Ethiopia Seeks to Shield Its People From Cost-of-Living Blow
Ethiopia has earmarked several billion dollars to cushion the cost-of-living impact of economic reforms being implemented to win support from the International Monetary Fund.
It plans 550 billion birr ($5.9 billion) in additional spending, of which 40% will go into food, fuel and fertilizer subsidies, as well as increasing salaries for government workers, according to Eyob Tekalign Tolina, state minister in the finance ministry.
“The government has prepared a big package for social spending,” Eyob said in an interview with Bloomberg TV’s Jennifer Zabasajja.
The debt-burdened East African nation last week unlocked more than $20 billion in financing from the IMF and World Bank after agreeing to several conditions, including allowing its currency to float against the dollar. The move is expected to cause a sharp rise in inflation and similar steps in Nigeria and Kenya triggered deadly protests in recent weeks.
“Wherever there is forex reform, there’s genuine fear of potential inflation spiraling. We’ve prepared for this over the last couple of years,” Eyob said.
At almost 20% in June, price growth is already onerous for Ethiopia’s 126 million people. The IMF expects the inflation rate will rise to an average 30% this fiscal year, before price increases start to ease.
The birr has weakened almost 40% against the dollar since the authorities liberalized the foreign-exchange market on July 29. It was trading at 93.1206 on Monday, according to central bank data. On the unofficial market, traders are selling the currency at about 122 birr per dollar, compared with 111 birr before the devaluation.
The four-year, $3.4 billion IMF program helped to unlock a further $16.6 billion from the World Bank.
The IMF program was a prerequisite for any debt-restructuring talks under the Group of 20’s Common Framework — the pandemic-era agreement to help poorer countries overhaul loans.
Ethiopia will be following Zambia and Ghana in seeking a debt revamp.
In Zambia’s case, bondholders took a 21.6% haircut while Ghana bondholders agreed to a 37% nominal reduction in value.
Ethiopia said it’s seeking a $200 million reduction on a $1 billion eurobond maturing at the end of the year, which it defaulted on in December.
Ethiopian officials will meet key bondholders at the end of August, Eyob said. In the interest of treating all creditors equally, commercial lenders may also have to agree to a haircut, he said.
Ethiopia has roughly $29 billion in external debt, half of which may fall under restructuring talks, Eyob said. Authorities have already rearranged some domestic debt to lengthen maturities. It has already swapped 265 billion birr of Treasury bills held by pension funds into 10-year securities, he said.
