Poverty to progress and distress to viability breakthroughs in ethiopia

Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.5, No.15 2014
Poverty to Progress and Distress to Viability: Breakthroughs in
Ethiopia
Teklu Kassu (Corresponding Author)
Ethiopian Civil Service University
E.mail: teklukasu@gmail.com
Professor D.K Mishra
Melesse Asfaw, Ph.D., PMP
E-mail: drmelesse@gmail.com
Abstract
Good News in Africa was uncommon. But Ethiopia is harvesting it in the current century in Economic progress,
Fiscal viability and Stability among others. The purpose of this study is to assess economic progress and
External Public debt in Ethiopia during the recent three planning periods: Sustainable Development and Poverty
Reduction program (SDPRP) Plan for Accelerated and Sustained Development to End Poverty (PASDEP) and
the Growth and Transformation Plan (GTP) periods which covers decade of 2003-2013. To this end, secondary
data on public debt and other relevant macroeconomic issues of the decade under study were collected, adjusted
and collated. Economic progress indicators such as GDP, percapita income, poverty level, unemployment,
income inequality and Debt indicators such as Liquidity Monitoring Ratios, Debt Burden Ratio, Present Value
Indicators, Debt Structure Indicators, Dynamic Indicators and Fiscal Indicators were collected/ computed and
analyzed to measure economic progress and the debt service capacity of the country. The result from descriptive
analysis of secondary data over the last 10 years showed that: The country registered uninterrupted and historic
economic growth with an average rate of 10.9 percent during the decade. The rate of investment grew to 33
percent. Domestic saving rose to 17.7. Import shares about 28 percent of GDP and per-capita GDP grew to 550
USD, un employment reduced to 17.5, poverty level came down to 26 percent and income in equality to 29
percent. The growth in debt accumulation and debt service cost did not compromise economic growth, equity,
employment and poverty reduction. The country’s debt utilization and management capacity significantly
increased. External Public debt of Ethiopia is well managed. There is no alarm of debt distress, no significant
manifestation of debt crises risk as it has track record in economic growth history and favorable growth potential
along with not high present value of external debts outstanding. The 1990’s debt problems are not issue of worry
now. The potential of the country to mobilize external debt finances at international level is improved. The
country was rated as B and B+ by leading international raters for its credit worthiness. More over the country
stayed as an island of stability in very unstable neighborhoods. In the other side, researches about private sector
development and policy advise papers show absence of easy access, unavailability and unafordability of finance
for private sector and weakness of institutional and policy environment. In this paper, the national policy makers
and implementers are advised to work on institutions and infrastructures required to make easy access of finance
for private sector and optimum use of debt finance, reducing bureaucracy, complex regulations and improving
transparency to attract and retain foreign finance and reduce primary deficit and growth in current expenditure,
raise efficiency of borrowing, reforms in debt management to sustain viability and look for non commercial and
concessional external borrowings for present an next GTP financing.
Keywords: Public External Debt, Economic growth, Debt distress, Fiscal Viability.
Introduction
Borrowing is an important source of development finance. Researchers have examined a number of reasons why
governments borrow from internal and external sources. The reasons include: to meet budget deficit, to maintain
economic stability, to finance development plan, to finance wars, to allocate resources, to create social overheads,
to finance public enterprises. (Source). To countries with limited taxable capacity, worried about
macroeconomic stability and having the will to economize, debt finance becomes Hobson’s choice.
The role and effect of public debt has been a matter of controversy among economists in the literature
of public finance. Recently, economists and policy makers have changed their mind from the debate of whether
external debt is important to the growth and transformation of a country to how much is needed in keeping fiscal
viability. An important role of public debt in developing country is economic growth by pushing an economy in
state of rest and catalyzing economic processes. The negative effects include the debt overhang effect,
uncertainty and the liquidity constraints which affect the confidence of both loan providers and recipients about
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the repayment of loan together with its services and future resource inflows. In almost all of its history, Ethiopia
has not been able to raise its own adequate domestic financial resources to finance its development planes. The
country has been suffering from the problems of resource gap and forced to rely on external debt finance.
Ethiopia has been known to the world in two white and black faces. The former was related to its un-colonization,
early civilization, large productive population, untapped natural resources and 13 months of sun
shine while the latter was due to its poverty, famine, drought, war, inequality and lack of economic, social and
political progress, debt distress and the likes among others. Two decades ago, the country was below threshold in
almost all African development indicators. Income inequality was wider. One third of population lives under
poverty line and GDP was very small (10.5b in 1991) and the changes in GDP were below 5 percent.
Unemployment was more than 26.1 percent. It was a highly indebted poor country with fragile micro economic
condition and big debt overhang problem when the present government comes to power in 1991. Nihal
Kappagoda,(2004)
Recently, this unique old Sub Saharan African country has shown its will and commitment to
sustainable growth and development in its legal frame works including constitution and now harvesting the fruits
of its political, economic and administrative will and commitments. A number of macro-economic reforms were
undertaken to recover and establish stable micro economic environment, resume growth and to put the country at
the right side of debt distress problem. Due to this, this least developed country walked up on the ladder of
growth and was ranked as the third fastest growing economy in the world next to china and India in2011 and as
the first of the five fast growing countries in Africa in 2014(World economic Forum 2011,2014).
