PM Abiy Ahmed (PhD) told the parliament on March 28, 2023, that the rising interest rate in the US has had devastating effects on the Ethiopian economy.
Ethiopia has a lot of debt owed to China and international multilateral lenders. Reports indicate that the country has 56 billion dollars in total debt to be paid. Out of the 56 billion, 28 billion were borrowed from external lenders.
The US and international financial institutions such as the World Bank and IMF pledged to provide Ethiopia with billions of dollars for the Homegrown Economic Reform’ initiated by PM Abiy to liberalise and privatise the Ethiopian economy.
The IMF and World Bank promised to give Ethiopia billions of dollars for the Homegrown Economic Reform.
Later on, these pledges were suspended. The World Bank and IMF suspended the disbursement of the pledged billions of dollars after Ethiopia began filling the Great Ethiopian Renaissance Dam (GERD) in June 2020 and due to the armed conflict in northern Ethiopia.
Ethiopia has since been barred from accessing financial provision from these multilateral financial institutions.
The US government halted hundreds of millions of dollars of budgetary support to Ethiopia in 2020 due to the GERD crisis. Additionally, Ethiopia has been excluded from the African Growth and Opportunity Act (AGOA) trade preference programme because of the war with the TPLF.
Since the wake of the COVID-19 lockdown, countries across the globe have been hit with inflation, mainly due to a shortage of supply (production) because people were off work.
The central banks of many countries have been increasing interest rates to reduce the circulation of money in the market so that inflation could be lowered. The US central bank, the Federal Reserve, has increased interest rates many times since 2022 to bring down inflation to 2%.
In 2022 alone, the US Federal Reserve increased interest rates seven times, raising them from 0.25% in March to 4.50% in December. On March 22, 2023, the Fed raised the interest rate to 4.9%, which is the highest since 2007.
Two weeks ago, the European Central Bank increased the interest rate benchmark to 3%, which is the highest since 2008.
The United Kingdom’s central bank, the Bank of England, raised the interest rate on March 23, 2023, to 4.25%.
Interest rates, particularly in the US and Europe, were very low before the outbreak of the COVID-19 pandemic. Money was cheap and accessible for borrowers.
The high interest rates in the US and Europe mean that countries like Ethiopia have to borrow dollars or other hard currencies at high interest rates to pay back their debts.
The Ethiopian economy has suffered from a shortage of hard currency. This resulted in sweeping inflation and an economic crisis. The government is desperately seeking foreign loans and financial support.
In addition to getting finances, the Ethiopian government has to deal with the staggering amount of matured debt in the country owed to China and international multilateral creditors.
The Ethiopian government has been asking multilateral and bilateral lenders to restructure the country’s debt. Ethiopia requested the G20 countries and the Paris Club, a group of major creditor countries, make debt adjustments.
Upon Ethiopia’s request, in September 2021, twelve member countries of the G20 and the Paris Club formed a committee co-chaired by China and France to discuss the country’s debt treatment.
Ethiopian Prime Minister Abiy paid a visit to France on Feb 8, 2023, and discussed with Emmanuel Macron, French President about the restructuring of debt.
On Feb 20, 2023, an Ethiopian government delegation that includes Finance Minister Ahmed Shide, Mamo Mihretu, Governor of National Bank of Ethiopia, Lelise Nami, Ethiopian Investment Commissioner, Eyob Tekalegn (PhD), Finance State Minister arrived in China to discuss about debt restructuring, among other things, with Chinese officials.
Since the interest rates are high, it is difficult for developing countries, especially those with huge amounts of matured debt, to easily borrow dollars and pay their debts. Money is only available at high interest rates.
