Twenty years ago, Bob Geldof, at the launch of Live Aid, argued: “Doing nothing for Ethiopia would mean you were complicit in murder.” This briefing is produced by Jubilee Research at nef (the new economics foundation) in February 2004 — 20 years after Live Aid, and one year after Ethiopia’s worst drought in history. We explain how G7 creditors, having promised substantial debt relief, have stalled the disbursement of relief, and are doing nothing for Ethiopia; this despite the fact that according to their own commitments and rules she is fully entitled to this relief. “Doing nothing for Ethiopia” we argue, is once again to be “complicit in murder”. Why? Because if Ethiopia is denied additional debt relief, her government will lose US$1 billion in new money, and be obliged to divert US$35 million [a year] to service debt repayments to much richer creditors. This money could instead be used for hospitals, clean water and sanitation.

Introduction

Late in 2003, the International Monetary Fund (Fund) and the World Bank (Bank) deemed Ethiopia eligible for an additional US$700 million (“Topping Up”) debt relief. Such relief is necessary to return Ethiopia to sustainability, according to the Bank and make her eligible for US$1 billion in new lending. If Ethiopia does NOT receive topping up then the Government will have to spend an average of about $35 million per year more in debt service over the next 10 years. In other words, getting the additional debt relief to lower Ethiopia’s ratio of present value of debt to exports to 150 per cent will reduce the annual debt service cost by about US$35 million per year over 10 years.

Jubilee Research at nef has been reliably informed that this promised relief is being delayed and blocked by the US with the tacit support of Germany and Japan. This is particularly ironic, as the Enhanced HIPC Initiative was largely the creation of the German government, which obtained G8 endorsement for more generous debt relief for countries like Ethiopia at the Cologne Summit of 1999. Furthermore, the denial of legitimate relief for Ethiopia is in stark contrast to the generous relief being considered for Iraq - whose future export revenues are projected to be 35 times those of Ethiopia.

In response to our demands that they proceed to implement their own rules and commitments, the US Treasury has argued that it is concerned that Ethiopia would have an excuse to borrow more from the Bank. “We are concerned about the bank being in a position where it is in a continual cycle of lending and forgiveness” said a US Treasury Official (FT 12 February 2004), to which we at Jubilee Research retort: the US should encourage the Bank to grant more aid - just as President Bush argued in July 2001. “Grants”, he said, “were the long-term solution to the debt burden of developing countries ... 50% of the funds, provided by Development Banks to the poorest countries be provided as grants for education, health, nutrition, water supplies, sanitation and other human needs.” (BBC News)

Ethiopia’s debt is not sustainable

Ethiopia needs additional debt relief, over and above that already granted, if she is to become sustainable, argue the Bank and the Fund. Under their stringent conditions, the external debt of poor countries is considered sustainable at no more than 150 per cent of that country’s annual export revenues. Under current debt relief arrangements Ethiopia’s ratio would be considerably higher.

To be eligible for debt relief, Ethiopia has met with the tough economic conditions set by creditors, and imposed through the Fund and the Bank, over the long five-year process of qualifying. Ethiopia has now, finally, reached completion point of the Enhanced HIPC process. Without the additional topping up — US$700 million that she has been promised and is now eligible for — the Bank and the Fund believe that Ethiopia will not emerge from an unsustainable level of indebtedness. If additional relief is denied, the Bank and Fund project that Ethiopia’s debt-to-export revenues ratio will rise to at 220 per cent after the full delivery of debt relief - fully 70 per cent above that considered sustainable.

Jubilee Research at nef has been reliably informed that although the Bank and the Fund finalised Ethiopia’s Debt Sustainability Analysis as far back as November 2003, publication of the Board paper that would move Ethiopia to completion point in the debt relief process is being delayed by the opposition of powerful Fund and Bank shareholders - notably the US, Germany and Japan. These creditors are attempting to bypass the HIPC framework, and in particular the principle of topping up debt relief for poor countries in the event of external shocks.

In other words two of the world’s richest creditors are attempting to adopt arbitrary criteria to deny a small and very poor country US$700 million of debt relief. If Ethiopia is denied this relief, debt service payments will be an additional US$35 million per year for the next 10 years. Worse, this denial of debt relief will prevent the World Bank from disbursing to Ethiopia a new, promised loan of US$1 billion - because HIPC rules prevent the Bank from lending to countries deemed unsustainable.

US$700 million of debt relief will have a significant impact on the Ethiopian economy as it represents almost twice the revenues from national exports per year. A fall in debt servicing of US$35 million per year will provide a significant fillip to Ethiopia’s budget for health, education, water and other vital services. Furthermore, if Ethiopia is to achieve its Millennium Development Goals - goals set by creditors like Germany and the US - additional debt relief, new loans and aid are urgently needed.