Highlights (quotes):
* ‘the GoE has encouraged external private and quasi-private financing from China and India to fund major SOE national infrastructure projects… the total stock of SOE [State-owned Enterprises] accumulated external debt is in excess of USD 3 billion.’
* [A gov’t official] ‘did express concerns about revealing sensitive proprietary information of certain state-owned enterprises such as Ethiopian Airlines’
* [Another gov’t official asked] ‘the USG should reconsider its evident insistence that transparency is the best policy in all business contexts’
* ‘IMF assesses 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’.
* ‘The IMF projects that debt indicators will worsen if GDP growth drops to five percent per annum for the next five years.’
* [The Embassy recommends for year 2010 to] ‘leverage U.S. votes on IMF and World Bank projects/programs to obtain access to the financial records of SoEs.’
Several leaked Cables of US Embassy Addis Ababa hint some sort of unease with the way the Ethiopian economy is run, though such remarks are often vague and appear as a side comment and are unclear. However, three Cables, dated 2008, 2009 and 2010, provide an insight into the nature and its development of the disagreement.
The Cables reveal that Ethiopia’s borrowings from China and India is a source of concern for United States. In fact, the US Embassy had been pressing for years to obtain access to the financial records of Public Enterprises, such as the Ethiopian Airlines and Ethio-telecom.
Frustrated by Ethiopia’s resistance, the US Embassy in Addis Ababa recommended to the State Department, on January 2010, the use of ‘US votes on IMF and World Bank projects/programs to obtain access to the financial records’.
The debt sceario
According to the Embassy Cables, Ethiopia’s stock of external public debt stood at USD 7.4 billion in 2003. However, after the 2006 debt relief, the debt size remained low. The Cable states:
the stock of 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.
But, there is another scenario. According to the Cables:
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.
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.
The Cables claim further that ‘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 Embassy details the SEOs borrowings, based on media reports and interviews with officials, as follows:
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.
Over the past two years[]2006-2008], 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.
* 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.
However, the US Embassy noted that ‘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.’
The Embassy also believes that:
Ethiopia’s domestic public debt has soared due to heavy SOE borrowing from Commercial banks of Ethiopia.
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.
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.
‘Open-up the books’ vs. Objections
Unhappy with its lack of access to the financial records of SEOs, the Embassy sent a diplomatic note to the Ministry of Foreign Affairs Acting Director General for Europe and the Americas, Tesfaye Yilma, and to the State Minister of Finance and Economic Development, Mekonnen Manyazewal, on Oct. 8 and Oct. 13/2009 respectively, to demand access to the finance records and ‘emphasizing USG concern with the complete lack of transparency regarding the books of Ethiopia’s many state-owned businesses.’
The response is summarized in the Cables as follows:
Yilma stated that he did not envision a problem with this issue; however, upon further clarification did not elaborate whether that meant he thought the U.S. would continue to give Ethiopia a waiver or whether Ethiopia would make progress on making its budget more transparent. Yilma did express concerns about revealing sensitive proprietary information of certain state-owned enterprises such as Ethiopian Airlines, but opined that some solution could be identified.
Manyazewal unapologetically defended Ethiopian practices, volunteering that even he, in preparing Ethiopia’s budget, does not have access to those books but expressing full confidence that the boards of directors of those companies accurately report profits and losses as the basis for payment of taxes and dividends. He argued that the USG should reconsider its evident insistence that transparency is the best policy in all business contexts and remember that the U.S., in its pre-privatization period, itself did not insist on full transparency. He pointed out that Ethiopia meets international standards for accountability and transparency in the private sector. P/ECouns(Political and Economic Councilor of the Embassy) agreed that Ethiopia’s recent transparency efforts in the private sector were impressive, but reiterated our concern about lack of transparency for state-owned and ruling party-owned enterprises. Manyazewal agreed to consider reftel nonpaper and to report any reaction. As of October 20, he had not contacted us.
The Cables note further that:
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……the International Monetary Fund (IMF) confirmed to post [the Embassy] that despite IMF pressure the Ethiopian Government refuses to budge on opening up the books of the SoEs and its requests often invoke strong negative reactions from GoE officials
What is that the United State’s worried about?
The Cables present its official reasons as follows:
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.
In criticism of the Ethiopian government position on the issue, the Embassy stated:
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?
The State Minister for Finance and Economic Development, Mekonnen Manyazoel, argued, in his meeting with US Embassy Officials that on September 22, 2009, 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.
However, the Embassy makes a lame argument to dispute Mekonnen Manyazewal’s argument. The argument goes as follows:
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.
SEOs debt ‘not that bad’
The Embassy admits that
‘IMF assesses 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’.
In deed, it notes further that:
According to the DSA report [Debt Sustainability Assessment report of IMF), 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 [2009-2013]. 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.
