This piece is the second of a two part series. The first part, Ethiopia’s Rapidly Inflating Debt Mountain, has set the background by presenting and discussing facts and figures on Ethiopia external debt and also providing a highlight of domestic debt. This part of the series will build on part I, it focuses on explaining the attitude of the Ethiopian government to debt and the behavior of lenders, particularly those of the multilateral agencies.

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“There are big mountains ahead of us, but we will move them”, said Ethiopia’s Minister of State for Finance Eyob Tekalign while presenting the so-called “Home-Grown Economic Reform Program” to a gathering of business leaders and international organizations early September 2019.

Apparently the event was organized to publicize Ethiopia’s economic reform and make a plea to donors to pledge funds.  The Ethiopian authorities have estimated that implementing the economic reform program would require about $10 billion. 

It has been a while since the Ethiopian authorities have developed a rather strange habit of indulging in designing complex and costly economic development programs with exceptionally lofty but not so smart goals.

These have often been done without bothering to economize anything along the way.  The external debt distress discussed in part I of this piece is a logical outcome of such a bizarre behavior that has been allowed to prevail for extended period of time. 

It was ironic that Ethiopia’s Minister of Finance used the expression “mountains”. What he had in mind was challenges he envisaged in implementing the economic reform programs and he was keen to get as much loans as possible to move the “mountains”, that is to say to overcome the hurdles. 

Little did the Minister know that he was in the meantime engaged in the process of topping up an already formidable mountain of debt which would be even more challenging to move in the foreseeable future. 

In that same gathering, Vera Songwe, the Executive Secretary of the UN Economic Commission for Africa (ECA), warned Mr Tekalegn that Ethiopia should begin to reduce its debt burden. She specifically drew his attention to the need to focus the economic reform program on less costly reforms with far reaching consequences, such as improving the ease of doing business and access to electricity, etc.  

In the end, the Ethiopian authorities have not adhered to Songwe’s advises, instead they relentlessly pursued the option of securing pledges for loans from multi-lateral and bilateral agencies among others.  Sure enough, their efforts culminated in a chain of multi-billion dollar deals signed early this month. 

Contradictory story lines

But why have the Ethiopian authorities doggedly been committed to borrow no matter what?  The answer to this brings us closer to the core element in the behavior of the government.  I would like to explain this in terms of what I call the reformist administration’s  ambivalent attitude to the EPRDF legacy.

This ambivalence takes a form of inconsistent story lines coming from PM Abiy’s administration.  To use the Soviet analogy, Gorbachov’s glasnost and perestroika involved openness and restructuring in both political and economic domains. 

On the other hand, PM Abiy Ahmed’s reformist agenda involved full-fledged openness and restructuring in the political domain but much less so in the economic domain.

PM Abiy Ahmed and his cabinet members are the same people who were part of the old EPRDF who have convinced themselves and the rest of the world that Ethiopia has experienced miraculous economic growth. 

The fact is that not even a substantive normal economic growth has taken place, never mind a miraculous one! This claim can be substantiated by making references to PM Abiy Ahmed administration’s contradictory story lines within the economic domain itself. 

On the one hand, government media amplifies catastrophic failures of almost all mega projects planned under the growth and transformation plan, e.g. sugar corporations, the farcical Military Engineering Complex (METC), etc. 

Ironically, Ethiopia’s so called miraculous growth story hinged on mega public investments, the same projects that the officials themselves have proven to be total failures!

Ethiopia’s agriculture is in dire state, close to a fifth of the population survive on food aid. Some on emergency and others hidden under varieties of safetynet programs. 

Ethiopia’s manufacturing has about the same share in Gross Domestic Product as in 1991, that is to say in nearly 30 years, no meaningful structural transformation has taken place in the Ethiopian economy. 

On the other hand, and bizarrely, the same administration declares that they are committed to building on “economic successes and achievements” of the previous decades.

Obviously, the story related to the micro-foundations (project failures) contradicts the macro level story, that is GDP growth, the only evidence EPRDFites could adduce to substantiate their claim on economic success story.   

