Ethiopia's Medium Term Debt Management Strategy

ETHIOPIA’S MEDIUM TERM DEBT
MANAGEMENT STRATEGY
(2016-2020)
Debt Management Directorate of Ministry of Finance
January 2019
Addis Ababa
Ethiopia
Ethiopia’s Medium Term Debt Strategy [2016-2020] Ministry of Finance –DMD Page 0
Table of Contents
FOREWORD ................................................................................................................................................... 5
ACKNOWLEDGEMENT ................................................................................................................................... 7
EXECUTIVE SUMMARY .................................................................................................................................. 8
I. EXISTING DEBT MANAGEMENT STRATEGY ......................................................................................... 11
1.1 Review of Public Debt Portfolio As At End of June 2015 .................................................................. 12
1.1.1 Financing Options from External Sources .................................................................................. 13
1.1.2 Financing Trends from Domestic Sources .................................................................................. 17
1.2 Ethiopia’s Cost and Risk Analysis of Public Debt Portfolio ................................................................ 18
1.2.1 Cost and Risk of the Central Government Debt Portfolio .......................................................... 22
II. RATIONALE FOR NEW MEDIUM TERM DEBT MANAGEMENT STRATEGY (2016-2020) ...................... 25
2.1 Objectives of the MTDS and Its Coverage......................................................................................... 25
2.2 Potential Financing Sources for MTDS Time Horizon ....................................................................... 26
2.2.1 Financing Options from External Sources .................................................................................. 27
2.2.2 Financing Options from Domestic Sources ................................................................................ 28
2.3 Baseline Macro-Economic Environment Assumptions ..................................................................... 29
2.3.1 Principal Risks to Baseline Macroeconomic Assumptions ......................................................... 31
2.4 Description of Baseline and Alternative Stress Scenarios................................................................. 32
2.5 Description of Alternative Debt Management Strategies ................................................................ 33
2.6 Methodology for Outcomes of Strategies Analysis .......................................................................... 36
2.6.1 Analysis of the Four Selected Strategies .................................................................................... 37
2.6.2 Selection of Appropriate Strategy.............................................................................................. 39
III. CONCLUSION and Way Forward ..................................................................................................... 41
List of Tables Page
Table 1: Stock of Public Debt, as at end of 2014/15……………………………………………….13
Table 2: Key Cost and Risk of Central Government Debt, as at end FY2014/15 ………..24
List of Charts
Chart 1: Total Debt Portfolio by Source as at end of June 2015………………………………13
Chart 2: Currency Composition of Public Debt Portfolio as at end of June 2015…….....14
Chart 3: External Debt Movement 2005/06 – 2014/15…………………………………………….15
Chart 4: External Debt Composition by Creditor Category as at end of June, 201………16
Chart 5 External Debt Portfolio by Interest Type as at end June, 2015…….……………….17
Chart 6: Government Domestic Debt by Holder Category as at end June, 2015……..….18
LIST OF ABBREVIATIONS
ADB - African Development Bank
ADF - African Development Fund
ATM - Average Time to Maturity
ATR - Average Time to Refixing
BADEA – Arab Bank for Economic Development in Africa
BoP - Balance of Payments
DBE – Development Bank of Ethiopia
DMD - Debt Management Directorate
DSA - Debt Sustainability Analysis
EEP – Ethiopian Electric Power
EEPCO - Ethiopian Electric Power Corporation
EEU - Ethiopian Electric Utility
EIB - European Investment Bank
EMTDS - Ethiopia’s Medium Term Debt Management Strategy
ETB - Ethiopian Birr
EAL - Ethiopian Air Lines
ERC – Ethiopian Railway Corporation
FX - Foreign Exchange
GDP - Gross Domestic Product

GTP - Growth and Transformation Plan
IDA - International Development Association
IFAD – International Fund for Agricultural Development
IMF - International Monetary Fund
MEEF - Macroeconomic Fiscal Framework
MTEF - Medium Term Expenditures Framework
NBE - National Bank of Ethiopia
NDF - Net Domestic Financing
OPEC Fund – OPEC Fund for International Development
PASDEP – The Plan for Accelerated and Sustained Development to End Poverty
SC - Sugar Corporation
SDR – Special Drawing Rights
SOE - State Owned Enterprises
USD – United States Dollars
FOREWORD
In Ethiopia there is a clear coordinating mechanism at the political and technical levels
as well as legislation and implementation circulars defining the parameters for debt
contraction, guarantees and servicing. The existence of a clear legal framework is an
important enabling element for formulating a debt management strategy. In addition,
the country’s institutional arrangement for public debt management lies under the
Ministry of Finance (MoF) with the Proclamation of Financial Administration of the
Federal Government of Ethiopia, to enable the Ministry execute its mandate effectively
and efficiently.