This paper examines the journey of Ethiopia in debt and growth path and its transition from poverty to
progress and distress to viability and to identify risk factors that may hinder Ethiopia from maintaining the
sustainability of its future debt and growth path. The term economic growth and economic development are
conventionally used to describe a long term cumulative process of economic change involving the progressive
development of the productive base of the economy and leading to self sustaining, increasingly higher levels of
economic activity Gerald M and Robert E. (1957). . This study examines economic performance of Ethiopia
within the last one decade. So the synonymity of growth and development does not work and the analysis is done
in the sense of economic growth by comparing the economic performance (growth) of the country and its effect
on employment creation, poverty reduction and equity aspects within and before the study period.
Debt viability analysis of Ethiopia was conducted in reference to the initiative and frameworks set by
the World Bank to identify countries under actual or potential debt distress for IDA grant eligibility. The World
Bank has used Highly indebted poor country (HIPC) imitative concerned with debt overhang problem poor
countries resulting from their past borrowing using single debt service ratio as an indicator and Debt
Sustainability framework (DSF) which focuses on future indebtedness by measuring the public and publically
guaranteed loans as proportion of the size of economy and export in addition to the strength and weakness of the
country in policy and institutional environment. The World Bank allocates funds for low income countries based
on need and performance. Countries performance is measured using CPIA organized into four major categories
related to (Economic management, Structural policies, policies for social inclusion and equality and public sector
management and institution) including about twenty elements associated to the major category. Based on the
country policy and institutional assessment (CPIA), Ethiopia was classified as medium performer. The threshold
for medium performer is as follows. Debt to export: 150, Debt to GDP: 40, Debt to Revenue: 250, Debt Service
to Export :20,Debt Service to Revenue 30,Present Value(PV)of Debt to Export and Remittance: 135, Debt
Service to Export and Remittance:18,Debt to GDP and Remittance:36
Literature
Andrew B.Abel (2001) defined Public debt as the total value of government loan that are outstanding at any
particular time. It includes internal and external public debt. External debt (or foreign debt) is that part of the
total debt in a country that is owed to creditors outside the country. The debtors can be the government,
corporations or private households. The debt includes money owed to private commercial banks, other
governments, or international financial institutions such as the IMF and the World Bank. In the Ethiopian
context public debt mainly includes: The Central government external debt, loan contracted b/n foreign creditors
and MoFED:
the Government guaranteed external debt that comprises loan and suppliers credit contracted by State
Owned Enterprises(SOE): (Ethiopian Electric Power Corporation (EEPCO), Ethiopian Sugar
Corporation,(ESC) Ethiopian Railway Corporation, (ERC) ,Ethiopian shipping lines (ESL) granted by
MoFED and state owned Commercial Bank of Ethiopia( CBE) .the Non-Government guaranteed
external debt that Contains loans contracted by SOE especially Ethiopian Air Lines and Ethiopian
Telecommunication Corporation (EAL and ETC) the internal debt which include the debt of the
national government raised through direct bank advances, Treasury Bill and Bonds. (MoFED, 2013)
The concept of external debt as such was condemned earlier by classical economists like Hume and Adam Smith
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who considered that it would compel the government to tax the public and hence lead to disequilibrium in the
economic system. Later the Great Depression of 1929 brought about a marked change in economic thinking of
which J.M. Keynes was the pioneer. It was felt that external debt would raise the national income, lead to
effective demand in the economy, and increase employment and output. Hence it was after the Second World
War that external debts came to occupy a prominent place in the budgets of governments.
Modern fiscal policy endorses unbalanced government budgets for purposes of stimulating economic
growth and stabilizing the economy, its application leading to a growing external debt. Growth of external debt
has been quite substantial in almost all developing economies in recent years. According to Rostow (1960)
external debt will act as a catalyst to capital formation in developing nations especially at the second stage of
development i.e. preparation for takeoff.
There is another side(negative role) to the external debt in economic development. If externally held
debt is incurred in reckless spending it would obviously result in a burden. The payment of interest and principal
require the transfer of a portion of real output to other nations. Excessive external borrowings as well as their
irrational deployments can become obstacles to economic development, if borrowed resources are not properly
utilized. One burden of external debt is extra taxes have to be imposed to finance the interest payments. These
taxes lead to some loss of real output because of their distorting and disincentive effects. It does contribute to the
negative effects of the tax system. Thus dead weight loss is borne year after year as the interest payments
continue to be met.
