FINANCE: Ethiopian Debt Relief Seen as High-Priced

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Nov 14 2001 (IPS) - Ethiopia’s creditors have agreed to write off 1.3 billion dollars of the country’s external debt so long as Addis Abba toes the line on economic restructuring laid down by the World Bank and International Monetary Fund (IMF).

Ethiopia is the 24th country to qualify for relief under the Heavily Indebted Poor Countries (HIPC) Initiative. Critics said that to get the relief, the country has had to take on a privatisation programme, economic deregulation, and other steps either negligent or harmful toward the poor.

ôEthiopia has basically acquiesced to lots of policies dictated by the World Bank and the IMF,ö said Rick Rowden, a researcher with Results, a Washington-based non-governmental organisation. ôPrivatisation of state firms as we have seen over the past twenty years leads to unemployment and often means extra costs for the poor. There are no jobs for the poor to find elsewhere.ö

Countries under HIPC often have to stick to a rigid programme of economic reforms from the ‘decision point’, the time when the creditors agree to write off the debt, to the ‘completion point’, when international creditors express satisfaction with the programme and actually trim the arrears.

Ethiopia has only reached the first point, according to the IMF and International Development Association (IDA), the World Bank’s soft loan window. However, it stands to save an average of some 96 million dollars per year in debt service until 2021.

“This is definitely good news for Ethiopia,” said Girmai Abraham, an African executive director at the World Bank. “They [the Ethiopians] will have savings that they can use to better their economy.”

Under HIPC, Ethiopia will cut its debt service burden to an annual average of 7.8 percent of fiscal revenue and 1.6 percent of gross domestic product (GDP) over the next ten years.

Multilateral creditors will provide 763 million dollars in debt relief. Of this, IDA’s share will be 463 million dollars and the IMF’s, 34 million dollars. Bilateral creditors will provide 482 million dollars and commercial lenders, 30 million dollars.

If the debt relief actually materialises, it will represent only around 10 percent of the country’s estimated external debt burden of 10.3 billion dollars. The Bank and other international financial institutions hold around 25 percent of the total amount while 50 percent is owed to Russia, which inherited the Soviet Union’s claims against foreign debtors.

Nor does the debt relief come free. Among classic conditions the Bretton Woods institutions attached to the deal, Ethiopia must strengthen its financial sector and pursue further privatisations. Other priorities include tax administration reform, introduction of a value-added tax, and further cuts in defence spending.

Abraham said these were not conditionalities but “recommendations.”

To call these terms conditionality is wrong,” he said. “If you get some money then they need to spend, maybe not all of it, but at least some to address poverty. This is where we come from,” he added, noting that the HIPC deal also calls for an increase in certain targeted anti-poverty outlays.

“We just want to make sure that this money is used for poverty- reduction, for sanitation, for education and for other social services. In that sense it’s a condition but it is also a recommendation,” Abraham said.

Rowden agreed, saying: ôOne good thing about debt relief is that it tries to lay out how to spend the money freed up and overcome how money is spent according to the Third World elites who have no solidarity with the poor.ö

According to the World Bank scenario, poverty-targeted expenditures are projected to increase steadily, from 10.9 percent of GDP in 2000-01 to 14.7 percent in 2001-02 and 15.5 percent in 2002-03.

The IMF and the Bank said that Addis Abba also would have to introduce a value added tax by January 2003, complete financial reorganization of the Commercial Bank of Ethiopia, improve competitiveness and efficiency of the fertilizer input market.

On the social front, they said they expected to see an increase in the enrolment rate for girls in primary education from 40 percent to 50 percent and the distribution of six million condoms to fight HIV-AIDS.