No Demarcation, No Debt Relief
By: Tekie Fessehatzion
February 20, 2004

The World Bank staff has determined that Ethiopia is in line to be considered for additional debt relief under the enhanced Heavily Indebted Countries Program (HPIC) initiative. The World Bank and the IMF created the mechanism to assist poor and heavily indebted countries to qualify, in a two-stage process, cancellation of their external debt in its entirety, and to apply the savings on poverty reduction programs. The rationale for relief is based on the Bank’s evaluation that poverty in Ethiopia is so intractable that without additional relief, beyond its usual allotment, Ethiopia would be unable to pay its loans. Further the Bank argued that Addis Ababa had proposed, on paper, an acceptable plan for poverty alleviation and economic growth.

Relief from debt, according to the Bank staff, allows Ethiopia to divert resources on social and economic development programs to make life better for its vulnerable population using resources that would have gone to make repayments. The amount the staff is requesting is in addition to the last debt write-off Ethiopia received (US$ 1,930 million in nominal terms) in 2001 when, according to the Bank, Ethiopia had reached the “decision point,” the first stage towards total cancellation of debt. The balance of the relief was promised to follow at the “completion point” when all loans and interest payments are scheduled to be cancelled provided Ethiopia implemented structural and social reforms with the view of reducing poverty and high sustainable development.

Recent newspaper accounts have revealed that there’s disagreement among principal donors whether to accept the Bank staff’s recommendation and grant Ethiopia the additional relief it says it needs to reach debt sustainability, bench-mark for measuring the amount of debt the economy can absorb. The disagreement revolves around a technical issue. According to the Bank, a country is said to have achieved debt sustainability if it attains 150 percent or less Net Present Value-to-Export ratio. In layman’s terms sustainability is a measure of debt vulnerability, the degree to which a country can generate enough export earnings, or government revenues to service its debt. For creditors it is an indicator of the risk of default. The higher the NPV percent the higher the probability of default.

When Ethiopia was granted relief in 2001 the Bank’s assumption was that the country would meet sustainability, that is, achieve the 150 percent NPV to export ratio by 2007. Instead the ratio deteriorated, from 173 percent in 2001 to 218 percent as projected for 2004. According to the staff’s calculations it would take an additional 10 years (2014) before the country achieves sustainability (below 150 percent NPV-to-export-ratio). Without significant infusion of assistance Ethiopia would not have the resources required to grow its economy, improve its export earnings, increase government revenues, to meet sustainability, hence the staff’s rationale for assistance beyond the normal IDA allotment.

Arguing that Ethiopia needs financial assistance, the staff recommended that either the current debt is “topped up” with fresh loans, or a large portion of Ethiopia’s loan needs be met through grants. The deterioration of the NPV-to-export ratio was explained away by external shocks, outside of Ethiopia’s control. Changes in exchange and interest rates, and deterioration of commodity prices are indeed outside of Ethiopia’s control, but it is by no means certain that Ethiopia has done all it could to improve its economic situation given the amount of assistance it has received since the current government came to power in 1991.

Since Prime Minister Meles’ government came to power, the country averaged 900 million dollars a year in Official Development Assistance. During the same period external debt has been reduced from 8.8 billion dollars in 1991, rising to 9.8 billion in 1997 on the eve of the war, then dropping to 6.0 billion dollars in 2002. Yet the per capita income has remained stuck at around 100 dollars. Life expectancy under the current government is 42 years (2000), four years lower than it was under the regime of Mengistu Hailemariam. The point is, from the perspective of the typical Ethiopia there has been hardly an improvement in the standard of living. The twin scourges of famine and poverty now compounded by the pandemic HIV/AID continue to wreak havoc on the country. Given the depth of Ethiopia’s socio-economic problems it is odd that Addis Ababa prefers to maintain political tension with Eritrea at such a high level.

By narrowly focusing on technical grounds for evaluating the need for additional debt relief, donors and the bank staff are missing the larger point. To be sure, relief from debt is desirable. But much more desirable in the long term for the entire region is relief from the too familiar ravages of war that may re-emerge because of Ethiopia’s continuing refusal to implement the “final and binding” decision of the Eritrea-Ethiopia Border Commission.

Through its recommendation for a combination of loans, relief and grants, the bank staff has ignored its own risk assessment guidelines on shielding IDA loans from risk. Indeed if the full amount (1.5 billion dollars) of regular loan to Ethiopia is approved, IDA’s share of Ethiopia’s debt would increase from 50 to 65 percent, an inordinately high exposure to risk. Concentrating on Ethiopia’s needs exclusively, the staff has underestimated the impact of political instability inside the country and the entire region, particularly the degree to which scarce resources would be diverted from alleviation programs to arms purchases to meet perceived or real, internal or external threat. The Ethiopian army’s forays deep into Somalia is well documented; as well as the occasional incursions into Kenya. There’s a virtual insurrection in resource-rich Gambella and Oromia that has taken many lives, by people and forces who feel left out.

The bank has ignored the impact of political instability on domestic and foreign investment without which the economy is unlikely to grow at a rate sufficient to reduce external debt to manageable levels. It should not come as a surprise that there has not been any appreciable direct foreign or domestic investment in Ethiopia or Eritrea since the war. Continuing uncertainty about the implementation of demarcation and the instability that would follow would insure that investment from whatever source would dry up completely.

For donors to continue giving Ethiopia assistance and debt relief without demanding full acceptance of the EEBC decision is to give yet another signal to Addis Ababa that defiance pays. Let us remember that the amount of debt relief Ethiopia received since the current government came to power is 3.8 billion dollars, almost twice what it took to finance the 1998-2000 war. Money is fungible. It does not take much to move it from one budget item to another without leaving a trace. Indeed it was common knowledge among donors, including World Bank staff stationed in Addis Ababa that Ethiopia had diverted IDA concessionary loans meant to help the poor, on military hardware, electronic gear, tanks and fighter jets. It is one thing to want to feed Ethiopia’s hungry population but to finance Ethiopia’s arms purchases through IDA loans is another. Ethiopia received debt relief to wage “war” on poverty, instead used almost half of it to pay for a war against Eritrea, creating new humanitarian crisis in both countries, which in turn became the basis for pleas for additional humanitarian assistance.

At this very moment when the World Bank is pleading Ethiopia’s case, there are at least 60,000 internally displaced persons, victims of war, and let us remind ourselves a war indirectly financed mostly through IDA loans. The unfortunate souls on the Eritrean side of the border have been living under wretched conditions, in tattered tents, the last five years, unable to till their farms and tend their animals because Ethiopia refused to vacate the territory the EEBC has told her is not hers. If the previous debt relief and development assistance made the last war possible, which it did, the current request for relief without the concomitant demand for compliance with the EEBC ruling Ethiopia would continue to stonewall to force the postponement of demarcation for as long as possible and subject the region to unending political tension.

If donors are serious about alleviating poverty in Ethiopia, and one hopes, also in Eritrea, they must insist that there will be no debt relief, no additional IDA loan without full demarcation. The most credible and enduring approach to poverty reduction is through smooth demarcation, to be followed by normal economic relations. The border must be marked on the basis of the EEBC ruling, if not we will have a Kashmir on the Horn in our hands, a ticking bomb that could go off at any time. Surely, it is not in the interest of the Ethiopian or Eritrean people to live under such a threat nor should it be their fate. Donors, must, therefore reject Ethiopia’s application for debt relief with a notation: No Demarcation, No Debt Relief.