As the debt financing of public spending leads to the decline in investment, there would be another
unambiguous loss of output. Future generation would inherit a small stock of capital, an economy with a smaller
capacity to produce, hence a smaller output. Debt financing also reduces private investment. Further, the higher
taxes to cover the interest must have some negative influence on investment. Finally, the existence of large debt
may have psychological influence on business behavior. If people really get alarmed over the national debt, the
loss of confidence may curtail their investment. The significance of this psychological factor is difficult to
evaluate. The average citizen fears the debt mainly as a source of inflation. The debt represents past outlays that
were not matched by taxes, hence it measures past government claims to resources that it could not pay for. If
government engages in debt financing when the economy is already at full employment, existence of a large
public debt tends to shift the consumption schedule upward. This shift will be inflationary.
There are a number of empirical studies in the literature of public finance dealing with the nexus of
external debt and economic performance. Studies in Africa show that Africa’s foreign debt to GDP is the highest
in the world. Some of them use about fifty percent of their export earnings. Their earning potential to serve the
increasing debt accumulation is limited. (Iyoha, 1999, cited in Mohamed and Demelash, 2010), Sachs (2002),
Adepoju etal. (2007), (Hunt, 2007), Khan, 2000). Ubokudom,Ogunmuyiwa,(2011), Qiu,(2010). Mohamed and
Demelash(2010) have critically examined the role and effects of public debt using time series macro economic
data and fitting it into the regression equation using various econometric techniques and come up with scientific
conclusions. Adepoju et al. (2007) note that developing countries are characterized by inadequate internal capital
formation due to the vicious circle of low productivity, low income, and low savings. Therefore, this situation
calls for technical, managerial, and financial support from international financial institutions and richer countries
to bridge the resource gap.
Colaco (1985) explains debt service vulnerability in developing countries using three contexts. First,
the size of external loans has reached a level that is much larger than equity finance, resulting in an imbalance
between debt and equity. Secondly, the proportion of debt at floating interest rates has risen dramatically, so
borrowers are hit directly when interest rates rise. Thirdly, maturities have shortened considerably in large part
because of the declining share of official flows. The analysis by Amoateng andAmoaku (1996) on 35 countries
for the period between 1970-1990 using granger causality tests declared that there is positive unidirectional
relationship between external debt service and GDP excluding remittances.
Materials, Method and Variables
Substantial data to accomplish this research work has been sourced out of statistical bulletins, economic reports,
press release reports and the likes of the National Bank, Ministry of Finance and Economic Development and
Central Statistical Authority of the Federal Government of Ethiopia and reports of IMF and WB joint Debt
sustainability analysis of Ethiopia. Descriptive method of research is employed to describe a situation, problem
and phenomenon of the country in question systematically.
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215
Description of Variables
EPPGDOSC: The central government and central government guaranteed external debt
Outstanding at the end of every Ethiopian fiscal year.
EPPGDS: Principal, interest and other payments related to central government
Guaranteed External debt
EPPGDDIS: The amount that has been disbursed from public and publically
guaranteed loan Commitment
EPPGDEXR: The ratio of disbursed debt outstanding EPPGD to export which measures
the ability of the country to pay its debt in a single year from its export
earnings.
EPPGDGDPR: The ratio that compares the amount of disbursed debt outstanding to the
Size of economy.
EPPGDRR: The central government and central government guaranteed external debt
to government Revenue
EPPGDSEXR: The ratio of The central government and central government guaranteed
external debt service to export of goods and service that are absorbed for
debt service payment.
EPPGDSRR: The ratio of the central government and central government guaranteed
external debt service to export of goods and service that are absorbed for
debt service payment.
PVEPPGDEXRR: The present value of the central government and central government
guaranteed external debt to government Revenue
PVEPPGDGDPR: The present value of the ratio that compares the amount of disbursed debt
outstanding to the size of economy
Data, Discussion And Result
Ethiopian Economic Performance (2003-2013)
1. Economic growth: Ethiopia, an old and poor African country is harvesting good news in the horn of Africa.
The countries will and commitment to grow and develop to assist the nation’s competitiveness shown in five
year plans enabled the country to achieve what it has not able to do in centuries. A lot of state financed huge
development projects with long gestation period like rail ways, sugar mill, fertilizer factories, mega power
dams, public housing and mobile network expansions are going on. During the recent three planning periods,
the national economy was inching towards double digit growth. During the last decade, Ethiopian economy
has grown by an average of 10.9 percent which is twice the African average growth .In the same period, an
average growth rate of the world, Africa, India and china were 3.88, 5.7, 8.18 and 10.5 respectively. The
country has shown sustained growth even during 2008 by recording 10.1 percent growth when the world
and developed countries economies decreased by 0.6 and 3.6 respectively. Economic growth during the first
decade of the present government (1991-2002) was about5.5 percent and it was only 1.7 percent for the
entire Derg regime (1974-1991). The present day economic growth of Ethiopia is about double of the
preceding decade and about 700 percent of the replaced government.
2. GDP and per-capita Income. Due to the strong efforts exerted by the government there was a tremendous
increase in national outputs. Agriculture which is a source of growth in Ethiopia, improved its output to 235
million tons in 2012 from 62 million tons in 1991 which is more than 270 percent increase. 10 percent of
which is accounted for within the present decade. Exports of the country jumped to 3.1 billion USD in 2012
from 276.4 million in 1991 and 601.8 million in 1998.(MoFED). Due to this and other factors, Real per-
Capita income has grown by 9.8 percent between 2004 -2012. It was (1.0) during 1974-1991 and 2.6
between 1992 and 2003.