It is therefore important to closely monitor the burden of public debt both at the
National level so as not to undermine economic growth. Similarly, it is important to note
that ensuring the level of public debt to be consistent with the overall fiscal framework
aimed at safeguarding macro-economic stability over the medium term. Accordingly,
one of the methods to finance long and medium terms of development plans of the
country is borrowing from both, external and domestic sources. These borrowing
activities need to be guided by the internationally recognized framework for developing
a debt management strategy while ensuring that the public debt remains within
sustainable levels.
To this effect, this medium term debt management strategy (MTDS), designed by the
Ministry of Finance (MoF) with the technical support of the International Monetary Fund
(IMF) that aims to achieve a desired composition of the public sector debt portfolio that
reflects a cost-risk analysis and captures the government’s preferences with regard to
the cost-risk trade-off. This second MTDS will also seek to assist Ethiopia in addressing
the debt sustainability problem in the prevailing development agenda of the
government. Of course, revision of this five years MTDS will be undertaken every year
when need arises.
The Government last three (2016-2018) borrowing requirement and the level of public
debt has been consistent with the designed five years MTDS and overall fiscal
framework supporting macro-economic stability for sustainable growth over the medium
term.
The purpose of the MTDS is to guide central government borrowing activities in the
medium term while providing a path for sustainable level of debt over the medium
term. The MTDS evaluates both costs and risks of various scenarios and recommends
an optimal debt management strategy for implementation during the period. The
Ministry of Finance will implement measures to simplify and disseminate information in
the MTDS through easily accessible channels to ensure wider outreach and
understanding by the general public.
The Government is considering this MTDS as a tool for evaluating and managing the
risk involved with different debt compositions; facilitating coordination with fiscal and
monetary management; and enhancing transparency. Moreover, the Government is
committed to ensure the government’s financing needs and payment obligations to be
at the lowest possible cost consistent with a prudent degree of risk. Furthermore, the
government is dedicated to follow up its implementation in order to maintain the
transparency and accountability of public borrowing.
ACKNOWLEDGEMENT
Ethiopia’s MTDS’ work would not have been possible without the input and assistance of
many individuals and organizations. We are deeply grateful to all those listed here.
Ministry of Finance owe a great debt of gratitude to IMF/World Bank Team for investing
considerable time and effort in the cost and risk assessment process as well as
producing a comprehensive mission report related to Ethiopia’s MTDS. Without the
mission support in terms of providing training on MTDS manual and Analytical Tool and
inputs it was not possible to produce this strategy document.
We appreciate the Debt Management Directorate for taking the initiative to undertake
the preparation of the second MTDS for Ethiopia. Thus, we wish to express our sincere
gratitude to all Debt Management Directorate staff and other participants for their
valuable contributions.
We are indebted to National Bank of Ethiopia (NBE), State Owned Enterprises (SOEs)
officials, some MoF’s directorates and individuals who made invaluable contributions in
terms of their key insights, opinion and data necessary for the assessment made in this
document. We are also indebted to our colleagues for the time and effort they put in
participating in the workshop as well as for their presence in opening and closing
ceremony of workshop. We believe that the support and input from them has made this
strategy document a reality.
Last but not least many thanks to many of our colleagues whom we cannot all name
but whose input during the MTDS opening and closing workshop remain vital to this
output.