There could be a number of possible explanations as to why the reformist regime chose to stick to the untenable economic success story narrative. 

First, as they were part and parcel of the old EPRDF regime, the reformists themselves might have heard this narrative repeatedly over the years so much that they might think it is actually a fact. 

Second, it is possible that the reformist leaders wanted to hung on to something from their past, retain something positive from their past to solidify the EPRDF legitimacy, otherwise, they might have feared, discrediting EPRDF legacy entirely would amount to lacking legitimacy to lead the reform process itself.

In this process, the reformist leaders ended up with inconsistent view points, oblivious to the fact that there is nothing more deadly in terms of tarnishing their own legitimacy and credibility than embracing EPRDF’s deceptive, dishonest, and bankrupted economic legacy.  

Ever since PM Abiy Ahmed came to office, I have made repeated pleas that his administration should disown Ethiopia’s Rapid Economic Growth Narrative for their own sake.  I have also argued it would be contradictory to pretend to do away with EPRDFs democratic centralism (in politics) while openly espousing and approving EPRDF’s developmental state model.

What have these muddled viewpoints got to do with the Ethiopia’s debt crisis? 

The relationship is straightforward! EPRDF economic success story is not tenable because large proportions of loans taken during the previous decades have been embezzled and transferred abroad.  Over three years ago, in a piece entitled Rush for the exits: Why is Ethiopia’s capital flight accelerating?, it was explained that on average annual outflow of illicit funds from Ethiopia was $2.6 billion during 2004 and 2013, that is to say $23billion during that period. 

It is possible that the situation got worse during the period 2013 to 2019.  Even if we assume the same rate of illicit capital out flow per year as before, then total capital flight between 2004 and 2019 would amount to $39 billion. This amounts to diverting the entire loan funds and still transferring abroad an extra $11 billion from domestic sources.

Cover ups

As soon as he took office, PM Abiy Ahmed was immediately preoccupied with the external loan budern. That external debt would prove to be his administration’s most severe headache was clear from his unexpected announcement so early in his term to sell a string of public enterprises, most of which had been used during the previous decades as vehicles for fund embezzlement and hence capital flights.

PM Abiy Ahmed chose to pick on privatization as top most economic reform program, not because that is what was required to energize and revitalize the Ethiopian economy but because he had no other options to pay off and reduce the country’s external. 

To that effect, the government sought assistance from multilateral and bilateral donors to urgently send in all known accountancy firms to revalue the assets and speed up the process of privatization.  Astonishingly, the world’s top most important accountancy and auditing firms (the so called Big Fours) have been parachuted into Addis Ababa.

It seems that process was not encouraging, since those public enterprises were engulfed in debt and their networth would not raise any meaningful amount of funds to pay off the country’s debt.

Having stumbled with privatization, the authorities lately pulled out another trick from their sleeves: the home grown economic reform program, which was announced a year after the process of economic program was launched with privatization. 

The latest multi-billion dollar loans are justified on the ground of financing Ethiopia’s home grown economic reform program.  As a justification for the 700% above quota loan to Ethiopia, the IMF wrote a preamble headed as Six Things to Know about Ethiopia’s New Program.

In this, the IMF go out of their way to convince the rest of us that: (a) the reform program was home-grown, (b) the loan would finance foreign exchange shortfalls, (c) reduce inflation and undertake exchange rate reform, (d) finance productive safetynet, (e) improve business environment, and boost investment; (f) create vibrant financial sector.

It is worth noting, the IMF started the list swearing that the reform program is home-grown (Addis Consensus), but they went ahead and listed classic Washington Consensus type reforms [especially, (d), (c) and (f)]. What is casually listed last (creating a vibrant financial sector), is by far the most important component IMF and the World Bank have cooked up for Ethiopia.

This is elaborated in a separate document produced by the world bank, entitled Exiting Financial Repression: the case of Ethiopia. Ironically this document was published in December 2019, the same month Ethiopia signed multi-billion loan deals with the multi-lateral agencies. 