3. Economic growth and Poverty: Ethiopia’s economic progress reduced urban and rural poverty in Ethiopia.
About 45percent of people lived under poverty line in Ethiopia in1995. It was reduced to 29.6 in 2010 and
come down to 26 percent in 2012. A report by (AUC, ECA, ADB and UNDP, 2012:1) also witnessed
Ethiopia’s fast growing economy which reduced poverty when the situation is not true for most African
Countries. (AUC, ECA, ADB and UNDP, 2012:2) also confirmed and projected that Ethiopia is left with
only 7 percent and to achieve its millennium development goal in 2014.
4. Economic growth and inequality: Equity matters. Fair distribution of the national output among people is
essential. Even though it is difficult for developing countries to distribute what the economy has produced
among the people without compromising reinvesting. Ethiopia has tried to do so. Ethiopia’s income
inequality as measured by Ginny coefficient which ranges between 0-1 is less than most nations in the world.
It was 0.29 in 1997 and remained the same 29.98 in 2011. It did not increase proportional to economic
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5. Economic growth and unemployment: Any equitable economic growth is expected to bring employment
or reduces unemployment. In Ethiopia, unemployment was a serious agenda for urban dwellers. In2002,
more than 26 percent of Ethiopia’s urban dwellers had no jobs or were under employed. It has shown
significant improvement and was reduced to 23, 20.4, and 19.18 1nd 17.5 during the years (2003, 2008,
2009, 2010 and 2012 respectively.) During the last 10 years urban poverty in Ethiopia was reduced by 8.7
percent.
Economic growth and External Public Debt
The external debt of Ethiopia refers to the liability of Ethiopian government, public sector, private sector and
financial institutions to foreign parties. External debt can be broadly divided into two groups. Long term bond: a
Multilateral, Bilateral or IMF, W.B etc borrowing with maturity of more than one year and Short term debt
which is a debt payable within one year period of time. The overall external debt of Ethiopia, comprises
government and none government debt. The government debt is owed by government authorities both at federal
and regional government where as non government debt is owed by private parties in Ethiopia. Government debt
also classified as Central Government debt, government granted and non-granted. The non- granted debt
comprises debts of Ethiopian Airlines and Ethiopian Telecommunication Corporation. None government granted
debts of EAL and ETC are excluded from Ethiopia’s external debt analysis because of their managerial
independence, term of borrowing(commercial terms) ,profit motive and external reporting of audited financial
statement.
During recent years public debt of Ethiopia has been growing at high rate. The underdeveloped nature of the
economy and institutional credit deficiencies make the financing of economic development a complex problem.
Hence the government has to play a key role in stimulating the rate of capital formation and in promoting the
economic development of the country. Therefore public borrowing can be used by the state as a means of
mobilizing financial resources.
The following tables shows the composition of Government and and Government Guaranteed public debt of the
federal government of Ethiopia and debt indicator ratios for the period of 2003/4-2012/13
Table 1: External Public Debt of Ethiopia and its Ratios (2003/4-2012/3)
216
Year PSED PPGED Disburs
Deb
ser Deb.rel Gra.ele
EPPG/
GDPR
EPPGDS/
EXR EPPGD/RR
EPPGD
/EXR
PVEPD/
GDP
PVEXD
EX
PVEXD/
RR EDS/EXR
2003/4 7,317.84 7,096.02 551.7 99.37 94.69 59.68 0.813353 0.063646 0.074191 5.30026
2004/5 5,917.04 5,598.14 497.98 108.67 1,837.39 56.8 0.564984 0.040868 0.062765 3.06683
2005/6 5,998.53 5,676.27 423.16 108.26 339.16 36.92 5.123189 0.028657 0.442912 3.00789
2006/7 2,314.56 2,033.09 357.79 99.38 4,090.40 60.96 1.655603 0.021891 0.377036 1.0753
2007/8 2,766.15 2,521.40 394.1 88.67 43.85 56.52 1.842214 0.018174 0.332654 1.20814
2008/9 4,352.16 3,365.43 1,750.20 77.16 18.69 73.74 2.219443 0.020309 0.264351 0.06969 9.1 80.9 65.4 1.3
2009/10 5,633.26 4,357.63 1,564.49 111.28 11.64 41.8 2.641283 0.031365 0.432939 2.01978 12.5 119.1 98.1 3.6
2010/11 7,807.60 5,765.29 2,081.47 241.88 9.12 40.99 3.178634 0.049312 0.542422 2.66473 17 132.7 122.5 5.7
2011/12 8,888.65 6,777.42 1,650.40 412.07 17.63 32.97 3.482474 0.069692 0.725844 3.05085 18.3 129 122.4 7.7
2012/13 11,117.22 8,517.38 2,679.15 550.59 9.5 38.94 18.7 124 118.5 7.7
Source MoFED and Own computation
1. Debt Outstanding: External Public debt of Ethiopia is very small. With the size of its economy, Ethiopia is
yet to reach its debt ceiling. It did not show substantial raise as the national economy did so in recent decade
During PASDEP, it has shown a decreasing trend. Total public sector external debt outstanding reduced to
4,352.16 million USD in June2008 from 7, 317.84 million USD in June 2003. During the same planning
period, Public and Publically Granted External debt outstanding were reduced to 3,365.43 million USD in
2008 from 7,096.02 million USD in June 203. During the present five year planning (GTP) , due to massive
public sector investments in mega projects, External debt of the country is increasing at an increasing rate.
