The Federal Democratic Republic of Ethiopia: Requests for Purchase Under the Rapid Financing Instrument, Debt Relief Under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-year Arrangements Under the Extended Credit Facility and the Extended Fund Facility, and Reduction of Access Under the Extended Fund Facility Arrangement—Debt Sustainability Analysis

Requests for Purchasing under the RapidFinancing Instrument, Debt Relief under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-Year Arrangements under the Extended CreditFacility and the Extended Fund Facility, and Reduction of Access under the Extended Fund Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia

Abstract

Requests for Purchasing under the RapidFinancing Instrument, Debt Relief under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-Year Arrangements under the Extended CreditFacility and the Extended Fund Facility, and Reduction of Access under the Extended Fund Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia

Ethiopia: Joint Bank––Fund Debt Sustainability Analysis1

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This Debt Sustainability Analysis (DSA) was conducted using the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries (LIC-DSF) that was approved in 2017.

Ethiopia’s public and publicly guaranteed debt is deemed sustainable, but downside risks and liquidity pressures have increased due to high uncertainty surrounding the intensity and duration of the COVID-19 outbreak and its implications for the economic outlook.1, 1 Ethiopia’s debt vulnerabilities stem from rising debt servicing needs, an overvalued exchange rate, and a small export base. The authorities have taken steps to reduce vulnerability by controlling external borrowing, debt service reprofiling, and committing to move toward market-based exchange rate and FX market liberalization, both of which should improve FX availability and boost private sector activity and exports. Under the baseline, two external debt indicators breach their thresholds. As a result, Ethiopia continues to be assessed at “high” risk of debt distress. The authorities have committed to undertaking additional reprofiling by the first review under the ECF-EFF arrangements to reduce external debt servicing needs relative to exports, with an aim of achieving a “moderate” risk of external debt distress rating. However, against the backdrop of the pandemic, the capacity to absorb shocks has declined indicating liquidity pressures. As such, a larger or more persistent impact of the COVID-19 shock than presently assumed could threaten debt sustainability. Steadfast implementation of FX reforms would reduce these pressures over the medium term and safeguard Ethiopia’s capacity to repay the Fund. Monitoring of contingent liabilities, the main vulnerability of overall public debt, and continued improvement in debt management and reporting are recommended.

Macroeconomic Outlook. In the context of a rapidly changing global situation due to COVID-19, the near-term macroeconomic outlook has been revised since the 2019 Article IV DSA. Growth is revised down to 3.2 percent and to 3.7 percent in 2019/20 and 2020/21, respectively, because of the expectation that the COVID-19 outbreak, including the related global slowdown, will have a significant impact on economic activity. The authorities have already put in place social distancing and other containments measures. Real GDP growth will converge to 8 percent over the medium term. Against this challenging global backdrop, exports and remittances are projected to contract significantly, but weak domestic demand and a decline in foreign direct investment will also lead to a contraction in imports. Improved terms of trade (e.g., higher coffee and lower oil prices) will also help the trade balance. Exports of services, the main source of Ethiopia’s export earnings, are expected to be severely impacted by travel restrictions, but a concomitant reduction in services imports will cushion the impact on the services balance. Thus, the current account deficit is projected to modestly improve relative to a year ago. In 2020/21, exports are expected to recover on the back of a global recovery. Over the DSA projection horizon, staff has revised down export growth given changes in global assumptions, but significant downside risks remain. Inflation is expected to remain elevated in 2020/21 and will moderate to the central bank’s single-digit objective by late 2021. The fiscal deficit is now projected to temporarily widen in 2019/20 and 2020/21 as the economic slowdown impacts revenues, while spending needs increase to respond to the COVID-19 shock.

Financing Strategy. Urgent balance of payments needs have arisen due to the COVID-19 shock, which are expected to be covered by Fund financing—which includes requests for assistance under the Rapid Financing Instrument (100 percent of quota or SDR 300.7 million) and for debt relief under the Catastrophe Containment and Relief Trust (included under exceptional financing in Table 1 and under debt relief in Table 2)—concessional financing from donors, and lower reserves. Given delays in the first review discussions under the ECF-EFF arrangements resulting from COVID-19 and to comply with applicable normal access limits, the authorities have also requested the Fund to rephase access under the ECF-EFF arrangements and to reduce the second and third EFF purchases, resulting in a reduction of overall access by 50 percent of quota under the EFF arrangement. Under the ECF-EFF arrangements, Ethiopia is subject to continuous performance criteria applicable to contracting or guaranteeing of concessional (a non-zero limit) and non-concessional (a zero limit) external debt. Financing needs will be revisited during the first review under the ECF-EFF arrangements. The World Bank recently approved a COVID-19 project for US$82.6 million and is exploring modalities for additional support.

Table 1.