This is not a place to dwell on it but the document reads as if it was prepared during early 1980s when IMF and World Bank were pushing the disastrous structural adjustment programs onto developing countries.

I can understand IMF and World Banks’ justification to extend loans to Ethiopia. It is not just they were doing their job as bankers to lend on behalf of their stakeholders but also geopolitics bears a huge weight in these decisions. They would say, if we don’t, China would lend Ethiopia anyway.

What I completely fail to comprehend is this: why the Ethiopian authorities are trying to convince us that economic reform costs multi-billion dollars? Why should economic reforms cost that amount of money? 

Economic reform is all about changing ways of doing things. It is about removing hurdles, red tapes, bureaucratic procedures, which stand in the way of doing business. 

Above all, why does IMF list financing productive safetynet programs (d in the list above) as justification for its loans? Safetynets are paid to poor people in birr, not in dollars.

The bottom-line is that both the Ethiopian government and the multi-lateral agencies are being extremely economical with the truth. They are not willing to tell us why exactly such a large sum of loans is required. 

However, we can read between the lines and get the real reasons: the pressing need to pay off past loans without defaulting on existing commitments! 

The multi-lateral agencies and the reformist leaders have a tacit understanding that they both do not want to indulge into discussing the messes emanated from colossal economic mismanagement of the previous decades.

After all, the current authorities and the multi-lateral agencies were culprits in that process, directly or indirectly. IMF had to extend seven times more funds than guaranteed by Ethiopia’s quota because they wanted to enable Ethiopia to pay off loans to creditors, IMF’s stakeholders. 

Viable and cost less alternatives to induce inflows of hard currency

Rather than playing hide and seek with the Ethiopian people, the government had real and viable alternatives.  This requires courage to openly admit they have inherited an economy in total disrepair and then hunt for funds diverted to foreign banks, going Ethiopia’s stolen money trail!

This is what the Sudanese are doing, having removed Al-Bashir from power only a few months ago through a popular revolution.  Even reformist regimes like Angola have pursued similar and courageous methods, holding the Dos Santos family to account and pressuring them to return stolen funds. 

The government could cooperate with Ethiopians rather than multi-lateral agencies to induce dollars amounting to or even exceeding the multi-billion dollars they are in the process of borrowing. 

I have written numerous pieces recently on effective financial instruments the Ethiopian government could deploy to entice the diaspora community send money to Ethiopia through official channels. 

As explained in, How Can Ethiopia Boost Remittance Inflows?, the government can instruct domestic banks to introduce sufficient incentives for hard currency deposits that would bear interest to which depositors can access at any time at ease.  This would create sizeable funds to enter Ethiopia’s banking system. 

The government must get even more bold, for instance, accepting the parallel exchange rate and introducing a dual foreign exchange rate as illustrated in Taming the Beast: Accepting the Parallel Market and Adopting a Dual Exchange Rate.

Importers have always gone around world capitals and siphoned off billions of dollars, offering attractive rates to the Ethiopian diaspora. The gap between official and parallel market rates currently stands at close to 45%. 

One of the policy innovations the government can introduce would be to make the parallel market rate official and work with it alongside with the existing official rates, except that the parallel rate works with financial flows, while the existing official rate for goods flows (import and exports). 

Dual exchange rate is a common phenomenon which almost all countries in the world have temporarily resorted to during times of foreign exchange troubles. 

Dual exchange rate may have its own complications but any complexity that might come with it would not come anywhere near the troubles that come with continuous build of the country’s external debt mountain.  

The authorities should rethink and change course. This would mean considering to redesign and refocus the economic reform program in such a way that a great deal more would be achieved at minimum cost.

Much of Ethiopia’s economic reform could be implemented by removing administrative hurdles, and making use of existing resources, at not so significant extra costs.

Otherwise Ethiopia’s economic reform program, as it is being envisaged, would only make matters worse, pushing the country’s economy over the cliff!