Ethiopia

Country Summary

Macroeconomic performance and outlook

Real GDP growth slowed to an estimated 7.4% in 2019 from 7.7% in 2018, caused by social unrest and fiscal consolidation to stabilize the public debt. On the supply side, industry and services continued to lead growth in 2019. Industry was driven by construction, notably for industrial parks and infrastructure investments. Struc- tural transformation is under way but needs to accel- erate. While agriculture’s share in GDP has fallen, the sector still employs more than 70% of Ethiopia’s work- force. Manufacturing accounts for less than 10% of GDP. On the demand side, private consumption and domestic investment were the primary growth drivers in 2019, but domestic investment slowed, reflecting fiscal consolidation.

Monetary policy was tight. But inflation remained in double digits in 2019 and above the 8% central bank target because of central bank advances to finance the fiscal deficit. Ethiopia’s managed float exchange rate foresees a 5%–6% annual depreciation to adjust for inflation differentials with trading partners. High inflation has, however, contributed to overvaluation of the Ethiopian birr despite the 15% devaluation in 2017, necessitating a gradual shift to a more competitive exchange rate. Fiscal consolidation has ensured low and stable fiscal deficits, despite a low tax–GDP ratio, averaging 11% during 2016–19. Tax reforms are under way to boost revenue mobilization, but deficit financing through central bank advances has fueled inflation and reduced monetary policy effectiveness.

Current account deficits have stabilized because of the phased reduction of import-intensive capi- tal projects—in line with the government’s strategy of reducing external borrowing—and been partly offset by official and private transfers. Ethiopia’s debt sustain- ability rating deteriorated to high risk in 2018 because of worsening terms of trade and the subsequent weak export performance.

Tailwinds and headwinds

The economic outlook is positive, and real GDP growth is projected to stabilize at 7.1%–7.2% in 2020–21 due to ongoing political and economic reforms and normaliz- ing relations with Ethiopia’s neighbors. Growth should benefit from the Homegrown Economic Reform Pro- gram, which seeks to address macroeconomic imbal- ances and unlock structural and sectoral bottlenecks, improving governance of state-owned enterprises and strengthening institutional capacities. Measures to open key sectors to competition—notably transport, logistics, manufacturing, and telecommunication—will attract pri- vate investment, catalyze high value-added services, and boost competitiveness.

Transport investments, such as the Addis Ababa– Djibouti railway, and ongoing logistics reforms, includ- ing measures to improve first- and last-mile railway connectivity, will produce efficiency gains in trade and manufacturing.

Ethiopia’s public–private partnership framework will diversify the country’s development finance sources, improve debt sustainability, and sustain growth-gen- erating infrastructure investments. Ongoing financial reforms, particularly to develop a capital market, will enhance domestic resource mobilization.

Overdependence on unprocessed agricultural exports has contributed to persistent trade deficits. For- eign exchange shortages, unstable electricity supply, low access to credit, weaknesses in raw material supply chains, and shortages of skilled labor have hindered business growth and reduced production capacity utilization for manufacturing firms (57% in 2018 versus the targeted 68%). Inefficient trade logistics have also slowed the development of a competitive manufactur- ing sector. Weak export growth and high debt-service ratios are depressing the growth outlook. Intermittent interregional conflicts could impede socioeconomic progress. Youth unemployment is high, particularly in urban areas (at 25%), requiring improvements in educa- tion quality to enhance employability.

Source: African Economic Outlook 2020

Fixed Income

Summary

By end June 2019, Ethiopia‟s total public external and domestic debt stock including publicly guaranteed debt amounted to USD 53,705 million compared to USD 49,340 million reported at the end June 2018 representing an increase of 9 percent. Domestic debt increased by 13 percent to USD 26,676 million while external debt increased by 5 percent to USD 27,029 million at end June 2019 from June 2018. The total public debt outstanding (external and domestic), which was USD 34,322 million in 2014/15 has significantly increased to USD 53,705million (1.55 trillion ETB) in 2018/19 which is an increment of 56 percent over the period.

[Source:  Annual Debt Portfolio Report and Analysis (2018 19)No. 20 ]

Issuance strategy 

  • Government uses Treasury Bills to fill the budget gap. Direct Advance (DA) which is the National Bank of Ethiopia overdraft facility to the government is used as a residual to fill the budget gap when government is not able to sell enough Treasury bill because of low demand. Treasury Bills are sold through auctions, and do have four different maturities: 28 days, 91 days, 182 days and 364 days. Most of the time the buyers of the bills are government banks, insurance companies, social Security securities agencies and other non-financial public enterprises.
  • Government Bonds, represent instruments which have long term maturity (10 years and more) issued for special purposes rather than being used as a means for filling budget deficit The government usually issues Government Bonds when there is a need to convert short-term borrowings of Central Government and bad debts owed by public enterprises into long-term instruments. .Most of the Government Bonds are non-interest bearing.  The holders of long term bonds among others include the National Bank of Ethiopia (NBE), the Commercial Bank of Ethiopia, the Development Bank of Ethiopia (DBE), Public Servants Social Security Agency and Private Organization Social Security Agency .
  • State Owned Enterprises (SOE‟s) borrows from the domestic sources by issuing corporate bonds as well as long term and short term loans from CBE and DBE. Most of these borrowings are made with government guarantee

The objectives of the (2016-2020) Medium Term Debt Management Strategy are:

  • to raise resources through borrowing to meet central government budgetary requirements at minimum cost and prudent level of risk;
  • and to promote the development of domestic debt markets.

Benchmark issues 

 

Yield curve 

Yield curve calculation models 

Interpolation methods 

Challenges in building an efficient yield curve 

Guide to Buying Bonds

Procedures for market participation

All eligible investors in government securities must apply directly to the National Bank of Ethiopia (NBE). They must also have account with the Central Depository which is managed directly by the NBE.

Taxation

Interest income and capital gains arising from debt securities are tax-exempt.

Settlement cycle

N/A

Market restrictions

Openness to international investors 

The government of Ethiopia understands the importance of the private sector for the economic development of the country. For this reason, it has promulgated some laws with the objective of increasing foreign direct investment. The 2012 Investment Proclamation and the multiple revisions of the Investment Code are two of these legislation (Ethiopia Investment Guide, 2013). The 2012 law enables any foreign investor to own a house in Ethiopia.

Capital controls

The NBE strictly monitors the movements of foreign currencies. Due to the shortage of foreign currency, there is a black market for foreign currency.

Non-residents can open foreign currency accounts. Residents can only hold foreign currency for 45 days before they have to exchange it at a bank.

Restrictions on Foreign exchange and profit repatriation

Foreign investors can freely remit profits, dividends, principal and interest on foreign loans, fees related to technology transfers and proceeds from the liquidation of a business with few restrictions. However, foreign exchange reserves are relatively low and as a result, foreign investors have experienced difficulty obtaining foreign currency.

Credit rating

Rating agency Rating Outlook
Moody’s B2  
Fitch B Negative 
Standard and Poor’s B Negative

List of Primary Dealers

There are no Primary Dealers in Ethiopia.

Documents & Resources

Documents - Ministry of Finance

Documents - Debt Management Office

Documents - Central Bank

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