IMF vs. Government

The issue of fiscal consolidation

It has been one of those weeks. Ethiopian monetary and fiscal authorities are kept on their toes 'defending' the outcome of their policies and what they have 

in-store for the current budget year.

Yes, it is time for receiving their report card; perhaps one of the most influential reports about country's overall economic standing. By one of the most influential international institution namely the International Monetary Fund (IMF). A well-established practice by now, a team of IMF experts pay a visit to countries like Ethiopia, countries receiving their financial assistance, to see how the economy is managed. The visits and the subsequent staff report are all done under what is dubbed the Article IV consultations between the IMF and respective nations. For many, the routine is more than consultation to say the least. It is an epic showdown where experts and authorities from both side get to test their intellectual and professional prowess. Well, this much can be said regarding the the Article IV consultation between the Fund and Ethiopia. A lot of the 'consultation' is about macroeconomic matters and the Fund is one of the two Bretton Wood institution designated for such areas.

The exchange becomes even more lively when a fundamental ideological divide exists between the two parties. Apparently, nothing sums up the Ethiopian government's relationship with the IMF than a “fundamental idealogical difference”. So, there appears to be an issue year-in-year-out. In the past, a number of macroeconomic matters like inflation, financial sector regulation, sectoral liberalization and overall growth paradigms had been sources of contention. In fact, severe resistance to IMF's policy recommendation is one of things that the late Prime Minister Meles Zenawi is remembered for. To put it into perspective, neither sides had the complete upper hand historically. While the Fund remained loyal to the widely championed market economy with a night watchman style government at its helm. Countries like Ethiopia and its leaders argued for a strong state role in shaping its growth path. And, both had their own support base in the global scene. Local spectators on their part look to be growing into this friction and these days it is taken quite seriously. This year, it is debt. It is about sustaining the external debt level. And the role of the State-owned Enterprises (SoE) in piling up the debt levels was of a special focus.

As a matter of fact, the two have not seen eye to eye regarding the state activities in the market. It is one of those ideological issues for them. To be fair, the debate have devolved so much through time and now, all the friction is happing around certain specific subjects. And one topic that is climbing fast to importance is the matter of the SoEs. The state on its part is firm on these enterprises being considered as fully autonomous entities, and whatever decision they make, it did not want it to be mixed with a regulatory decision. As can be imagined, the position of the government regarding the issue of external debt contracted by the SoEs is reflective of this approach. Meanwhile, it is highly unsettling for the Fund to exclude the books of the SoEs when dealing with external public debt of the country. What appeared as an observation a couple of years ago has now grown in importance to become the most contentious matter in the consultation process. The Fund is of the view that each and every bit of the activity of the SoEs should be taken as the activity of the general government. This means every bit of spending decision made on the SoEs would have macroeconomic impact almost as equal as the decision of the general government. To some extent, the Fund argued for the inclusion of the SoEs books to the budget schedule of the general government. This incorporates the revenue, expenditure and debt (a point of focus now) figures of these SoEs. It is for the sake of better management in the fiscal department, IMF says. But, authorities of the Ethiopian government greatly differ with this assessment and refuse to heed such advice.

To put this into context, the Fund is not exactly a fan of what government is doing with SoEs. In fact, not even with existence of such institutions in favor of further liberalization and limiting the participation of the state in the market. One of the highlight of the Article IV consultation is hence the issue of consolidating the fiscal side of the public sector. At least, the debt statistic. The Fund recommended all government debt most importantly that of the debt of the SoEs be put in the same basket if one is to talk about the overall debt burden that the country can and is carrying at the moment. The rationale behind this is a perceived debt risk that Ethiopia faces at this time. The report out of the consultation anchored on this issue this year. It is mostly about external debt. 

Owing to the massive financing needs of the Growth and Transformation Plan (GTP), the resource gap greatly calls for huge alternative financing mechanism to realize it. And debt is almost the only instrument to make this happen. The Ethiopian authorities are not shy to deep into financiers' coffers whether domestic or foreign. In fact, the availability of such credit facilities and favorable terms of borrowing is the main problem. The GTP, however, is a combination of both off-budget and formal budget programs requiring almost equivalent amount of financial resources. Here is where things start to get more complicated. Since both are important part of GTP, finding financing is priority to authorities. So now, both central government programs and projects and those off-budget programs mainly carried out by SoEs is accessing financing from both domestic and external markets. But, although for all practical purposes SoEs are part of the state, their cumulative financial position, debt in particular, is not scrutinized as those of other state agencies. This bothered the IMF for years.