EXECUTIVE SUMMARY
The Federal Democratic Republic of Ethiopia Long Term Vision aspires to transform
Ethiopia into a modern and prosperous society through provision of adequate
infrastructure, development of agriculture, human resource and services sectors,
enlargement of markets, strengthening of the private sector through industrialization.
Implementation of the Ethiopia long term Vision will require substantial resources that
will partly be garnered through domestic and international borrowing. To ensure that
our debt remains sustainable, such borrowing has to be carried out through a properly
formulated Medium Term Debt Strategy.
Accordingly, this MTDS has been prepared by the Ministry of Finance with the support
of IMF and World Bank technical support and it illustrates government’s cost and risk
tradeoffs associated with different financing options and the risk exposure embedded in
the current debt portfolio. The 2015/16-2019/20 MTDS provides a financing framework
to meet the medium term fiscal financing requirement that would minimize debt
servicing budgetary costs and the risks exposure to government while at the same time
endeavoring to maintain debt sustainable of the country. It is a coherent framework
which determines the appropriate financing mix of concessional and semi concessional
debt necessary to finance planned expenditure, to be acquired in line with the GTP II
objectives.
It is important to note that parallel to this central government debt strategy the Ministry
has developed in collaboration with the IMF and World Bank technical support team has
developed the comprehensive (SOEs and central government borrowing) MTDS for
internal purposes aiming emplacing mechanism to monitor the borrowing process of
SOEs so as to avoid any unforeseen debt burden problem including the occurrences of
contingent liability that create burden on fiscal policy of the country.
The central government MTDS is primarily focused on determining the appropriate
overall composition of the entire central government debt portfolio over the medium
term, taking into account macroeconomic indicators and the market environment. In
arriving at the preferred debt management strategy, the technical team considered
combinations of various financing options and instruments relative to the existing
financing structure and debt composition. Four financing strategies were formulated
and tested through simulation against a variety of market shocks over a 5-year period.
The results obtained, especially on the cost of debt were compared with the baseline
and with each other with a view to selecting a preferred one that is in line with the
key debt management objectives of the Government. The process of selecting a
preferred strategy was a challenging one because of the cost-risk trade-offs, as well
as the many constraints associated with each of the strategies, including the size and
availability of funding from the various sources, estimation of the annual funding
requirements and the absence of well-structured and developed domestic financial
market. The outcome of the analyses supports the identification of a robust strategy
that is expected to reduce the cost of debt and exposure to interest rates changes and
refinancing risk, while at the same time maintaining liquidity in Government’s securities
markets.
The preferred debt management strategy based on economic realities would require:
 An increase in external financing with a view to rebalancing the public debt

portfolio in favor of long-term external financing in order to reduce the debt
service cost and lengthen the maturity profile. To achieve a significant reduction
in cost would require that the Government accesses relatively cheaper long-term
external financing in such a way that it first maximizes the available funds from
the concessional and semi-concessional sources, taking into account what may
be readily available within a given period.
 Lengthening of the maturity profile of the domestic debt portfolio through
reduction in the issuance of new short-dated (like treasury bills and borrowing
direct advance (overdraft) directly from National Bank of Ethiopia debt
instruments or refinancing of maturing with external financing or both. Although
the impact on cost of the introduction of new debt instruments into the domestic
debt market is expected to be relatively high, the impact on maturity profile of
total domestic debt could be significant, hence reducing the risk of bunching,
roll-over risk, and the associated debt servicing costs.
Of course, the selected strategy is not without constraints including an increase in the
foreign exchange risk, due to the rise in external debt relative to domestic debt and the
need to maintain liquidity in the short end of the government domestic securities
market.
Obviously, the borrowings will be used to fund priority infrastructure projects, which will
boost output and put the economy on the path of sustainable growth and
competitiveness and the loans are long-term which means that the economy would
have been sufficiently diversified for increased export earnings for ease of debt service
payments.
