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Cablegate: Profile of Ethiopia's Debt Sustainability

VZCZCXRO6987
PP RUEHROV
DE RUEHDS #3060/01 3150431
ZNR UUUUU ZZH
P 100431Z NOV 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 2678
INFO RUEPADJ/CJTF HOA PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY
RUEWMFD/HQ USAFRICOM STUTTGART GE PRIORITY
RUEKJCS/JOINT STAFF WASHINGTON DC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP PRIORITY
RUCNIAD/IGAD COLLECTIVE

UNCLAS SECTION 01 OF 03 ADDIS ABABA 003060

DEPARTMENT FOR AF/EPS - ABREITER AND GMALLORY; EEB/IFD/OMA -
JWINKLER AND EEB/CBA - DWINSTEAD
DEPARTMENT PASS TO USTR FOR CONNIE HAMILTON, CECILIA KLEIN, AND
BARBARA GRYNIEWWICZ
DEPT OF COMMERCE WASHDC FOR ITA BECKY ERKUL

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV EAGR ET
SUBJECT: PROFILE OF ETHIOPIA'S DEBT SUSTAINABILITY

REF: ADDIS 2800

ADDIS ABAB 00003060 001.2 OF 003


-------
SUMMARY
-------

1. (SBU) Although the government of Ethiopia (GoE) has assumed only
minimal new official external bilateral and multilateral debt since
completing two rounds of external debt relief, state-owned
enterprises (SOE) are accumulating off-budget external (and
domestic) debt at an alarming rate. The GoE argues that SOE debt is
not government debt and does not pose a liability to its already
strained fiscal budget. The GoE has made a distinction between
debts taken on by the state (reflected in the national budget)
versus off-budget debt accrued by SOEs. The GoE maintains monopoly
control over SOE operations and procurement activities and places
high level government officials on SOE executive boards. The
government has authorized SOEs to take on large amounts of debt from
both domestic and foreign sources in order to fuel massive
infrastructure development initiatives. The GoE has essentially
transferred its historical appetite for external public debt
financing onto the books of purportedly independent SOEs. The level
of SOE debt and GoE fiscal exposure to such debt remains unclear.
END SUMMARY.

----------
BACKGROUND
----------

2. (SBU) Ethiopia reached the completion point under the Heavily
Indebted Poor Country (HIPC) initiative in 2004 and Multilateral
Debt Relief Initiative (MDRI) in 2006. Since the inception of debt
relief, Ethiopia's current debt picture has demonstrated two
divergent scenarios: 1) a rapid increase in off-budget debt taken on
by SOEs, and 2) a steady decrease in on-budget external public debt
loads. SOEs have been accumulating debt at a break-neck pace as the
GoE has channeled state and private resources to SOE coffers in
order to undertake massive national infrastructure development
projects. The GoE has loosely regulated SOE borrowing, allowing its
own Commercial bank to provide large loans and favorable financing
terms to SOEs. As of September 2008, the total stock of outstanding
SOE domestic debt reached USD 978 million, roughly five percent of
GDP. The Ethiopian Electric Power Corporation owns the bulk of this
domestic debt as a result of issuing coupon bonds to the Commercial
Bank of Ethiopia. In addition, the GoE has encouraged external
private and quasi-private financing from China and India to fund
major SOE national infrastructure projects. The total stock and
financing terms of these deals between SOEs and private foreign
investors is unclear and GoE interlocutors have refused to claim
them or disclose balances or terms with us. According to press
accounts, post has inferred that the total stock of SOE accumulated
external debt is in excess of USD 3 billion.

3. (SBU) On the other hand, Ethiopia's official external public debt
load offers a different picture than the soaring SOE debt situation.
Prior to debt relief initiatives, Ethiopia's stock of external
public debt stood at USD 7.4 billion in 2003. After debt relief,
according to official statistics, the stock of official external
public debt declined from 39.6 percent of GDP in 2006 to USD 2.75
billion or 12 percent of GDP in July 2008. Of this, multilateral
debt declined from 32.2 percent of GDP to 6.7 percent while official
bilateral debt shrunk from 5.1 percent to 4.1 percent and commercial
loans from 2.3 percent to 1.2 percent in the same period. The GoE
has aggressively sought to decrease the stock of its on-budget
external public debt. The GoE has attempted to improve official
budget transparency as it relates to gains from debt relief, by
implementing a specific budget line item to show gains from debt
relief. The IMF assesses that the current level of Ethiopia's
external public debt has been sustainable as a result of disciplined
fiscal programs and the rapid growth in export earnings in the last
several years. However, there is now an increasing chorus of
bilateral and multilateral donors who have publicly called for the
GoE to rein in public sector spending and non-concessional SOE
financing to support its aggressive infrastructure projects. A July
2008 IMF staff report advised the GoE to increasingly rely on
concessional financing to avoid medium and long-term external debt
distress.

