By D.G. Yntiso
As Ethiopia's public enterprises amass huge loans, UNCTAD's recommendations are pertinent
The United Nations Conference on Trade and Development (UNCTAD) has reported that the mechanism for controlling global finances is in shambles.
In presenting its 2015 Report at the Ministry of Finance & Economic Development (MoFED) last week, UNCTAD's Director for Africa and Least Developed Countries, Tesfachew (PhD) Taffere, suggested a framework for dealing with the most glaring problems in finance, particularly regulating the international financial system, financing for development, predatory speculation, mitigating ongoing financial crises and a mechanism to work out sovereign debt.
This report came a week after Ethiopia was declared by the International Monetary Fund (IMF) as a country where government debt is rapidly escalating, raising a smoke signal worthy of attention. The IMF decried Ethiopia's external debt service and the role of public enterprises in it.
Sovereign (or government debt) is itself a hot topic of debate the world over, with many countries in the developing world calling for the outright cancellation of their debt. The problem is made worse by a growing trend for private investment firms in developed countries to buy up debt from developing countries at a price lower than the actual value of the debt, forcing the governments to pay in full, or be taken to court, as happened in Argentina.
In Ethiopia's case, while debt speculation is not yet an issue, growing national debt presents other problems. As IMF noted in its recent report, loan accumulation by public enterprises causes external debt distress while at the same time crowding out private investors.
Determining whether UNCTAD suggestions have any relevance to Ethiopia requires reading the fine print. It is first pertinent to note that public enterprise debt is not directly counted in the government's books. However, as an Ethiopian economist who opted to remain anonymous explained to Fortune, the government is essentially backing the loans
This is because while it assumes that the public enterprises will pay back their loans from revenue (for example, user fees) there is no guarantee for that, so the debt is effectively part of sovereign debt. Attempts by the government to issue bonds to alleviate certain debt issues only make matters worse, according to the economist. And as the dollar gets stronger, it will become more difficult to service the debt. Eventually, major macroeconomic instability may result, putting the country in a debt trap.
The report further notes that external debt is not a problem in itself, however, and can in fact be useful. The problem arises when foreign borrowing is unrelated to productive investment, which is not the case in Ethiopia, as the sole mandate of public enterprises is to build the country's infrastructure. However, according to our source, many of the projects are unnecessary and overambitious.
In other words, in order for debt to be justified, public enterprise projects must be carefully and strategically selected. This means using cost-benefit analyses, feasibility studies and similar tools. As an example, consider the new airport, expressway and railway being planned for Hawassa, a town with a population of just over 165,000. Asking whether these projects are necessary is a relevant, though seldom posed question.
The economist warns that government debt will catch up soon, noting the lack of a proper management mechanism or institutional framework to deal with the growing figures. So the UNCTAD report definitely touched on an issue relevant to the country.
At the same time, however, there was no time scale given for the recommended reforms, which require approval at numerous stages.
In addition, it is uncertain to what extent investors and development partners would be amenable to making new arrangements for repayment. The difficulty of multiple nations with diverging interests achieving consensus on anything, much less a sovereign debt workout mechanism, presents a serious challenge for nations like Ethiopia to act on UNCTAD's recommendations.
Source: AllAfrica
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