Total public sector external debt and Public and publically granted external debt reached to 11,117.22 and
8,517.38 Million USD respectively in June 2013 from 5,633.26 and 4,357.63 In June2010 which is more
than 95 percent increase in both cases.
2. Commitment and Disbursement: The countries credit worthiness and paying capacity has been improved
continuously. The country remained as an island of stability in very unstable neighborhood (Eritrean,
Somalia and Sudan), increased its export in value, volume and destination, silent for international financial
crisis and recorded an average of 10.9 percent annual economic growth for decade, rated as B+ and B by
globally known raters (Moody’s Fitch and P and S) for its credit worthiness, shown political will and
commitment to grow even by its own resource at the wrest case and many other efforts , external financial
assistance commitment and flow to the country is improved during the study period. Due to this, as it can be
seen from the table annexed, new external public debt commitments and disbursements has shown
significant increase for the decade as a whole and an exceptional growth during the recent five year (GTP).
During the decade a total of 18800.91 million USD loan commitments was signed and about
11950.44million USD were disbursed. Of this total over 86 and 81 percents respectively were signed and
disbursed in the recent five year.
3. Debt Relief: Optimum use of available debt relief possibilities is an important element of sound debt

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management Ethiopia reached Highly Indebted Poor Countries (HIPC) completion point in 2004 and
benefited from Multilateral Debt Relief Imitative (MDRI) in 2006. It has received significant amount of debt
relief from most of its commercial and non commercial lenders. It has received about 6472.07Million USD
from its Multilateral and Bilateral creditors during the last ten years. Ethiopia has enjoyed substantial debt
relief, about 98.3% from World Bank, International Monitory Fund, and African Development Fund during
2006/7 due to HIPC and MDRI. In 2005/6 IMF has cancelled about 164.8 USD under HIPC and MDRI. The
debt has come down to 2,324.8 million and become sustainable. Public and Publically Granted External
public debt was reduced by five percent of GDP in 2006 from 23.4 percent in 2005 to 18.4 in 2006. Debt
relief negotiation for 540.4 Million USD which accounts about ten percent of debt outstanding in 2009/10 is
going on with some bilateral official creditors and Russia and some of it is advancing in good direction.
4. Debt Service: Debt service refers to withdrawal of resources from a country due to payment of principal,
interest and other payments related to debt management. A country is forced to export goods and services in
amount to debt service without importing any or go for another new loan to service its existing external debt.
If it is too huge, it can consume the substantial portion of exports and affects the countries capacity of
import financing. So it should be with in moderate range. Ethiopia’s debt service payment has shown an
increasing trend during the last ten years in general and during GTP (as of late 2010) in particular. About
28140.73 million USD were spent as debt service in last decade. 22,859.31Million USD which accounts
over 81 percent is disbursed as debt service during GTP.
5. Concessionality: Concessional loans are loans that are extended on terms substantially more generous than
market loans. Concessional external debt conveys information about the borrower's receipt of aid from
official lenders at concessional terms. Concessional debt refers to loans with an original grant element of 25
percent or more. The grant element of a loan is the grant equivalent expressed as a percentage of the amount
committed. It is used as a measure of the overall cost of borrowing. The grant equivalent of a loan is its
commitment (present) value, less the discounted present value of its contractual debt service; conventionally,
future service payments are discounted at 10 percent. Loans from major regional development banks--
African Development Bank, Asian Development Bank, and the Inter-American Development Bank--and
from the World Bank are classified as concessional. About fifty percent of the total debt committed to
Ethiopia during the last ten year was in concessional terms. The highest concessional loan with grant
element of73.74 percent was committed in 2008/9 and the lowest with grant element of 36.92 was
committed in 2005/6.