How to push Ethiopia
Despite all the arguments from Ethiopian officials and the assuring debt sustainability assessment of IMF, the US Embassy is determined to obtain access to the financial records of state-owned enterprises.
Thus, in a January 2010 Cable, the US Embassy outlined two strategies in a Cable sent to State Department.
The Cable states:
· In mid-2009, post[the Embassy] outlined a strategy to promote improved budget transparency. This strategy included two parts:
(1) apply diplomatic pressure on GoE officials underscoring the budget transparency requirements mandated by Congress and how it ties into eligibility to receive USG assistance;
(2) leverage U.S. votes on IMF and World Bank projects/programs to obtain access to the financial records of SoEs.
Regarding part one of the strategy, post has continually delivered the message to GoE officials regarding Ethiopia’s need to comply with USG fiscal transparency guidelines; however, this message has fallen on deaf ears and only seems to aggravate relations.
In terms of part two of the strategy, post is not aware of any relevant IMF or World Bank projects/programs that the U.S. could have leveraged its vote on in the second half of 2009.
Looking forward to 2010, post would recommend focusing USG efforts on part two of the strategy, since part one has not produced the desired results and the GoE believes donors will not pull out of a highly-impoverished country such as Ethiopia.
What is the United States after? It is eye-catching though that the Embassy failed to mention the huge amounts that the Ethiopian Airlines borrows from US banks to buy Boing planes.
****************
You may read the full text of the three Cables below.
[Note that there are no leaked US Embassy Cables after February 2010]
*************************
Reference ID – 10ADDISABABA83
Created – 2010-01-21 05:11
Released – 2011-08-26 00:00
Classification – UNCLASSIFIED//FOR OFFICIAL USE ONLY
Origin – Embassy Addis Ababa
VZCZCXRO3621
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHDS #0083/01 0210511
ZNR UUUUU ZZH
R 210511Z JAN 10
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 7443
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUEPADJ/CJTF HOA
RUEAIIA/CIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RUEWMFD/HQ USAFRICOM STUTTGART GE
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP
RHEHAAA/NSC WASHDC
UNCLAS SECTION 01 OF 02 ADDIS ABABA 000083
SENSITIVE
SIPDIS
DEPARTMENT FOR EEB/IFD/OMA – BSAUNDERS AND JWINKLER AND
EEB/CBA – DWINSTEAD
USAID FOR AFR/EA HELLYER AND DALTON
DEPT PASS TO USTR FOR PATRICK COLEMAN, CECILIA KLEIN, AND
BARBARA
GRYNIEWWICZ
DEPT OF COMMERCE WASHDC FOR ITA MARIA RIVERO
DEPT OF TREASURY WASHDC FOR REBECCA KLEIN
E.O. 12958: N/A
TAGS: EAID ECON EFIN PREL ET
SUBJECT: ETHIOPIA: FY10 PROHIBITION ON ASSISTANCE AND BUDGET TRANSPARENCY
REF: A. STATE 1923
¶B. 09 ADDIS ABABA 2497
¶C. 09 ADDIS ABABA 2556
ADDIS ABAB 00000083 001.2 OF 002
¶1. (U) This cable is a Ref A response cable regarding questions on Ethiopia’s fiscal transparency and USG FY2010 assistance.
¶2. (SBU) Ethiopia’s central government is slated to received USG assistance through the Department of State, Foreign Operations, and Related Programs Appropriations Act in fiscal year 2010;
however, the majority of USG assistance is not channeled through the central government. Directed USG assistance to the central government includes USAID funded technical assistance to the Ministry of Trade and Industry to support Ethiopia’s accession to the World Trade Organization (WTO), ongoing capacity building programs aimed at improving the operations of Parliament and the National Election Board, and a Supreme Court program that is working to bolster judicial independence. In addition, International Military Education and Training (IMET) and Foreign Military Financing (FMF) funds will provide U.S. military course instructors for the Ethiopian Defense Command and Staff College and enable the Ethiopian military to maintain its vital role in counter terrorism and international peacekeeping operations.
¶3. (SBU) Ethiopia’s budget information is regularly published and disseminated at the direction of the government. The budget and its income/expenditure details are available in the public government gazette (Federal Negarit Gazeta) and on the Ministry of Finance and Economic Development’s website (www.mofed.gov.et/index.php? option=com content&view=article&id=25&itemid=33). Ethiopia does not, however, have specific laws or regulations governing the public disclosure of revenues and expenditures in national budgets. There are no independent auditors of government budget data, so information is taken at face value. International economists generally focus their criticism on the number of extra-budgetary items that are omitted from the national budget. Notably, the national budget does not include the over 100 state-owned enterprises (SoEs) or the over 70 "endowment" companies owned by the ruling political party. The omitted SoEs include large entities such as Ethiopian Airlines, Ethiopian Telecommunications Corporation (ETC), Ethiopian Shipping Lines (ESL), and Ethiopian Electric Power Corporation (EEPCo).
