Ethiopia joins BRICS, China gives 1-year debt service relief

By Muluken Yewondwossen
Ethiopia will get at least a fourth of its debt service for a year as per the deal that the Chinese and Ethiopian leaders agreed upon in the sideline meeting of Pretoria’s BRICS summit.
In his congratulation address, PM Abiy Ahmed hailed Ethiopia’s selection as one of the six countries to join BRICS and appreciated the Chinese leadership for the pledge to pause debt service for one year.
As the PM indicated, until a total debt restructure is emplaced, the Chinese President Xi Jinping has given a one year debt service relief, which is a great outcome for Ethiopia.
Over the past one and a half decade, China has been Ethiopia’s major source of finance through concessional and commercial loans. While the repayments have started to take shape in the past few years, the government has felt the weight of allocation of huge amounts on its budget portion for external debt service.
The growing service continues to be a thorn in the flesh for the government as the debt is paid in foreign currency, to which the country is highly in short of.
Cognizant of this, Ethiopia was a pioneer at requesting for a debt treatment under the Common Framework (CF), a framework that aimed to address the problem of unsustainable debts faced by many countries in the aftermath of the Covid19 pandemic. This agreement included all members of the G20 and the Paris Club.
Despite Ethiopia’s request being tabled in early 2021, the debt rework under CF is still under discussions with development partners to which the response is mainly expected from big financers like China.
As per the debt service information from the Ministry of Finance (MoF), Ethiopia repaid almost USD 1.245 billion to its creditors in the nine months of the 2022/23 budget year of which the principal was USD 947 million whilst the remainder was allocated to commission and interest.
As indicated by the MoF report, the debt service that was settled in the first three quarters of the past budget year that ended in June 30 was mainly channeled to Chinese financers.
In the first three quarters of the last budget year, Ethiopia’s public sector external debt service was USD 298.54 million, in total, to the Chinese financial institutions but the figure was not inclusive of payments for the government guaranteed private creditors as well as the non-government guarantees.
Of the stated service amount, USD 215.3 million was principal and the balance was commission and interest payments. Ethiopia mainly uses Exim Bank of China, Industrial and Construction Bank of China and China Development Bank as its financier. It has taken huge amounts of non-concessional loan from Chinese financial institutions including the Exim bank particularly in the second decade of the millennium.
The payment that went to China took 24 percent of the total service that was settled in the three quarters of the 2022/23 budget year.
For the coming two years, it is expected that Ethiopia will be on a high burden with regards to debt service since some other huge payments like USD one billion birr and Euro Bond repayment period is closed.
As a result, experts cite that the government has been highly demanding for a debt rework, to get some sort of relief, not only to channel the resources for other development projects, but also to ease the foreign currency shortage.