Ethiopia minimizes foreign long term loans

Prime Minister Hailemariam Dessalegn

The government announced that it has minimized long term loans that were secured from foreign sources. It is said that loans are now in a moderate level.

Prime Minister Hailemariam Dessalegn, who appeared to present his six month report to the parliament on Thursday March 16, said that the due to the increase of external debt distress the country has held on to accessing long term loans.

He said that doing this has contributed to an increase in access to hard currency.

“By stopping long term loans foreign currency generation has decreased by 14.5 percent compared with a year ago, while foreign direct investment has grown by 101.3 percent, the capital account has improved by 27.3 percent,” Hailemariam explained.

He said that as per the evaluation of international institutions the country’s debt distress has gone up in to a moderate level.

The low performance of the country’s export compared with the GDP and being unable to meet the projection to expand the export earnings by 20 percent per annum are the reasons for this performance, according to the PM.

During its Article IV consultation the International Monetary Fund (IMF) assessed that debt from external sources continued to be a moderate risk.  However, because of an increase in the nation’s budget deficit and foreign debt the county is more vulnerable because the debt is not sustainable in the near future.

IMF called for Ethiopia to do more to reduce the external imbalance.

The IMF report stated that the 2015/16 foreign borrowing requirement of the non-financial public sector is estimated to be five percent of GDP, a significant reduction compared to the recent past. Public and publicly-guaranteed debt is estimated to have been 54.2 percent of GDP in June 2016, of which 30.2 percent of GDP corresponds to external debt.

In the first six months the expense of hard currency for importing items that included petroleum has declined by 4.1 percent compared to the same period last year. a A decreasing in import expenses is an unusual occurrence. Experts said that this happened because importers were not able to get hard currency easily to import their products.

In the first six months of the 2015/16 fiscal year the country’s trade deficit was USD 7 billion, while in the first half of the 2016/17 fiscal year this figure decreased to USD 6.72 billion, according to the PM’s report.

Even though the export expense allocation decreased the balance of payment gap is still wide.

The revenue from export items in the first six months of the fiscal year only covers 15.5 percent of the import items.

Remittances have played a significant role in reducing the balance of payment gap. In the first half year individuals’ remittances grew by 10.3 percent compared with the preceding period.

In the past six months the country was able to earn USD 1.4 billion from exports, which is 57 percent of the target and declined by 6.45 percent compared with similar period a year ago.

The PM said that the over valuation of the birr has played a role in the  low performance of  exports in addition to price increases on the international market and lack of usual demand from some major destinations.

The international financial institutions have recommended that the government significantly devalue the birr.

“A more flexible exchange rate would reduce external vulnerabilities and the buildup of foreign reserves,” the IMF Article IV evaluation report recommended.

A stable exchange rate policy has a role to compete on the export market and improve the balance of payment and other policy achievements, according to the PM.

“Based on that the value of birr with USD has declined by 6 percent compared with the previous fiscal year,” he said.

On the other hand to keep running a stable market the government sold treasury bills worth 107.1 billion birr in an auction held weekly for the past six months by the National Bank of Ethiopia.

Hailemariam said that the  Treasury bill auction was above the set target and has shown a 38.8 percent increase.

The involvement of non bank actors in the auction has contributed to the increase of the income which is one of the methods to control inflation.

State of emergency

During his latest appearance at the parliament Prime Minister Hailemariam Dessalegn also hinted that the state of emergency will be extended.

The six month state of emergency, declared on October 9, 2016, was expected to be lifted on April 7. The PM said that there is still some instability in some parts of the country and they need to extend the state of emergency for a further period. But he did not give any specific indication about how long it would be extended.

He said that the command post formed to implement the state of emergency has evaluated the situation and would submit the evaluation to the parliament in the coming month.