¶4. (SBU) In the past year, there have not been any events that affected Ethiopia’s budget transparency and the Government of Ethiopia (GoE) has not made any steps towards improving its fiscal transparency.
ADDIS ABAB 00000083 002.2 OF 002
In response to post’s October 2009 demarche, State Minister of Finance and Economic Development Mekonnen Manyazewal maintained that he does not have access to the SoEs’ books either, but has full confidence in the boards of directors who operate those enterprises (Ref B). He argued that the USG should reconsider if full transparency is the best policy in all business contexts. Ministry of Foreign Affairs Acting Director General for Europe and Americas echoed the GoE concern about revealing sensitive proprietary information of certain SoEs. In October 2009, the International Monetary Fund (IMF) confirmed to post that despite IMF pressure the Ethiopian Government refuses to budge on opening up the books of the SoEs and its requests often invoke strong negative reactions from GoE officials (Ref C). The IMF unwillingly relies on GoE data because there are no other reliable figures and is concerned about Ethiopia’s increasing public debt.
¶5. (SBU) In mid-2009, post outlined a strategy to promote improved budget transparency. This strategy included two parts: (1) apply diplomatic pressure on GoE officials underscoring the budget transparency requirements mandated by Congress and how it ties into eligibility to receive USG assistance; (2) leverage U.S. votes on IMF and World Bank projects/programs to obtain access to the financial records of SoEs. Regarding part one of the strategy, post has continually delivered the message to GoE officials regarding Ethiopia’s need to comply with USG fiscal transparency guidelines; however, this message has fallen on deaf ears and only seems to aggravate relations. In terms of part two of the strategy, post is not aware of any relevant IMF or World Bank projects/programs that the U.S. could have leveraged its vote on in the second half of 2009. Looking forward to 2010, post would recommend focusing USG efforts on part two of the strategy, since part one has not produced the desired results and the GoE believes donors will not pull out of a highly-impoverished country such as Ethiopia.
YATES
******************
Reference ID – 09ADDISABABA2497
Created – 2009-10-20 14:42
Released – 2011-08-30 01:44
Classification – UNCLASSIFIED//FOR OFFICIAL USE ONLY
Origin – Embassy Addis Ababa
VZCZCXYZ0015
PP RUEHWEB
DE RUEHDS #2497 2931442
ZNR UUUUU ZZH
P 201442Z OCT 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC PRIORITY 6553
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
UNCLAS ADDIS ABABA 002497
SENSITIVE
SIPDIS
STATE FOR EEB/IFD/OMA BRIANA SAUNDERS
E.O. 12958: N/A
TAGS: EAID ECON EFIN PREL ET
SUBJECT: ETHIOPIA: ENCOURAGING CENTRAL GOVERNMENT BUDGET TRANSPARENCY DEMARCHE – CONTINUED
REF: STATE 98111
¶1. (SBU) P/ECouns and EconOff delivered reftel demarche to Ministry of Foreign Affairs Acting Director General for Europe and the Americas Tesfaye Yilma on October 8 and Minister of Finance and Economic Development State Minister Mekonnen Manyazewal on October 13, emphasizing USG concern with the complete lack of transparency regarding the books of Ethiopia’s many state-owned and ruling party-owned businesses. Yilma stated that he did not envision a problem with this issue; however, upon further clarification did not elaborate whether that meant he thought the U.S. would continue to give Ethiopia a waiver or whether Ethiopia would make progress on making its budget more transparent. Yilma did express concerns about revealing sensitive proprietary information of certain state-owned enterprises such as Ethiopian Airlines, but opined that some solution could be identified.
¶2. (SBU) Manyazewal unapologetically defended Ethiopian practices, volunteering that even he, in preparing Ethiopia’s budget, does not have access to those books but expressing full confidence that the boards of directors of those companies accurately report profits and losses as the basis for payment of taxes and dividends. He argued that the USG should reconsider its evident insistence that transparency is the best policy in all business contexts and remember that the U.S., in its pre-privatization period, itself did not insist on full transparency. He pointed out that Ethiopia meets international standards for accountability and transparency in the private sector. P/ECouns agreed that Ethiopia’s recent transparency efforts in the private sector were impressive, but reiterated our concern about lack of transparency for state-owned and ruling party-owned enterprises. Manyazewal agreed to consider reftel nonpaper and to report any reaction. As of October 20, he had not contacted us.
MEECE
***************************
Reference ID – 08ADDISABABA3060
Created – 2008-11-10 04:31
Released – 2011-08-26 00:00
Classification – UNCLASSIFIED
Origin – Embassy Addis Ababa
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
*******************
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