Adopting such an explicit and formal MTDS will enable the Government of Ethiopia to
make informed decisions on the costs and risks associated with any alternative
financing considerations. The MTDS will guide on the most appropriate financing option
which will ensure that government of Ethiopia takes advantage of new financing
opportunities without impairing our cost and risk thresholds in the GTP II.
The ministry is committed to annually review the MTDS in line with the medium term
fiscal framework to provide an insight and clear guidance on the risk and cost tradeoffs
that can be accommodated consistent with the long term debt management framework.
Implementing the MTDS will help to avoid the consequences arising from unsustainable
accumulation of public debt and build broad based support for responsible financial
stewardship, and accountability.
I. EXISTING DEBT MANAGEMENT STRATEGY
The Federal Democratic Republic of Ethiopia (FDRE) debt management strategy was
formulated in 2012 covering the period FY2012/13-2016/17. That strategy helped the
country to maximize external concessional loans from multilateral and bilateral sources,
and uses domestic financing to cover residual financing needs. The MTDS document
was addressed the absence of a formal debt management strategy for decades based
on a quantitative and qualitative analysis in the country. Similarly, although the
strategy was not covered the State Owned Enterprises (SOEs) borrowing, to implement
mega priority infrastructure projects from Non-concessional and domestic sources was
restricted to SOEs.
It was obvious that the implementation of the debt management strategy during the
2012/13-2014/15 was in line with the published strategy. It means the three years
(2012/13-2014/15) Debt management and borrowing process in Ethiopia was guided by
the strategy.
After the completion of the first GTP there was a need to emplace the new MTDS that
fit for the second five years GTP. Accordingly, in order to align the financing
requirement for the second phase of GTP this strategy has been (for the period
2015/16-2019/20) designed and tabled for the period to be implemented.
This document was a crucial step forwarded for the government to implement a formal
debt management strategy containing analysis of cost and risk tradeoffs of alternative
strategies in order to avoid macroeconomic instability and debt hangover while
accessing finances prudently to meet the development agenda of the country. The
undertaking of the government in terms of emplacing borrowing strategy will support
the government to plan based on projected availability of funding and adjust spending
continuously through the years as financing actually becomes available.
1.1 Review of Public Debt Portfolio As At End of June 2015
Nearly four decades ago, Ethiopia’s debt had peaked to unsustainable levels such that
the economy did not have the capacity to meet its debt obligations. Fortunately,
Ethiopia became among countries to qualify for debt relief under the Heavily Indebted
Poor Country (HIPC) Initiatives in 2001 and subsequently under the Enhanced HIPC in
2004. In 2006/07, Ethiopia benefited from another form of debt relief under the
Multilateral Debt Relief Initiative (MDRI). All these debt reliefs eased Ethiopia’s debt
service obligations and the country debt position has since remained sustainable.
Later on due to created fiscal spaces the government has borrowed substantial
resources from concessional sources as well as provided consent and guarantees to
SOEs to borrow from non-concessional sources to implement priority mega projects.
These subsequent borrowing created to some extent in increments of debt volume of
the country within short period of time.
Accordingly, the total debt stock (domestic and external) reached US$ 34.056.00 million
(Birr 705,391.00 million) at end June 2015. In the last more than one decade the
volume of debt outstanding substantially increased at increasing rate due to increased
borrowing from both external and domestic sources in order to implement infrastructure
projects.
Obviously, out of the total public debt the external debt represented about 55% while
the share of domestic debt was 45%. This shows a significant increase in the domestic
debt portfolio, reflecting increased direct advances and treasury bills. It is pertinent to
underscore the reasons for the upward trend in the domestic debt stock over the years.
The following table and chart shows the public debt stock of the country by sources and
borrowers.
Table 2: Stock of Public Debt, as at end of 2014/15
End of June 2015 ETB Millions US$ Millions

External Central Government* 205,329.00 9,984.00
External SOEs Guaranteed 96,309.00 4,683.00
External SOEs Non- Guaranteed 86,633.00 3,969.00
Domestic Bonds 10,345.00 503.00
Domestic Treasury Bills 43,605.00 2,120.00
Domestic Direct Advance** 83,265.00 4,049.00
SOEs Domestic Bonds and Loans 179,905.00 8,748.00
Total Debt 705,391.00 34,056.00
Remarks:
 Most of the external debt stock owned by the central government is secured
from concessional sources.