6. Present values: the present value of PPG external debt of Ethiopia is continued to increase to 14.4percent
of GDP at the end of 2013/14 fiscal year and expected to rise to 19 percent of GDP in 2017/18. Even though
it has showed increase and expected to increase, it was not beyond sustainability range and expected to be
within the sustainability range. Two offsetting events that increase and decrease external public debt to GDP
ratios are forecasted for the next five years. PPG external debt will raise due to the ambitious growth and
Transformation Plan (GTP) which planned huge public sector investments to be financed from external debt
sources and also the enhanced capacity of the country to raise loan at international level due to
internationally recognized rating of B and B+ for its credit worthiness which will increase PV.of PPG
external debt. On the other side GDP of the country is expected to grow due to the favorable economic
conditions, the resilience of the economy to international distress and will and commitment of the
government to economize. Therefore an increase in PPG external debt will be offset by an increase in GDP
keeping PV of PPG/GDP with in sustainable limit. The debt to GDP ratio has reached about 348 percent in
2011/12 and continued to grow. According to the information obtained from Ethiopian Ministry of Finance
and Economic development (MoFED), Ethiopia’s external debt grown by over 95 percent during the last ten
years .The main reason for increasing public debt in Ethiopia was the requirement of resources for financing
the mega development projects and programs as both tax and nontax revenues were totally in adequate to
finance the government expenditure. The external debt increased significantly during the five year growth
and transformation plan (2011 to present) as it was utilized for import payments. Public and Publically
Guaranteed External debt to exports of goods and services in Ethiopia was over 300 percent in 2011. Its
highest value over the past 10 years was 530 percent in 2003/4, while its lowest value was 6.5percent in
2008/9. Public and Publically Guaranteed External debt as percentage of GDP was 348 percent in Ethiopia
21 as of 2011. Its highest value over the decade under study was 512 percent seen in 2005/6 while its lowest
value was 0.56percent shown in 2004/5. In 2011/12 EPPGDRR reached to its maximum level of 72 percent
of GDP over ten recent years. The minimum ratio was 6.27 percent shown in 2004/5.
7. Management of public debt: The growth of public debt puts burden on the citizens of the country. The
burden of public debt adversely affects the growth and development of the economy. Therefore there is a
need for efficiently manage public debt. Management of the public debt involves repayment of public debt,
controlling the amount of borrowing, and the productive use of borrowed fund for development. In Ethiopia
Public debt is well managed. The use of remittances from Ethiopian Diaspora throughout the world as an
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important source of debt service payment significant improvement in Ethiopian export earnings, the
countries efficiency in utilizing soft term loans and the resilience of the country economy to international
financial crisis has helped the countries debt distress vulnerability to come down from moderate to low risk.
There is no significant risk of debt un viability. Debt viability refers to the capacity of a country to service
all its borrowings from any sources in any form and term without curtailing its long-term development aims
and purposes. Countries use various debt indicators and levels to estimate sustainable levels of borrowing.
8. Productivity of public debt: Productivity of public debt is measured by the use of borrowed money for
creation of productive assets. Ethiopia has relayed on debt sources to finance its huge state financed projects
like :Road construction, Education, Health ,Mobile net work expansion, , Rail way, Erection of sugar miles,
Fertilizer factories, Acquiring vessels, Creating whole sale companies, Mega power dams, Public housing
and likes which are designed to enhance the nation’s economic competitiveness under its Five year planes.
9. Debt and Road: Standard road net work availability is an essential infrastructure to make and sustain
economic growth, product competitiveness, develop private sector and enhance the well being of nations
among others. In Ethiopia, road transport is a leading type of transport which accounts more than 90 percent
of goods and traveler transports. In Ethiopia, the road net works (asphalt, gravel, federal rural or
community/woreda) are at premature stage. There are a lot of woredas and zones without a single km.
asphalt road. According to Ethiopian Roads Authority (ERA), Ethiopia demands about 200,000 K.M roads
to provide faire access to its people. In 2011/12, the total stock of federal rural and woreda roads network
reached 63,083 km. Out of which asphalt accounts less than half. Construction of road is very costly and
cannot be financed from the domestic capital. It is advisable to developing country to make huge
investments in infrastructures by borrowed fund. To this end Ethiopian government has assigned substantial
borrowed money from external and domestic sources to finance the federal, rural and urban roads during the
last five year planning periods? Total of 96.5 billion borrowed birr was invested in this sector since 2004-
2011. The annual investment expenditure in road has increased to 29 billiion birr in 2011/12 from 3.1 billion
in 2004/4. It has shown over 900 percent change. During the period, the road density has improved from
0.50/1000 person and/or33.7/1000 sq.km to 0.75 /1000 person and/or 57.3/1000 sq.km. at the late
2015,GTP,planed to increase it to 123.7km/1000 person and 1.54km/1000sq.km. The following table show
annual external debt disbursed to road construction.
Table 2: Debt finance in Road Sector (2004/5-2011/12)
F.Y 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12
Debt finance 3,114.3
0 4088.1 6215.2 8977.5 10,930.4 15,038
218
19,490.
9
28,616.
3
Source: Ethiopian Road Authority (2013)
10. Debt and education: Education plays an important role in the process of economic progress. Educated
person is an asset to given country. Ethiopian government has set strategic plan to improve education and
training in Ethiopia in quantity and quality. About 20 percent of national budget has been assigned to the
sector in average during the recent ten years and it exceeded quarter of national budget in 2011/12. The
number of educational institutions and the number of student were increased significantly during past years.
The ratio of student in relation to: School, section, teacher, book and other indicators has improved from
primary to tertiary level. As it is consuming large share of national budget, its share of external finance is
also significant. The table below external debt allocated to education sector during the recent ten years.