Ethiopia: External Debt Sustainability Framework, Baseline Scenario, 2017–39

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt. Presented on fiscal year basis (e.g., 2020 referes to fiscal year ending in June 2020).2/ Derived as [r – g – ρ(1+g) + εα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt.3/ Includes exceptional financing (i.e., changes in arr ear s and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution fr om price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Ethiopia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–39

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: general government, SOEs (excl. Ethiopian airlines), and the central bank . Definition of external debt is Residency-based. Presented on fiscal year basis (e.g., 2020 referes to fiscal year ending in June 2020).2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ 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.5/ 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.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Realism Tool. The realism tool indicates that the assumed fiscal adjustments could have downside risks. One of the objectives of the ECF/EFF-supported program is to address vulnerabilities arising from nonfinancial public sector balance sheets and there are implementation risks. However, the authorities have demonstrated in recent years that they are aware of external debt vulnerabilities and have reined in borrowing by public enterprises. On the growth projections, the realism tool implies upside risks to staff projections in the near term, but these results reflect past high debt-financed rates of growth that have now become unsustainable, and do not account for the COVID-19 shock. Given the considerable uncertainty around the impact of COVID-19, staff believes there are downside risks to growth in the near term.

DSA Baseline and Alternative Scenarios. The DSA baseline includes the first phase of debt reprofiling under the ECF-EFF arrangements for which firm assurances were received at the time of the approval of the arrangements in December 2019. This phase of reprofiling is expected to generate savings of about US$1.65 billion over 2019/20–2022/23. The authorities intend to request debt service relief under the G20 initiative, but these are not yet included in the DSA baseline, pending a formal request and clarification on the underlying technical details. Similarly, the second phase of debt reprofiling under the ECF-EFF arrangements will be included once specific and credible assurances are received, expected by the first review of the ECF-EFF arrangements.

Figure 1.
Figure 1.

Ethiopia: Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2020–30

Citation: IMF Staff Country Reports 2020, 150; 10.5089/9781513542935.002.A002

Figure 2.
Figure 2.

Ethiopia: Indicators of Public Debt, Baseline Scenario, 2020–30

(In percent)

Citation: IMF Staff Country Reports 2020, 150; 10.5089/9781513542935.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Table 3.

Ethiopia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2020–30

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, 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 3.

Ethiopia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2020–30 (concluded)

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, 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, Baseline Scenario, 2020–30

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Figure 3.
Figure 3.

Ethiopia: Drivers of Debt Dynamics – Baseline Scenario, External Debt

Citation: IMF Staff Country Reports 2020, 150; 10.5089/9781513542935.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Ethiopia: Realism Tools, Baseline Scenario

Citation: IMF Staff Country Reports 2020, 150; 10.5089/9781513542935.002.A002

Figure 5.
Figure 5.

Ethiopia: Market-Financing Risk Indicators, Baseline Scenario

Citation: IMF Staff Country Reports 2020, 150; 10.5089/9781513542935.002.A002

Sources: Country authorities; and staff estimates and projections.
Figure 6.
Figure 6.

Ethiopia: Qualification of Moderate Category, Baseline Scenario, 2020–301/

Citation: IMF Staff Country Reports 2020, 150; 10.5089/9781513542935.002.A002

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
1

Public debt data includes Ethiopian Airlines, but this information is excluded from the DSA. Ethio-Telecom is included, in line with the December 2019 DSA, although the authorities view it as meeting the criteria for exclusion.

1

As reported earlier, Ethiopia owes arrears to Libya, Bulgaria, Russia, and former Yugoslavia, totaling about US$538 million, which are deemed away under the policy on arrears to official bilateral creditors, as the underlying Paris Club agreement is adequately representative, and the authorities are making best efforts to resolve the arrears. Furthermore, there are about US$8.2 million worth of external arrears (principal and interest payments combined) to commercial creditors, all pre-dating the1990s, from former Czechoslovakia, India, Italy, and former Yugoslavia. The authorities are continuing to make a good faith effort to reach a collaborative agreement with these creditors.

The Federal Democratic Republic of Ethiopia: Requests for Purchasing under the Rapid Financing Instrument, Debt Relief under the Catastrophe Containment and Relief Trust, Rephasing of Access Under the Three-Year Arrangements under the Extended Credit Facility and the Extended Fund Facility, and Reduction of Access under the Extended Fund Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia
Author: International Monetary Fund. African Dept.
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    Ethiopia: Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2020–30

  • View in gallery

    Ethiopia: Indicators of Public Debt, Baseline Scenario, 2020–30

    (In percent)

  • View in gallery

    Ethiopia: Drivers of Debt Dynamics – Baseline Scenario, External Debt

  • View in gallery

    Ethiopia: Realism Tools, Baseline Scenario

  • View in gallery

    Ethiopia: Market-Financing Risk Indicators, Baseline Scenario

  • View in gallery

    Ethiopia: Qualification of Moderate Category, Baseline Scenario, 2020–301/