Realist, not conformist analysis of the latest financial, business and political news

IMF Tells Ethiopia – No More Foreign Currency Market Borrowings, Probably Sensibly

The IMF has told the Ethiopian Government that it really must stop borrowing from the overseas markets in foreign currency – this is probably a very sensible idea. Not because more capital wouldn’t aid in developing the country, but because Ethiopia just isn’t that developed as yet. This means that it doesn’t have the fiscal room to take on debt levels which more advanced countries would simply laugh at.

This is actually one of those little problems we’ve got with development. Sure, capital aids in development, by definition poor places don’t have any. Foreigners, given that we’ve got some rich countries around, have lots of capital. Send from the one to the other and we should see the poor places getting richer. Well, yes, but and there’s always a but isn’t there? The but being what happens if there’s a bit of slippage in that development? Who knows a recession, a change in the terms of trade. Having lots of debt denominated in foreign currencies could – and has meant in places – mean having to halt the development efforts to pay down that debt:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]In its latest staff report released this week, dubbed “Article IV Consultation for 2018,” the International Monetary Fund (IMF) stated that Ethiopia has to restrain from accessing any Non Concessional Borrowings (NCB) for the upcoming fiscal year, respecting the agreed up on zero ceiling limit on its commercial borrowing portfolio.[/perfectpullquote]

Note that this doesn’t mean that concessional borrowing cannot happen. World Bank say, to build a dam, a water treatment plant, a railway, these sorts of infrastructure development can still be done.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The Fund recollects the steady growing external debt level the government of Ethiopia has contracted since 2012 until 2018, amounting to 62 percent of its GDP. The 62 percentage is an aggregate of both the external and domestic public debts. The external borrowings cover close to 34 percent of this amount.[/perfectpullquote]

It also doesn’t mean that equity investment must be stopped. So capital is still available. It’s just that which comes as debt from the financial markets that needs to be curbed. The reason? Just that these levels aren’t a problem as long as this continues:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Projecting an 8.5 percent GDP growth for 2019, IMF is currently recruiting a country representative for its office in Ethiopia, which remained closed for years following the fierce relationship it had with previous administrations.[/perfectpullquote]

8 to 10% growth carried on for decades will cover just about any economic mistake. But our past experience is that very few places indeed manage this. A handful since WWII in fact. More likely – although we’d not wish it at all – is that there will be recessions, distinct crises along the way. And we’ve seen what happened in the 80s when all too many countries – many of them in Africa – met those with debt levels already up at or above these. The result wasn’t happy nor pretty and a goodly portion of the near ceasing of economic growth for a decade or two can be laid at that door.

In other words, keep the debt levels down even though debt aids growth. For low debt levels aids in being able to weather growing pains. That’s something we really did learn about development from the past.

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