Ethiopia tactfully services debt despite financial stretches

The share of public sector domestic debt continues to be at its lowest as the outstanding volume of debt shows sharp jump in the past few years after successful replacement of other instruments at the beginning of the economic reform period.
According to the quarterly debt bulletin issued by Ministry of Finance (MoF), in the first quarter of the fiscal year the country settled a positive foreign debt service against the disbursement.
The quarterly Public Sector Debt Statistical Bulletin developed by Debt Management Directorate of MoF, highlighted that the net issuance of direct advance (DA) for the first quarter of the 2022/23 fiscal year was 60 billion birr which cumulates the total outstanding DA that is taken from the National Bank of Ethiopia to 219.5 billion birr as of September 30, 2022 up from 159.5 billion birr of June 30, 2022.
In the first quarter of the past fiscal year, the government borrowed 30 billion birr from the central bank which resulted in the first quarter figures to go twice as high.
A new boundary has been crossed, one that has not been seen in recent years as the DA passed the 200 billion birr line. Since the reformist government come to power, one of the major moves undertaken was the reform of government expenditure and its source of finance.
For instance, in the middle of the 2019/20 budget year the treasury bills (Tbills) propelled the market which attracted more buyers providing an opportunity for the government to use the finance stemming from Tbills as opposed NBE’s DA.
Last year despite the money obtained from Tbills being huge, the government was forced to take more DA to fill the demand in finance for rehabilitation and support that arose from the conflict in the northern part of the country.
In spite of the DA growing swiftly over the years, in the past few years its share fromthe total public sector domestic debt has been lower particularly when compared with the experience before 2019.
In the past, the share of DA was about a quarter from the total domestic debt but it has reduced in the past few years since the government replaced it by other instruments including Tbills.
However the DA has expanded to 13.8 percent of the total public sector domestic debt at the end of September from 10.4 percent in the end of the past fiscal year and 7.1 percent in the 2020/21 fiscal year.
In the past years however, the central government has been strongly controlling itself from taking finance from the central bank and has shifted to the finance amassed from alternative instruments like treasury bills but pushing factors like reconstruction and aid has forced it to take the DA.
Experts argued that one of the reasons for the expansion of the DA was the lowest flows of external loans and the expansion of the budget deficit.
During his Budget Speech in June, Ahmed Shide, Minister of Finance (MoF), told parliament that from the proposed 786.6 billion birr budget for the 2022/23 budget year, the gap was 231.4 billion birr or over 29 percent of the proposed budget which was to be covered by domestic and external sources.
The Finance Minister said that the budget deficit was 3.4 percent of the GDP, “The budget deficit has shown some increment in contrast to the preceding periods. The gap has widened due to the need for coverage in crucial areas in the budget year.”
According to Ahmed the major portion, 224.5 billion birr of the budget deficit will be covered by local sources whereas the remaining 6.9 billion birr will be sourced from foreign creditors.
The total domestic debt as of September 30, 2022, was 1.59 trillion birr (USD 30.2 billion), up from 1.53 trillion (USD 29.4 billion) as of June 30, 2022. Forty two percent of the total public domestic debt is notably held by state owned enterprises, with the remainder falling to the central government.
The total public sector debt (domestic plus external) stood at USD 57.1 billion as of September 30, 2022, down from USD 57.3 billion of June 30, 2022.
According to the Finance Ministry’s document the nominal public sector debt (domestic and external) as a percentage of GDP as of September 30, 2022, was approximately 50.1 percent, with nominal external debt making up about 23.6 percent of that percentage.
The present value of external debt as a percentage of GDP was around 17 percent, while the present value of total public sector debt as a percentage of GDP was around 43.6 percent.
“Both of these figures are significantly below the low-income country debt sustainability thresholds of 40 percent for external debt and 55 percent for total public sector debt for the medium debt carrying capacity countries,” it said.
By the reporting period, domestic debt made the majority (52.9 percent) of the public sector’s total debt, with approximately 47.1 percent coming from external debt.
As of September 30, 2022, the public sector’s total external debt was USD 26.89 billion, down from USD 27.9 billion as of June 30. Between the two periods, there was a sharp decline in the total amount of external debt.
“One of the main reasons for the decline is the variation was the exchange rate of the US dollar against other currencies, i.e. a stronger dollar caused a rippling decrease in the stock of external debt in terms of USD,which is down by about USD 1billion or 3.7 percent from June 30, 2022,” the MoF bulletin stated.
As of the stated period, the stock of external debt has decreased by approximately USD 2.6 billion, or about 9 percent, compared to June 30, 2021.
Another reason why the debt stock fell this quarter was a negative net flow of USD 250.95 million because of total principal payments of USD 441.08 million and disbursements made during the period of USD 190.12 million, where principal payment was greater than new disbursements made during the period.
Disbursement (inflow) minus principal payments minus interest payments yielded a net resource transfer of negative USD 383.36 million. In the reporting period, the country serviced USD 573.5 million that includes principal, interest and commission.
Ethiopia has managed the highest ever debt service in the past fiscal year compared with the previous three years.
As of September 2022 the country outstanding external debt has dropped by 8.8 percent compared with the fiscal year that closed in June 2021.
At June 2021, the country’s outstanding external debt stood close to USD 29.5 billion which thinned out to about USD 26.9 billion on September 30, 2022.

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