--------------------------------
SOE DEBT NOT A LIABILTY SAYS GOE

ADDIS ABAB 00003060 002.2 OF 003


--------------------------------

4. (SBU) The GoE contends that SOE debt is not a liability. As a
result, the GoE has maintained a public veneer of independence from
SOE activities. The State Minister for Finance and Economic
Development, Mekonnen Manyazoel told EmbOffs on September 22 that
the day-to-day operations and private debts accrued by SOEs like
Ethiopian Airlines, Ethiopian Telecommunications Corporation (ETC)
and Ethiopian Electric Power Corporation (EEPCO) are subject to SOE
shareholder and management review and do not pose a risk to the GoE.
The GoE's rationale for allowing the rapid accumulation of debt in
SOEs is embedded in the notion that SOEs operate independently and
bear no liability to the state's already tight fiscal budget.
Nevertheless, the GoE has courted private investors from China and
India in order to provide debt financing for its SOE infrastructure
projects. Additionally, the GoE still maintains monopoly control
over its SOEs and sits several senior government Ministers or ruling
party Executive Committee members on the executive boards of SOEs.
All SOE private financing deals continue to be approved by GoE board
members, which fall in line with government development targets.
Over the past two years press reports have highlighted that the GoE
signed a USD 640 million soft loan with India's EXIM bank to develop
the domestic sugar sector. The GoE concurrently authorized ETC to
sign a USD 2.4 billion vendor financing loan with China's ZTE
Corporation to modernize and expand Ethiopia's telecom services.Q,lQq6QQQonstruct a 5,000 km railway network
within the country in the next 8-10 years at an estimated cost of
USD 5 billion. The GoE expects foreign contractors to finance 55
percent of this USD 5 billion project in hard currency loans and
Ethiopia's banks to provide the remainder of the financing. While
it is unlikely that these are the only such external loans to
Ethiopian SOEs, we do not know whether the USD 3 billion (estimated)
accumulated debt and the proposed USD 5 billion debt for railway
network reflects all, the majority, or just a fraction of SOE's
current and future debt burdens.

5. (SBU) Ethiopia's domestic public debt has soared due to heavy SOE
borrowing from Commercial banks of Ethiopia. The government's push
to upgrade the country's physical infrastructure through massive
investment in SOE ventures has significantly drawn down domestic
banking resources and strained the country's balance of payments.
Public domestic debt is now roughly USD 6.0 billion, which is about
2.5 times the value of that of on-budget external public debt
(External debt: USD 2.75 billion - SOE portion unknown). According
to the National Bank of Ethiopia, SOEs account for about USD 978
million (roughly five percent of GDP) of the domestic public debt.
In 2005/06, the stock of external and domestic public debts as a
percentage of GDP were relatively even (Domestic debtJ_QRQ5Lby the World Bank,
heavy SOE borrowing
remains a significant risk to the GoE's debt sustainability. The
fast growing stock of SOE debt obligations as indicated by the
steady stream of publicized SOE financing deals in the local
Ethiopian media has not been accurately calculated to date because
of the lack of transparency in SOE budgets and the GoE's reluctance
to publicly accept liability for SOE debt.

---------------------------------------

ADDIS ABAB 00003060 003.2 OF 003


DEBT SUSTAINABILTY MAY FAIL STRESS TEST
---------------------------------------

7. (SBU) Although the IMF has projected Ethiopia's stock of public
external debt to be moderate, the large financing needs of SOEs, low
expected FDI inflows, low elasticity of demand for Ethiopian exports
and fuel inflation may precipitate a return to an unsustainable debt
scenario. The Economist Intelligence Unit's (EIU) October 2008
report alsQ_QA]Qf8jects a sharp increase in
Ethiopia's debt-to-export ratio and a subsequent potential breach in
its sustainable debt thresholds, primarily as a result of likely
less favorable financing terms on future public and SOE debt. The
IMF has privately admitted to EconOff that they simply have not had
the facility or capacity to monitor levels of SOE borrowing and
financing terms from external sources. Also, a dip in export growth
may also push Ethiopia into an unsustainable debt scenario.
According to the DSA report, in order for the GoE to support this
current debt sustainability assumption, Ethiopia must maintain a
baseline GDP growth rate of seven percent over the next four years.
The IMF projects that debt indicators will worsen if GDP growth
drops to five percent per annum for the next five years. The global
financial crisis, uncertain climatic conditions, and the low-demand
elasticity for Ethiopian exports remain serious threats to
double-digit output and export growth.

-------
COMMENT
-------

8. (SBU) To date, the GoE has not been able to quell significantly
its large appetite for heavy domestic and external debt financing in
its SOEs for its widespread physical infrastructure projects.
Although it has exercised fiscal prudence in maintaining low levels
of its official external debt loads since HIPC and MDRI debt relief
in 2006, the government has essentially redirected most of its new
debt obligations to SOEs. The GoE's contention that SOE debt is not
a public liability seems to run contrary to the fact that the GoE
controls these SOEs and their ultimate repayment will draw from the
country's common pot of limited hard currency reserves. In
addition, the GoE implicitly assumes the risk of SOE borrowing
particularly since all major SOE capital expenditures and borrowing
are approved by the GoE officials who sit on SOE boards. The GoE
appears intent to convince itself and the international donor
community that its strict fiscal tightening with respect to
on-budget spending and external public debt maintenance is the true
barometer for assessing its debt sustainability. It is clear,
however, that the increasing value and volume of SOE debt cannot be
reasonably separated from government liabilities, since the GoE in
fact benefits from the growth and profitability of these same SOEs.
Also, the GoE's reliance on sustained double digit output and export
growth to reduce their debt burden hangs on tenuous climatic and
global economic cycles. The tricky questions remain: how much
longer and at what cost can the GoE support the growing SOE debt
burden and rely on export-led growth to meet its fiscal commitments?
END COMMENT.

YAMAMOTO

© Scoop Media

 
 
 
 
 
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