Table 3: Public External debt disbursement for education in Million USD, (2003-2012)
Year 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2010/11 2011/12 2012/13 2013/14
Debt
8.65 23.95 25.01 51.58 39.34 49.78 28.14 54.88 38.27 15.68
finance
Source: MoFED 2014
11. Sustainability of public debt: However Ethiopia has carried a mounting debt owed to foreign creditors and
its external debt is ever increasing; the national debt stock is well managed. The debt sustainability ratio is
very good and it is on the right side of the debt distress problem. The government did not crowd out private
investment. According to the Govt. of Ethiopia private sector domestic borrowing increased by 17%
in2014.This shows debt financing in Ethiopia did not caused liquidity holdup. A combination of revenue
from exports, flow of foreign direct investment, and an increase in remittances have contributed to lifting off
Ethiopia from the list of moderate risk countries to low risk countries.
Conclusion and Policy Recommendation
Ethiopia, an old unique and early civilized African country was also known to the world as least developed poor
Sub Saharan country. At this decade, this poor country is advancing in right direction to achieve the MDG target
of reducing poverty by half in 2015.In Ethiopia, the depth of poverty reduced significantly with in the decade
under study. It has come down to29.6 % in 2010/11 from 38.7 % in 2004/. During the same period, poverty gap

Vol.5, No.15 2014
is also reduced. Nationally, the Gini coefficient for per adult equivalent consumption remained constant. In
urban areas there was a substantial decline in inequality from 44 % in 2004/05 to 37.8 % in 2010/11 while it was
increasing until 2004/05 at an alarming rate. The national economy was inching towards a decade with annual
economic growth of double digit was historic for its uninterrupted expansion in Gross Domestic Product (GDP).
The double digit economic growth is expected to continue for the next years due to enhancement in agricultural
productivity, expansion in industrial investment and consequent growth in services.
Ethiopia was under serious external debt problem ten years before. It has very limited access and utilization
capacity to external loan, not rated and not trusted for its credit worthiness by global lending communities and
vulnerable to high debt distress risk. Within the recent decade,(2003-2013), it has made a breakthrough. It
became low risk country with regard to its external debt sustainability. EPPGD and the overall national debt
become sustainable, more debt relief has been taken, debts are on fixed interest long terms, grant elements are
not less than 35 percent, Debt service, debt stock and risk of unsustainability come down due to the raise of
HIPC and MDRI, Debt burdens are reduced and access to international finance is improved. At present, Public
and publically granted external debt of Ethiopia is at the right side of debt distress problem. The significant
improvement in this regard is due to enhancement of international trade and the inclusion of remittances as an
important source of debt service. In this conclusion, the non Government granted debts of Ethiopian Airlines and
Ethiopian Telecommunication Corporation are excluded even though they are parts of external public debt of
Ethiopia. Recently their liability is exceptionally increasing at an increasing rate. Appropriate debt management
for all granted and non granted debt is required to retain the present low risk level. Ethiopia government is
advised to: Reduce primary deficit, Reduce growth of current expenditure by reducing: Government
consumption expenditure, subsidies, capital assistance and subsidies to public enterprises, liquidation of public
debt, and reduction of government civilian employment, Raising efficiency of borrowing programs of the federal
government, Reform debt management of regional governments, Consolidate sinking fund, Improving the state
of the debt market and Proper monitoring of expenditure reduce and repay public debt among others.
References
Abraham Tekiste (2013), Constitution, Democracy and Development in Ethiopia
Adepoju, A.A., Salau, A.S., Obayelu, A.E. (2007), "The effects of external debt management on sustainable
economic growth and development: lessons from Nigeria", Paper No. 2147, Munich Personal RePEC
Archieve (MPRA), Munich]
AUC, UNECA, AfDB and UNDP (2012) MDG Report 2012: Assessing Progress in Africa Towards the
Millennuim Development Goals. Addis Ababa.
Befekadu Degefe., 1992. Growth and Foreign debt: the Ethiopian experience: 1964-1986. African Economic
Research Consortium Research Papers, No 13. Kenya: English press limited.
Capital News Paper; year 16,No.806 ,Sunday May 18,2014
Capital News Paper; year 16,No.807,Sunday May, 25, 2014
Catherine Pattillo, Hélène Poirson, and Luca Ricci WP/04/15 IMF working paper What Are the Channels
through Which External Debt Affects Growth?
CSA (2012) Analytical Report on the 2012 Urban Employment Unemployment Survey. Addis Ababa. Ethiopia
Ejaz Ghani(1995), Is Ethiopia s Debt Sustainable?
External Debt Statistics: Guide for Compilers and Users. 2003, international Monetary Fund, Washington D.C.)
