports 2018, 354; 10.5089/9781484388600.002.A002

Sources: Country authorities, and staff estimates and projections1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches is also presented.2/ The magnitude of shocks are based on the commodity prices outlook prepared by the IMF Research department.
Figure 2.

Ethiopia: Indicators of Public Debt Under Alternative Scenarios, 2019–291/

Citation: IMF Staff Country Reports 2018, 354; 10.5089/9781484388600.002.A002

Sources: Country authorities, and staff estimates and projections1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches is also presented.
Table 3.

Ethiopia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019-29

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Ethiopia: Sensitivity Analysis for Key Indicators of Public Debt, 2019-29

(In percent)

article image
Sources: Country authorities: and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Includes official and private transfers and FDI.

Figure 3.
Figure 3.

Ethiopia: Drivers of Debt Dynamics–Baseline Scenario

Citation: IMF Staff Country Reports 2018, 354; 10.5089/9781484388600.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.
Figure 4.
Figure 4.

Ethiopia: Realism Tools

Citation: IMF Staff Country Reports 2018, 354; 10.5089/9781484388600.002.A002

Figure 5.
Figure 5.

Ethiopia: Market Financing Risk Indicators

Citation: IMF Staff Country Reports 2018, 354; 10.5089/9781484388600.002.A002

Sources: Country authorities; and staff estimates and projections.

1

This debt sustainability analysis was conducted using the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries (LIC-DSF) that was approved in 2017. Please see ¶10 for a description of the composite index-based capacity assessment and the resultant assessment thresholds.

2

PPG debt covered by the DSA includes foreign deposits of the National Bank of Ethiopia, the debt of the federal government, regional governments, and all state-owned enterprises that borrow externally, except Ethiopian Airlines (EAL). EAL meets the criteria for exclusion set out in the 2017 Staff Guidance Note on the Debt Sustainability Framework for low-income countries (Appendix III) because it is run on commercial terms, has a sizeable profit margin (as reflected in audited accounts published annually), enjoys managerial independence, and borrows without government guarantee. Nevertheless, statistical data published by the authorities includes the debt of EAL. The debt of Ethiopian Telecom (ETC), which also borrows without a government guarantee, does not meet these criteria and is therefore included in the DSA. The authorities continue to request the exclusion of ETC, which could have a material impact on the results of the DSA. An important requirement in this context is the availability of independent annual financial audits and publicly available comprehensive annual reports.

3

Debt relief negotiations with a number of bilateral creditors (Bulgaria, Libya, Russia, and FR Yugoslavia) and commercial creditors from Italy, the former Czechoslovakia, India, and FR Yugoslavia are ongoing. The total principal in arrears to these creditors amounted to US$355 million as of June 30, 2018. Standard HPIC terms were assumed for this amount in the DSA.

4

Including debt outstanding to the Fund.

5

The DSA is based on the Ethiopian fiscal year, which runs from July–June.

6

Financial years mentioned in this paragraph (prefixed by FY) refer to IDA NCB ceilings and correspond to financial years of the World Bank.

7

Based on the conventional birr-per-US dollar basis. The authorities’ announcement of a 15-percent devaluation is on a US dollar-per-birr basis.

8

The new LIC-DSF, similar to the previous one, assesses the risk of debt distress by observing the evolution of selected indicators against predetermined thresholds that are set according to countries’ debt carrying capacities. The indicators are identical to those in the previous LIC-DSF, with the exception of the PV of debt-to-government revenues (PVDR), which is no longer used. This was dropped as it was found to add no new information in the process of determining the risk of debt distress. See IMF Policy Paper on Review of the Debt Sustainability Framework for Low Income Countries: Proposed Reforms, October 2017.

9

This is computed relative to the projections or historical data, whichever is lower.

10

Including external deposits of the NBE.

11

The debt service burden in 2018/19 shown in Figure 2 reflects a methodological change in the new LIC-DSF wherein the entire stock of short-term domestic debt—mainly Treasury bills—that comes due during the year is being treated as amortization of debt. In the previous framework, short-term domestic debt maturing was excluded from debt service payments as it was expected these obligations would be rolled over. Staffs do not consider this methodological change as signaling additional risks: the authorities have been able to roll over this debt readily in the past and owing to the structure of Ethiopia’s financial system and the lack of alternative instruments, staffs expects this to extend in the near term. In terms of magnitude, maturing domestic short-term debt accounts for 74.4 percent of the total public debt service coming due in 2018/19.

12

The Federal Republic of Ethiopia: Staff Report for the 2017 Article IV Consultation (IMF Country Report 18/18).

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The Federal Democratic Republic of Ethiopia: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2018: Issue 354
Publisher:
International Monetary Fund
ISBN:
9781484388600
ISSN:
1934-7685
Pages:
83
DOI:
https://doi.org/10.5089/9781484388600.002
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    Text Figure 1.

    Ethiopia: Net Financing Flows to the Non-Financial Public Sector

    (Percent of GDP)

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    Text Figure 2

    Ethiopia: Composition of Public and Publicly-Guaranteed External Debt

    (As at June 30, 2018)

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    Figure 1.

    Ethiopia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–291/

  • Figure 2.
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    Figure 2.

    Ethiopia: Indicators of Public Debt Under Alternative Scenarios, 2019–291/

  • Figure 3.
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    Figure 3.

    Ethiopia: Drivers of Debt Dynamics–Baseline Scenario

  • Figure 4.
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    Figure 4.

    Ethiopia: Realism Tools

  • Figure 5.
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    Figure 5.

    Ethiopia: Market Financing Risk Indicators

Text Figure 1.

Ethiopia: Net Financing Flows to the Non-Financial Public Sector

(Percent of GDP)
Text Figure 2

Ethiopia: Composition of Public and Publicly-Guaranteed External Debt

(As at June 30, 2018)
Figure 1.

Ethiopia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–291/
Figure 2.

Ethiopia: Indicators of Public Debt Under Alternative Scenarios, 2019–291/
Figure 3.

Ethiopia: Drivers of Debt Dynamics–Baseline Scenario
Figure 4.

Ethiopia: Realism Tools
Figure 5.

Ethiopia: Market Financing Risk Indicators