 As domestic debt market is not well developed the government may use Direct
Advance as one of sources for its budget deficit financings.
Chart 1: Total Debt Portfolio by Source as at end of June 2015
Domestic
External Debt
Debt 45%
55%
1.1.1 Financing Options from External Sources
As very well-known thanks to the HIPC and MDRI initiatives the debt stock of the
country reduced to a level of USD 2,314.6 million in 2006/07 and the country was
within sustainable debt thresholds. Consequently both initiatives create fiscal spaces to
borrow from concessional as well as limited volume from non-concessional sources to
implement infrastructure projects.
Subsequently, it constantly increased and reached USD 18,636.23 million at the end of
June 2015. The main reasons for this rise in external debt outstanding are mainly new
disbursements by IDA, AfDF and IMF as well as non-concessional sources borrowings
by the public enterprises, particularly by Ethiopian Electric Power (EEP), Ethiopian
Railways Corporation (ERC), Sugar Corporation (SC), Ethio-Telecom (ETC) and
Ethiopian Air Lines (EAL). The following chart presents currency composition of public
debt as at end of June 2015.
Chart 2: Currency Composition of Public Debt Portfolio as at end

of June 2015
OTHERS
SDR EUR
2% ETB
15% 2%
45%
USD
36%
Remarks: As SDR is decomposed into its constituent currencies the portfolio of USD,
JPY, Euro and GBP will be proportionally increased.
Out of the total external debt outstanding as at June 30, 2015, USD 12,448.96 million
(68.8%) was owed to official creditors. This comprised multilateral (52.1%) and
bilateral creditors (47.9%). The remaining 33.2% was owed to private creditors, which
constitute commercial banks, Bond holders and suppliers and the proportion being
42%%, 16.0% and 42.%, respectively. The relative and absolute share of the private
creditors in 2014/15 is much higher than the previous years, as most of the ETC, EAL
and EEP (former Ethiopian Electric Power Corporation) owed debt are suppliers credits.
Chart 3: External Debt Movement 2005/06 – 2014/15
20,000.00
18,000.00
16,000.00
14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
-
2005/06 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Source: Ministry of Finance
Similarly, in FY2014/15 it obtained 65% of total external credit from concessional

multilateral sources, and 35% from concessional bilateral creditors. During the period
International Development Association (IDA) accounted for 45% of total external credit
followed by 14% from China and 13.5% from African Development Fund (AfDF).
Chart 4: External Debt Composition by Creditor Category as at end of
June, 2015
6,600.00
6,500.00
6,400.00
6,300.00
6,200.00
6,100.00
6,000.00
5,900.00
5,800.00
5,700.00
MULTILATERALS BILATERALS COMMERCIALS
Source: Ministry of Finance
The share of the central government debt has decreased from more than 61.3% in
2011/12, to 52.5 % in 2014/15. It is evident that since 2008/09, the relative share of
central government has significantly decreased due to new borrowings by public
enterprises, particularly by EEP, ERC, EAL and ETC.
On the other hand, out of the total debt outstanding in 2014/15, nearly 67.5%, 26.3 %,
and 2.9 % was denominated in US dollar, SDR and Euro, respectively, while the
remaining 3.8% was denominated in other currencies including Chinese Yuan.
Similarly, in 2011/12 the proportion of the debt with the fixed interest rate was 66.6%
and this reduced to 58.7% as at June 30, 2015. This is mainly due to the decrease in
relative share of central government debt which was contracted on fixed interest rates.
