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.

The framework enables debtor countries to seek an IMF programme to strengthen their economies and renegotiate their debts with public and private creditors. But such a debt restructuring for Ethiopia would face barriers due a lack of transparency, analysts say.

Any attempt to reconcile balance of payments and published public external debt figures with underlying debt-creating flows shows information gaps and supports “a narrative of opaque lending”, argues Irmgard Erasmus, senior financial economist at NKC African Economics in Cape Town.

Along with Djibouti and Zambia, Ethiopia’s dealings with China “raise the probability of higher-than-estimated debt contracted by extra-budgetary units (EBUs) as well as potentially large contingent liabilities,” she writes in a research note.

China does not publish official or non-official bilateral debt agreements with central governments or state-owned enterprises, she notes.

The channel through which private-sector participation in the framework can be forced is not clear, Erasmus says.

“The agreement of the principles of the G20 Common Framework is positive but negotiations in actual restructurings are likely to be challenging,” says Mark Bohlund, senior credit research analyst at REDD Intelligence in London. Lack of clarity on what is owed to China is one obstacle. While he hasn’t seen any firm evidence of Chinese loans to Ethiopia being understated, there is “less transparency” on Chinese lending, he says.

Chinese loans aren’t the only problem.

The fact that India and Turkey, which are non-Paris club G20 lenders, are the largest bilateral creditors after China, may complicate an Ethiopian restructuring, Bohlund says.

A further stumbling block is reluctance from debtor nations to participate in fear of adverse credit rating actions. African countries intending to tap international debt markets this year, such as Tunisia, Ghana and Kenya, may be reluctant to join the initiative, Erasmus says.

Unrealistic growth outlook

For Africa, recent sharp declines in external borrowing costs for many countries amid global optimism on emerging markets provides a “silver lining” to the cloud of debt woes, according to Jacques Nel, head of Africa macro at NKC. “Markets are now open to lending to many sub-Saharan African sovereigns, which could provide the necessary fiscal breathing room in 2021.”

But official Ethiopian projections for annual economic growth of 8.4% are dismissed by Erasmus. NKC predicts growth of 2.2% given the “dire fiscal position and balance of payments risks.”

“The near-term outlook is clouded by political tensions ahead of the June election, reputational risks related to armed conflict in Tigray, an upsurge in desert locust infestation and forex shortages,” Erasmus writes.

That means the long-awaited liberalisation of Ethiopia’s high-potential sectors such as telecommunications and banking is now urgent. This would be the “crucial first step in addressing structural vulnerability and lowering government debt dependence,” Erasmus argues.

Dual-track danger

Zambia, heavily indebted to China, in November became the first African country to default on its debt during the COVID-19 pandemic. Even the G20’s less expansive debt service suspension initiative (DSSI), which allows repayments to be deferred but does not provide for writing off debt, is hard to implement in the absence of transparency, says Harry G. Broadman, managing director at Berkeley Research Group LLC in Washington.

“The mode and channels through which Chinese lending is made to poor countries present thorny challenges for the effective functioning of the DSSI,” he says.

Chinese state-owned entities do not face strong incentives to follow market standards of transparency. And on the borrower side, there can be disincentives or bans on fully disclosing the terms and magnitude of debts to Beijing, he adds.

A DSSI may have only a limited impact if a debtor government is unable to come clean, Broadman says. “Perversely, what may emerge, in effect, is a dual track paradigm for debt relief, one pertaining to bona fide official flows under the auspices of the DSSI, and the other focused on Chinese debt,” he says. “This would hardly be a framework for sound macroeconomic management in recipient countries.”

Bottom Line

As was the case with Zambia, opaque debts to Chinese creditors are likely to continue to hamper attempts to provide African debt relief.