But, now the concern looks to be more serious in a sense that the IMF is indicating a potential risk from debt contracted by these SoEs. According to the report, the stock of external debt climbed to USD 12.2 billion in the first half of 2013/14 from 11.2 just few months ago. In this, the Fund accuses the SoEs basically utility and other big companies. It further says that the state has to check heavy borrowing by the SoEs for sake of sustainable debt stock. A macro-economist, who spoke to The Reporter under the condition of anonymity, backs the Funds position that SoEs' risky borrowing is putting overall debt level at a dangerous threshold. He even goes further in saying SoEs borrowing is progressing in such a way that it is making the overall debt stock to be unsustainable. According to the report, borrowing of SoEs has reached 10 percent of the GDP thereby raising the public and publicly guaranteed debt stock of the nation to 23 percent of the GDP. The authorities disagree. In fact, they did so even in the report that Fund made public. For the government, the borrowing of the SoEs is driven by the commercial consideration as corporations and if they access any external finance it should be because the financiers have believed that the projects on the table would be able to repay the loan extended to them within the specified data of maturity. 

Individually, the Fund hails Ethiopian Airlines and states that it could manage debt it contracts from the market. In fact, Ethiopian is one of SoEs in Ethiopia which do not require treasury's guarantee to access finances. But, large SoEs like Ethio Telecom and the power company do have their own risk, it says. With large telecom services purchase in recent years, Ethio Telecom was mostly featured in the report as the face of SoE group. The authorities are not also inclined to accept the so-called future potential risk of the building-up debt today. By extension, the overall debt level is considered to be not a risky one, it maintained.

Here, one issue that begs explanation is how big and real this risk of borrowing of SoEs is. Luckily, the article four consultation contains a debt statistic analysis annex that shows the details of the debt level and its potential risk in the future. The Debt Statistic Analysis (DSA) was conducted on the basis of the three different debt sustainability indicators: Debt to Export, Debt to GDP and Debt to Revenue. And of course, various scenarios of flow of debt and macro and external economic conditions were assumed to see future trajectory and potential risk. Various shock scenarios were also assumed and simulated to tell the story. Currently, the country's external debt stress level remain to be LOW at best. And projection of the various scenarios of external debt levels for the period 2012/13 to 2033/34 and calculation of the three various indicators as well do not seem to be that risky. 

To beginning under all the indicators, the country would not face the feasibility of becoming a moderately stress by external debt. The threshold of ratio of debt to export, GDP and revenue are 150 percent, 40 percent and 250 percent respectively. In that, it was only in the debt to export ratio (141 percent) that Ethiopia comes close to or becomes a borderline case to cross the moderately stressed threshold (150 percent). And that was projected for 2016 and 2017 right in the  middle of GTP II. Currently, debt to export ration is around 115.0 percent well in low stress category. The Fund's  analysis simulated various shock scenarios and in all of them finding a risk of becoming a borderline case to cross the moderately stressed threshold at best. However remote, the risk still exists and the recommended caution on borrowing is valid from all angle. 

Such debate as well come at the period where the treasury was getting ready to float sovereign bonds in the international money market. This too is another dimension to the debt structure. The macro-economist quoted earlier thinks that this should be more reason for consolidating the debt structure and even the fiscal stance of the country by including the SoEs. “It is important for fiscal management in face entering sovereign bond market,” he argued. The bond market will surely open up the economy for exchange rate and fiscal risk, he explains, and this is the time to consider consolidating. The Fund's concern as well is about the possible impact of SoEs for the overall macro-economy. And, argues for consolidating SoEs' finances with general government to clearly see and respond to the impact of these entities.

But, another economist Girma Abebe [named changed because he is not at liberty to comment] feels that such debate is a waste of time at best. He says, the only thing that matters is not agreeing on an accounting methodology rather making sure that the SoEs can repay their debts in a timely manner. Whether in the same books or separate, the level of debt that SoEs are accessing first needs to be in line with their servicing capacity. “In this regard, the likes of the Ethiopian and Ethio Telecom do have a sustainable income stream to suggest they can probably carry the level of debt at their rosters,” he says. However, for the rest of them, if there is a closely monitored debt contracting and debt servicing plan consolidation can not be a point of friction.

As far as, plans are concerned, the Ministry of Finance and Economic Development (MoFED), have completed its Medium-term Debt Management Strategy in 2013 to guide the financing activities for the period up to 2017. In the document, MoFED admits that SoEs' borrowing activities requires some sort of guidelines which it pledges to include in its next edition. “Had it not been for shortage of data and time constraints, it would have been good to include the SoEs in overall debt management strategy,” it said.

Source: www.thereporterethiopia.com