Chart 6 External Debt Portfolio by Interest Type as at end June, 2015
variable
41%
FIXED
59%
1.1.2 Financing Trends from Domestic Sources
The volume of the debt as at end of June 2015 has reached to the level of Birr
317,120.00 million or equivalent to US$15,154.00 million. The major instruments of
government domestic borrowing were treasury bills, bonds and direct advance. Of
course, in future when domestic debt markets develop direct advance has significantly
increased over the last decade. Its share in the total domestic debt portfolio constantly
increased and reached 60.7% in 2014/15. In the near future, as the domestic debt
market develops its contribution to fill the financing gap is expected to increase and the
dominance of the DA is expected to diminish.
The outstanding balance for treasury bills, which was ETB 19.9 billion at the end of
June 2011/12, increased sharply to ETB 43.6 billion in 2014/15. The share of 91 days
treasury bills was the highest which accounted for 57.3 % in 2014/15.
Government Bonds, with longer term maturity (10 years and more), have been issued
for special purposes rather than as a means of raising money to fill the budget gap. In
2011/12 the outstanding bond balance was Birr 12.1 billion, and decreased and reached
Birr 10.3 billion at end 2014/15.
The major holders of government securities in Ethiopia are the National Bank of
Ethiopia and the Commercial Bank of Ethiopia followed by government and private
banks and insurance companies, Public Servants Social Security Agency and other
public enterprises.
State Owned Enterprises (SOEs) have issued corporate bonds and borrowed long term
loans from government banks to implement infrastructure mega projects. Some SOEs
have access to borrow loans term loans directly from government banks for capital
investments. The bonds and loans outstanding balance was Birr 77,761.0 million in
2011/12, and constantly increased and reached to ETB 179,905.00 million in 2014/15.
Chart 7: Government Domestic Debt by Holder Category as at end June, 2015

PSSA OTHERS
19% 2%
DBE
11%
CBE
NBE
1%
67%
Remarks: NBE, CBE, DBE and PSSSA stand for National Bank of Ethiopia, Commercial
Bank of Ethiopia, Development Bank of Ethiopia and Public Servants Social Security
Agency respectively.
1.2 Ethiopia’s Cost and Risk Analysis of Public Debt Portfolio
As observed, the share of external and domestic debt as percent of total public debt
was 55% and 45% respectively. Accordingly, it is important to assess the Cost and risks
associated with the debt portfolio because such information enables decision makers to
design forward looking strategies on the optimal debt structure in terms of maturity
period, interest rate and exchange rate. In this regard market risk, operational risk and
liquidity risk are the types of risks associated with Ethiopia’s public debt portfolio.
The weighted average interest rate for the external Public debt was 3.2% at June-
FY2014/15, compared to 2.1% for Central Government External Debt. The weighted
average interest rate for the domestic public and publicly guaranteed debt was 4.5%
and a weighted average of 2.8% for Central Government Domestic Debt. The non-
concessional debt by the SOEs increased the weighted average cost of the PPG debt
portfolio was increased. As a result of the different weighted average interest rates of
debt central government’s interest payment obligations as percent of GDP was only
0.6%, while for interest payment including SOEs was 1.8% of GDP.
Out of the total, public debt 11.4% was maturing in one year and this is equivalent to
6.4% of GDP. Similarly, due to dominance of domestic debt 14% of the total central
government portfolio was fall due within one year.
The central government share of external debt was characterized by very low exposure
to rollover/refinancing risk while the domestic debt was characterized by high level of
rollover risk due to short term direct advance and treasury bills.
It is important to note that since the main creditors of the domestic central government
debt are the National Bank of Ethiopia, public banks, Public Servants Social Security
Agency and Private Organization Social Security Agency refinancing risk is not a major
concern as long as the public banks do not face sudden liquidity needs.
Given the debt management strategy of the country, Ethiopia is expected to contract
concessional loans (from official multilateral and bilateral creditors) for central
government and hence external debt obligations will be repaid over a long time horizon,
spanning over 30 to 40 years. On the other hand, external debt contracted by SOEs on
variable interest rate are gradually rising since 2015 and the interest payment by SOE’s
for their respective creditor is increasing from time to time and expected to rise on the
upcoming years.
