Commercial loans to be reduced

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The government is going to slow down commercial loans since the country’s export revenue has not met expectations.
Abraham Tekeste (PhD), Minister of Finance and Economic Cooperation, told the parliament when the fiscal year begins next month, the government will reduce overseas commercial loans.
The country has undergone a hard currency shortage over the last few years since its overseas loans increased significantly and hard currency revenue particularly from commodity exports declined.
Ethiopia is borrowing money to fund major capital expenditures to stimulate growth.
Public investments like industrial parks are another reason for major external loans. The government now wants to increase foreign direct investment (FDI), to earn hard currency increase exports and remittances from governmental and nongovernmental sources.
In Mid March during his six month report at the parliament Prime Minister Hailemariam Dessalegn stated that his government had minimized long term loans that were secured from foreign sources.
Hailemariam said that the due to the increase of external debt distress the country has held on to accessing long term loans.
“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 according to evaluation from international institutions the country’s debt distress has gone up to a moderate level.
The low performance of the country’s exports 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.
According to the latest report of the Finance Minister, the country’s savings went up 22.4 percent in the 2015/16 budget year.
The country’s investment in the stated period has taken 38.5 percent of the GDP, which is much different than the savings rate. The difference has been made up from external sources.
“Due to that we have to work to improve domestic savings and exports,” he explained during his budget speech at the parliament on Thursday June 8.
The 2015/16 budget year export performance was USD 2.9 billion, which is lower than the preceding two years.
The sector is crucial to going on the development path, to supply capital goods, improve the private sector investment, import goods and settle foreign debts.
“Until we improve the country export sector and get out of external debt risk, we have to keep getting commercial loans for some time,” Abraham said.
Previous enterprises that received foreign loans and undertook their projects have to obtain capacity building in terms of corporate management and corporate finance and improve their project implementation and commence operation.
Sugar, which is a commodity the nation hopes to export more of, is product being boosted via external loans. It secured part of the finance from sales of the first euro bond about two years ago, but it did not start exporting yet even though it has begun paying the loan back over the last year.
Aid secured from wealthy nations is not expected to increase since their economy has slowed down and they have focused on internal issues. “Due to that the country has to give attention for FDI and cooperation of other fast growing countries over grants and loans,” he said.
He added that they are working to get the private sector involved in investment projects currently run by the government. “We are preparing to introduce a ‘public private partnership (PPP)’ that will privatize more sectors.” The PPP will be seen as a developmental finance option, he said.
To implement this option the structural work and legal frameworks have been drafted and tabled for discussion with stakeholders although specific details were not given.