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Debt Burden and shortage of foreign exchange paralyze Ethiopia’s economy

Avatar: Hagos Gebreamlak
Hagos GebreamlakAugust 26, 2021
City: Addis AbabaAnalysis
Debt Burden and shortage of foreign exchange paralyze Ethiopia’s economy

The Ethiopian economy is suffering from spiking inflation. Infrastructure projects and other investments are being suspended due to a hard currency shortage.

The economy has experienced extreme volatility over several years for a number of reasons. These include popular protests against the then ruling party, Ethiopian People's Revolutionary Democratic Front (EPRDF); the global COVID-19 pandemic; plus the ongoing armed conflict and instability across the country. 

In the midst of this uncertainty, galloping inflation has become the norm. In 2020, the average inflation rate in Ethiopia was 20.35% compared to the previous year. In July of 2021 food inflation scored 32% and the headline inflation reached 26.4pc, which is the highest in 10 years.

As a response to the rising cost of living, government authorities have put price caps on certain commodities. Last week Harari regional state imposed a price ceiling on 41 items, including edible oil, teff, beef, and cement which was aimed at stabilizing the market. Regional states are confusing matters by acting individually to stabilize the market. The Somali state council recently legislated to establish a new enterprise that imports food items.

Adanech Abiebie, the Deputy Mayor of Addis Ababa City Administration,  has blamed ‘greedy merchants’ for the commodity shortage and the resulting surging prices. She threatened that the government will take serious action against those found responsible for creating inflationary pressures and artificial shortages.

In addition to these, the Ethiopian economy has been suffering from huge debt stress which is owed to various state and non-state lenders. Ethiopia's external debt has reached 29 billion dollars accounting for 27% of its GDP.

The country is applying to its debtors for a debt extension of several more years. But the move does not seem to be producing positive results. The Chinese Exim Bank has recently withheld the disbursement of 339 million dollars in loans to Ethiopia amid a debt extension negotiation of five years with a one-year grace period.

China has been one of the major lenders to Ethiopia. Ethiopia owed China Exim Bank alone 7.5 billion dollars.

Since the reforms endorsed by the previous ruling party and the coming of Prime Minister Abiy Ahmed (Ph.D.) in 2018, major international lenders including the World Bank and International Monetary Fund (IMF) promised loans and financial assistance to Ethiopia. The loan pledges were part of an initiative by the new administration to liberalize the economy and privatize state-owned enterprises by the Ethiopian government.

The government then announced the Homegrown Economic Reform Program to restructure the country’s economy. The program obtained financial support from the Bretton Woods Institutions and other donors.

The IMF approved in December 2019 three billion dollars in loans for Ethiopia aimed at supporting the Homegrown Economic Reform Program and to help the country address foreign exchange shortages, reduce debt vulnerabilities, and enhance domestic revenue mobilizations.

However, Ethiopia's major lenders are reluctant to disburse more than 11 billion dollars in loans that should have been released by March 2021. The lenders fear that additional loans to the country could further weaken its ability to repay. The International Development Association (IDA) has not yet released 3.3 billion dollars to Ethiopia. The International Monetary Fund (IMF) and China have not disbursed 2.7 billion dollars and 1.4 billion dollars, respectively, to the country.

The suspension of loans to Ethiopia could greatly hurt the country’s economy. Because of the disbursement suspensions by lenders, megaprojects are being halted. Eight mega projects have been suspended due to the loan withholding by the Exim Bank of China.

Due to this and other reasons, foreign currency shortage has hit the economy of Ethiopia. The local currency is being highly recessed from time to time, decreasing its purchasing value. The US dollar at the parallel market is sold for up to 60 Birr.

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A PIECE BYHagos Gebreamlak

Hagos has a BA degree in Political Science and International Relations from Addis Ababa University. He worked for Addis Fortune (Independent News & Media Plc) as a reporter. Hagos is currently working as a fact-checker at Addis Zeybe.