Federal Democratic Republic of Ethiopia (2013), Development and Poverty in Ethiopia, 1995/96-2010/11
International Monitory Fund (2010), The Federal Republic of Ethiopia Joint IMF/World Bank Debt
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Sustainability Analysis
International Monitory Fund (2012), The Federal Republic of Ethiopia staff report for the 2012 article IV
consultation –debt sustainability analysis
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consultation –debt sustainability analysis
Mehdi Safdari1 and Masoud Abouie Mehrizi External debt and economic growth in Iran
Minga Negash (2008), Ethiopian Diaspora Investment Potentials and Ethiopian Electric Power Corporations
Millennium Bond: University of Witwatersrand
Ministry of Finance and Economic Development (2008), Public Sector Debt Statistical BulletinNo.1, (20030/4 –
2007/08)
Ministry of Finance and Economic Development (2012),Ethiopia’s Medium term Debt Management strategy
Ministry of Finance and Economic Development (2013), Public Sector Debt Statistical Bulletin No.11, (2008/09
- 2012/13)
MOFED (2012) Ethiopia’s Progress Towards Eradicating Poverty: An Interim Report on Poverty Analysis
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Mohammed Yosuf and Demmelash Habte(2010), External Debt and Economic Growth in Ethiopia

Vol.5, No.15 2014
Naeem Akram(2010), Impact of Public Debt on the economic growth of Pakistan
Nihal Kappagoda,(2004), debt sustainability framework for low-income countries policy and resource
220
implications
WW.Rostow ,(1960),The stages of Economic Growth: Anon-Communist Manifesto: (Cambridge: Cambridge
University Press
Yunhe Qiu(2010) Debt Crisis and Debt Sustainability In Developing Countries
Annexes
Annex.1. Real GDP Growth Rate of selected countries and regions
Country 2003/ 2004/ 2005/ 2006/ 2007/ 2008/9 2009/ 2010/1 2011/1 Avera
Ethiopia 11.7 12.6 11.5 11.8 11.4 10.
1
10.5 11.4 11.1 11.34
Sub
Saharan 7.1 6.2 6.4 7.1 5.6 2.8 5.3 5.1 5.4 5.67
Gana 5.3 6.0 6.1 6.5 8.4 4.0 7.7 13.6 8.8 7.38
Botswan
6.0 1.6 5.1 4.8 3.0 -4.9 7.2 4.6 3.3 3.41
a
Moriciou
s
5.5 1.5 4.5 5.9 5.5 3.0 4.1 4.1 3.6 4.19
Senegal 5.9 5.6 2.4 5.0 3.7 2.1 4.1 2.6 3.8 3.91
Kenya 4.6 6.0 6.3 7.0 1.5 2.6 5.6 5.0 5.2 4.87
Malawi 5.5 2.6 2.1 9.5 8.3 9.0 6.5 5.5 4.3 5.92
Mozambi
7.9 8.4 8.7 7.3 6.8 6.3 5.8 7.1 6.7 7.22
qe
Ruwanda 7.4 9.4 9.2 5.5 11.2 4.1 7.5 8.8 7.6 7.86
Tanzania 7.8 7.4 7.0 6.9 7.3 6.7 6.5 6.7 6.4 6.97
Uoganda 6.8 6.3 10.8 8.4 8.8 7.2 5.9 6.7 4.2 7.23
4.5
Mali 2.3 6.1 5.3 4.3 5.0
.
5.8 2.7 6.0 4.83
World
economy 4.9 4.5 5.2 5.4 2.8 -0.6 5.3 3.9 3.5 3.88
Develope
d
3.1 2.6 3.0 2.8 0.0 -3.6 3.2 1.6 1.4 1.57
Country
China 10.1 11.3 12.7 14.2 9.6 9.2 10.4 9.2 8.2 10.54
India 7.6 9.0 9.5 10.0 6.2 6.6 10.6 7.2 6.9 8.18
Brazil 5.7 3.2 4.0 6.1 5.2 -0.3 7.5 2.7 3.0 4.12
Source: MoFED(2013)
Annex 2. Poverty in Ethiopia
Description People living under poverty in percentile
1995 1992 2005 2013 2012
N ational 45.5 44.2 38.7 29.6 2 7. 6
Rural 47.5 45.4 39.3 30.4 28.6
Urban 33.2 36.9 35.1 25.7 23.8
Annex 3. Real Gross Domestic Product and Real Per-capita GDP Growth Rate
Description 1972-1991 1994-2003 2003 2004-2011/12
Real GDP Growth Rate 1.7 5.5 (2.1) 11.4
Real Per-capita GDP Growth Rate (1.0) 2.6 - 8.8
Source: MoFED (2014)

Vol.5, No.15 2014
Annex 4. Income Distribution in Ethiopia (GINI Coefficient)
Year Rural Urban National
1996 0.27 0.34 0.29
2000 0.26 0.38 0.28
2005 0.26 0.44 0.30
2011 0.274 0.371 0.298
Source: MOFED (2012).
221
ANNEX 5. UNEMPLOYMENT IN URBAN ETHIOPIA
Year Unemployment Rate
2003 26.2
2004 22.9
2009 20.4
2010 18.9
2011 18.0
2012 17.5
Source: CSA (2012).

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