Ethiopia taking several actions to address macro-economic instability: Finance Minister
Addis Ababa, March 26, 2021 (FBC) – A statement from Ministry of Finance indicates that Ethiopia is working aggressively to address macro-economic instability in the economy.
According to the Ministry the comprehensive assessment of the debt distress of SOEs is among the activities being carried out by the government to address macro-economic issues.
Assessment results indicate that seven SOEs were identified as under a high risk of debt distress. These SOEs included the Ethiopian Electric Power, Ethiopian Electric Utility, Ethiopian Railway Corporation, Ethio-Engineering Group (formerly METEC), Chemical Industry Corporation, Construction Works Corporation, and the Sugar Corporation. Together these SOEs hold close to 19.5 Billion Birr in domestic and international debt.
The statement further indicated that the last ten years saw a high GDP-growth and significant improvement in human development indicators in Ethiopia. However, says the statement, the public investment-led and debt-based infrastructure development model was proved financially unsustainable.
While these investments were important to meet Ethiopia’s significant infrastructure needs, the financing models often did not consider the viability of financial returns of the investments or overlooked the mismatches between the loan maturity of the and the returns on the investment. In just ten years, SOE debt increased by 21-fold.
Ethiopia is taking corrective measures to address these instabilities as well as building a new sustainable model for SOE investments and financing. After evaluating a range of options, the Liability and Asset Management Corporation (LAMC) was selected as the most effective way to address the high debt distress of the SOEs. The Liability and Asset Management Corporation will be a commercial entity; thus, its operational costs will not be a drag on the government budget.
Depending on the SOE, the government will transfer between 20 to 100 percent of the SOEs’ debt to LAMC, with the terms of engagement between LAMC and the SOEs clearly defined to avoid moral hazard. The SOEs will continue to service the balance of their debt to their creditors. For example, there will be a 20 percent transfer of debts for the Ethiopian Electric Authority while Ethiopian Railway Corporation and Ethiopian Sugar Corporation will see all of their current debts transferred to LAMC.
On the asset side, the primary source of finance for the LAMC will be the privatization proceeds and SOEs’ dividends. Upcoming telecommunication sector transactions and the privatization of the Ethiopian Sugar Corporation will generate proceeds to finance the LAMC’s liabilities in the short term.
As a commercial entity with professional management, LAMC can engage in additional revenue-generating activities. For instance, it can invest the privatization proceeds and underutilized public assets to generate additional revenue. This approach will ensure that debt service on the SOE stays on track without burdening the central government’s annual budget.
Liberalization of SOE-dominated sectors and privatization of SOEs. Telecom and logistics are sectors that have been liberalized, where the private sector is expected to play a key role. The government will maintain some level of participation in these strategic sectors. Ten government-owned sugar factories are slated for full privatization to help usher in an efficient, private market participant to both meet domestic demand and strengthen Ethiopia’s export potential in the sugar sector.
Revise and strengthen the financing and investment strategies of SOEs. Project identification must be prioritized and sequenced, and financing must be based on commercial viability. SOEs have already begun a process of streamlining their investment and financing strategies.
SOE-level reforms to improve efficiency and competitiveness. Mechanisms are being devised for the SOEs to improve their efficiency by implementing important reforms. SOEs are expected to meet certain performance improvement targets in the short and medium terms and to increase their dividend payments to the government. They will contribute assets to the LAMC to contribute to the servicing of their debts. The GOE is establishing indicators to monitor these performance improvement targets, the statement added.