The Role of Credit in Ethiopia’s Economic Progress
By Tsehai Alemayehu
October 19, 2014
Whether or not Ethiopia’s external debt is growing too fast and too large has become an emerging topic of conversation among many observers. While the government is seeking to tap any and all sources of financing domestic and foreign, observers argue that the country needs to be very careful about acquiring any more loans. As always, the World Bank and the International Monetary Fund are the thought leaders and have taken it upon themselves to point out all of the hidden dangers of the growing external indebtedness. But others, including Ethiopian academics, are chiming in their agreement with the concerns raised by the two multilateral institutions.
The most recent point of attack for those who are concerned with the developments in Ethiopia’s external debt picture has been the exclusion of the external debt of state enterprises from the nation’s official external debt data. They argue that the usual debt assessment metrics such as debt to GDP or debt to export ration will not be meaningful unless the official external public debt data is inclusive of the billions of dollars borrowed by state enterprises such as the national airline and the state telecom monopoly, among others. They argue these institutions are fully owned by the Ethiopian government and as such, even though their indebtedness does not appear in the official ledger of external public debt, the national treasury nonetheless bears the ultimate responsibility for making good on such loans.
On the surface, the argument for correcting the national external debt statistics appears legitimate. And obviously, the metrics of external public indebtedness would be less attractive to future lenders and worrisome to the authorities if the several billion dollars borrowed by these enterprises were lumped with the external debt of the treasury.
Let us be clear, however, what brought this topic to the forefront is not a new discovery of these shortcomings in Ethiopian data is reported or a new realization that the debt acquired by public enterprises is no different than the external debt acquired by the national treasury. Instead, what seems to be driving this conversation is the government’s recent decision to explore the feasibility of issuing Eurobonds. Unlike the loans from bilateral and multilateral institutions which are often earmarked for specific activities and are evaluated on the merits of the projects to be funded, the investment banks which underwrite Eurobonds rely on the general good faith and credit of the national authorities and the funds are available for the national authorities to use for any purpose they deem appropriate. The multilateral financial institutions and others who are now raising their voices appear to be concerned that this gives the government the latitude to do much harm if it accessed this new financing window opening to it in the near future. So, they seek to push the government to “take a poison pill”, as it is called on Wall Street, by adopting a new accounting standard which will magnify the extent of its indebtedness so it would be difficult for the government to access the Eurobond market in a substantial way.
To be sure, it is certainly possible for a country to be too indebted. And if Ethiopia finds itself in such a situation, its external loans can become an albatross that makes it impossible to pursue a flexible development strategy. The situation in Ethiopia today is far from this and I believe that those who push against raising external debt funds are likely aware of this fact.
All of the large major public enterprises in Ethiopia are operated on commercial bases and raise debt on the merits of their commercial viability. As such the argument that Ethiopia should view these entities as extensions of the treasury is bogus. Those who argue that the debt of Ethiopia’s public enterprises constitutes a contingent liability for the government are the very same people who have been advising the government that international telecoms, power companies, foreign airlines, and international banks salivate over the prospect of acquiring the same entities which they now say might become a liability to the state.
The most well-known among the state enterprises such as the CBE, Ethio-Telecom and Ethiopian Airlines have never incurred losses. Not even once. Instead, these highly profitable institutions have been generating surplus which funds part of the huge capital requirements of the nation’s growth agenda. As such insisting that the debt of these commercially operated public institutions be lumped with the external public debt of Ethiopia is no more logical than asking other countries to include corporate and/or household debt in their national debt data.
As stated earlier, I suspect the real concern of those who speak against Ethiopia accessing the international bond market is a concern of whether the Ethiopian authorities have the discipline to use it responsibly. I view the situation quite differently. If in fact the markets are inclined to absorb a decent amount of Ethiopian paper, say USD$10-15 billion, it would be irresponsible for the authorities not to tap the markets and secure the funds the country’s mega projects are starving for. Many projects ranging from the rail network and the sugar plantations to the power plants have fallen behind schedule, I suspect, for lack of funding. These are highly profitable project which can generate surplus for the many initiatives that have yet to be started. But, perhaps more importantly, these projects will deliver, among others, cheap and reliable power supply, cheaper and more reliable logistics and large quantities of a new exportable commodity. If the nation completes these projects and bring them online, it stands to creates untold new jobs and to transform the international competitiveness of the economy across the all sectors. If the government were to secure substantial external debt funds, it might even make it possible for the treasury to rely less on domestic financing and leave more on the credit trough for the private sector. As readers recall, the magnitude of government local borrowing has been a bone of contention between the government and its multilateral finance partners in Washington.
Certainly, just like households, nations must use credit prudently. But, credit is not to be dreaded. It is what makes possible for nations and individuals to aspire to what is beyond their current means. Allow me to relate to you a discussion I was a party to while visiting my keen folks in rural Machakil Woreda in Gojam last January which clearly illustrates the case in point.
As they often do when my wife and I visit there, many of my keen folks had gathered in my brother’s home for lunch. In the course of our conversations, my wife asked the gathered what they thought of the microfinance institutions we have been reading about. My brother reported that the wisest among them have gotten rich accessing loans from these institutions. But several others jumped in in protest, complaining that these institutions entrap people in a never ending debt trap. I asked how they worked and if they can tell us of cases they knew of.
One among the gathered related to us the following story. A few people, he said took advantage of the credit facility to buy an old cow or an ox and supplies to fatten and sell the animal to the meat packing houses. He said that you could buy the animal for between Birr3,000-4,000, spend another Bir900-1,200 for deworming the animal, for feed and for fencing to keep the animal separated from the rest. Then 4-6 months later, the now healthier and bigger animal would fetch about Birr12,000-14,000, a return of more than 100%. One can repeat this cycle at least once and may be twice during the year before the loan is due at the end of the year. This opportunity is available on to those who have 4,000 to 5,000 birr in their pockets or those who can access the microfinance institution could.
He continued to relate to us about one of his neighbors who, having been approved for a loan by the microfinance firm, was so excited about his prospects that he spontaneously invited all of his buddies to the local bar to buy them “yefinTir” to celebrate the occasion. By the end of the night, he had gone through much of the loan funds and did not have enough money to buy the cow. He had to sell his own milk cow to pay the loan off. He cracked, “the fool thought the loan was his profit”.
There is no reason here for dreading critically needed capital simply assuming that the authorities must be prone to foolhardiness. Yes things can go wrong. Nations have gotten in trouble acquiring excessive external debt, structuring their debt improperly and/or financing white elephants with borrowed money. Interest rates are very attractive today and Ethiopia may be able to borrow at something like LIBOR+3% or LIBOR+4%, that is about 3.75% to 4.75% today. Yet Ethiopia has no control over future LIBOR rates. If it were to jump to 4% in 2 years, Ethiopia can be forced to pay rates or 7-8% for the balance of the bonds terms. While there is nothing Ethiopia can do about the future course of international interest rates, there is much it can do about the term structure of its bonds to minimize the damage which might arise from interest rate volatility.
The Ethiopian economy seems to be poised just short of what Professor W.W. Rostow calls ‘the take-off into self-sustained growth’. It would be the height of all foolishness to waste the opportunity for fear of what might go wrong.
* The author is a retired academic and a onetime official of the National Bank of Ethiopia. He lives in Atlanta, Georgia and can be reached at email@example.com.
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