Ethiopia's Downgrade to High Risk of Debt Distress: A Policy Framework for the Government

18 Pages Posted: 1 May 2019

Date Written: March 1, 2019

Abstract

Ethiopia was downgraded to high risk of debt distress in January 2018 based on the Low-Income Country Debt Sustainability Framework (LIC DSF), a finding reaffirmed by the updated 2017 Review of the LIC DSF, which was rolled out in the second half of 2018. This finding illustrates the shortcomings of the LIC DSF, which were supposed to have been addressed by the 2017 Review. The fundamental problem is a continued myopic focus on debt distress in relation to external public debt. In Ethiopia’s case — as with most LICs — external debt distress is a symptom of unsustainable public debt dynamics driven by high fiscal deficits that spill over into current account deficits and external debt. Ignoring this fundamental causation results in basic development questions being left off the table. For Ethiopia, these questions include: (a) What would the government’s debt dynamics look like in the absence of financial repression and overvalued exchange rates, both of which need to be corrected in order to improve the private investment climate as the Government prepares to hand off the growth baton to the private sector? And (b) will the large public investments in infrastructure pay off in terms of future growth and taxes in order to ensure fiscal solvency? The Government of Ethiopia needs answers to these questions as it implements its growth strategy and pursues its dialogue with donors and the private sector.

Keywords: debt, rate, GDP, currency, birr, impact, deficits, nominal, SOE

Suggested Citation

Pinto, Brian, Ethiopia's Downgrade to High Risk of Debt Distress: A Policy Framework for the Government (March 1, 2019). Duke Global Working Paper Series No. 2019/05. Available at SSRN: https://ssrn.com/abstract=3364649 or http://dx.doi.org/10.2139/ssrn.3364649

Brian Pinto (Contact Author)

Independent ( email )

No Address Available

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