by Mary Ongore
Photo: ILP’s Mary Ongore with Afrodad and event participants, Ethiopia
Executive Summary
Even though Ethiopia has been one of the fastest growing economies in the world for the past two decades it is in high risk of debt distress. The country’s public debt has accumulated significantly for several reasons. Among these include the need to finance huge infrastructure and social investments; domestic and external shocks such as civil war, the Russia-Ukraine war and drought; and structural macro-economic imbalances amidst weak export performance. Given that unsustainable debt limits the amount of public spending which then increases poverty levels, it is essential that prudent debt management is practiced. This blog considers the legislative and regulatory framework of taking on and managing debt in Ethiopia. It highlights the gaps in the current framework and makes recommendations that could be adopted.
Introduction
AFRODAD and ILP have been working together to conduct several case studies on the legislative and regulatory framework surrounding taking on new debt and managing existing debt in Africa. This study is timely as several African countries are either in debt distress or at a high risk of debt distress. Moreover, governments with unsustainable debt levels are forced to service debt payments at the expense of providing social services and investing in development. Ethiopia was chosen as one of the case studies as it is currently in debt distress. This means that it is unable to fulfil its financial obligations and debt restructuring is required.
Prior to 2023, Ethiopia’s external debt to GDP ratio was about 22.6%. This had risen to 46.37% as of December 2023. Moreover, it has $7.7 billion in external debt with $5.2 billion being owed to private creditors.
In late December 2023, Ethiopia became the third African country to default on its $33 million coupon (interest) payment on its only international government bond. In anticipation of its default, on 15 December 2023, S&P Global, an organisation that expresses independent opinions on borrowers’ creditworthiness, downgraded the bond to “default”. This means that, according to S&P Global, Ethiopia would fail to pay the principal and interest on its debt on the due date.
To manage its burgeoning debt, in 2020, Ethiopia participated in the Debt Service Suspension Initiative which allowed it to temporarily suspend its debt service payment. Subsequently, Ethiopia joined the G20 Common Framework. This brought on board private sector bondholders as well as bilateral creditors. Relief under the Common Framework has however been criticised for its slow pace and its inability to compel private creditors to engage in the restructuring.
ILP’s pro bono lawyers conducted a study to evaluate Ethiopia’s legal and institutional framework on taking on new debt and managing existing debt. Validation and national advocacy sessions were conducted to give contextual feedback. The study was presented by ILP to a variety of attendees, including representatives and officials from the Ministry of Finance, Representatives from the House of Peoples’ Representatives (HoPR), and various CSOs.
Gaps and challenges in the legislative and institutional framework for debt contraction and management of sovereign debt
Following the discussion on the safeguards that exist in the law, the gaps and challenges currently faced in Ethiopia were highlighted.
Key among the gaps in the legislative framework for taking on sovereign debt is the lack of a robust framework for public participation. Despite the requirement of approval from the HoPR, there is no scope for participation of the members of the public. Such a provision would ensure that there is scrutiny of debt instruments that directly affect the citizens of Ethiopia.
Another gap is the lack of requirement for the involvement of the HoPR when taking on domestic debt, unlike requirements for taking on external debt.
In addition, the terms and conditions of sovereign debt contracts negotiated by the Ministry of Finance and lenders were found to be unfavourable. This was due to a lack of capacity in the Ethiopian negotiating teams. As such, the negotiations did not take place on equal terms with external lenders.
There is also minimal accountability of persons mandated to contract sovereign debt. While there are general penalties for legal violations during the management of public monies, there are no specific penalties for persons violating the law when contracting sovereign debt.
Recommendations
Various recommendations were made during the session.
The participants underscored the need for public participation when taking on sovereign debt. This process would be better scrutinised if CSOs were involved.
In addition, the importance of having minimum terms and conditions of debt contracts was underscored. These would need to incorporate standard clauses on force majeure, shocks and dispute resolution among others. To this end, it was suggested that a model sovereign debt contract be developed.
The need to build capacity in debt negotiation was also highlighted. A representative from the HoPR indicated that they often did not know how to evaluate debt instruments and often engaged in a rubber-stamping exercise.
The importance of having a debt cap was also discussed. Although this existed previously, it was repealed in 2007. Other states’ experience on this was welcomed and it was recommended that there should be a monetary limit on the debt incurred or a fixed limit of debt as a percentage of GDP.
It was also agreed that it is important to have specific penalties for the violation of laws governing sovereign debt. This would ensure that duty bearers could be held accountable.
In addition, the importance of budget tracking also underscored. This would ensure that the debt incurred was used for specific projects and would curb the practice of debt incurred being used for purposes other than what the debt was taken on for.
Finally, the need for the effective monitoring of debt guaranteed for State Owned Enterprises was highlighted. This would build a full picture of what the debt repayment obligations were.
Conclusion
In a bid to manage its public debt, it is imperative that these recommendations are considered to ensure that debt levels are sustainable. This will ensure that debt repayment obligations do not interfere with Ethiopia’s ability to fund public services and to implement its development agenda. It should also be noted that Ethiopia’s $1 billion bond matures in December 2024 and significant changes will need to be made to ensure that it will not default on its repayment.
Mary Ongore is Legal Manager of our Sustainable Finance Programme. Mary is a Kenyan legal professional with extensive experience in taxation including research on international tax, fiscal policy, illicit financial flows and human rights aspects of tax policy. For more information or to support ILP’s work, visit our website or contact us.