The average time to maturity of the total debt portfolio is about 8.9 years with the
external and domestic debt portfolio displaying 11.3 years and 5.8 years, respectively.
The domestic debt is associated with a substantial degree of refinancing risk due to the
short term maturity of Treasury bills. The domestic debt portfolio of bond and treasury
bills (combined) shows a lower maturity and may create risk to refinance the debt
portfolio but if we see the Average Time to Maturing (ATM) of only the domestic bond it
become much higher. Applying the above analysis the external debt will take a longer
period of time before the debt is due for repayment on average. Comparing the ATM for
the total public debt at 8.9 years the external debt portfolio has a lower exposure to
refinancing risk.
This is explained by the structure of the external debt profile which is comprised of
concessional loans. All in all, the average time to maturity for central government
external debt is 12.6 years while that of state owned enterprises (SOEs) is about 6.9
years.
The external and domestic central government debt portfolio is made up of instruments
that were contracted on fixed and low interest rates, with the exception of domestic
debt particularly treasury bills which are susceptible to interest rate risk. This implies
that the central government’s share of external public debt is less susceptible to interest
rate risk. It means adverse interest rate movements on the world market would not
significantly affect Ethiopia’s interest payment obligations. Although a significant
proportion of the external loans are highly concessional and the interest rate is
significantly below the market rates loans contracted by SOEs at market prices may
increase risk exposure on the country.
Interest rate risk of the public debt is well captured by the proportion of debt that is
subject to interest rate re-fixing within a specified period. For both external and
domestic debt, changes in interest rates affect debt servicing costs. Hence, assessing
the proportion of debt to be re-fixed shows the extent to which the portfolio is
vulnerable to higher funding costs as a result of higher market interest rates.
Analysis of Ethiopia’s external public debt shows that the portfolio is subject to low
interest rate risk because the majority of the loans are contracted in fixed interest rate.
On the other hand, analysis of domestic debt particularly treasury bills show that the
portfolio was subject to high interest rate risk due to the short-duration nature of the
Treasury bills. A higher proportion of debt that is subjected to re-fixing within one year
indicates high risk to adverse interest rate movements.
In contrast, in June 2015 the Average Time to Re-fixing (ATR) of Ethiopia’s public debt
was 7.9 years. Thus, it will take an average of 7.9 years to re-fix the interest rates of
the portfolio. The ATR of the external debt stands at 9.5 years which imply that it will
take, on average, 9.5 years to reset the interest rate of the external debt portfolio. This
high value indicates lower interest risk associated with the external debt portfolio. It is
noted that domestic debt is highly exposed to interest rate risk. This is confirmed by a
low value of ATR which stands at 5.8 years. This implies that it will take only 5.8 years
to re-fix the interest rate on domestic debt hence domestic debt has a high exposure to
interest rate risk than external debt.
In the same way, there are three methods of quantifying exchange rate risk of the debt
portfolio namely: the share of external debt in total debt, the currency composition of
the debt portfolio and degree of currency mismatch between the debt service
obligations and the composition of foreign exchange reserves for a given country. It is
well noted that the country’s external debt portfolio is exposed to exchange rate risks.
Hence any significant depreciation of the Ethiopian Birr against the foreign currencies
can substantially contribute to higher debt service payments in local currency terms. As
a result, there could be higher debt service payments in the budget than forecasted.
The currency composition of total public debt exhibits minimal exchange rate risk
emanating from currency mismatch since most of the external debt service obligations
are in United States Dollars as the majority of our export or reserve is in USD ,and all
domestic debt service obligations are in Ethiopian Birr. It means the currency
composition of Ethiopia’s external debt does not constitute a significant source of
external vulnerability except exposure to exchange rate fluctuation because the
currency structure closely matches with foreign reserves/earnings.
1.2.1 Cost and Risk of the Central Government Debt Portfolio
The proportion of the existing central government external debt constituted 54% of
total central government debt as at end of June 2015 and the dominance external debt
continue. The large share of external debt and particularly concessional borrowing, in
the debt portfolio lowered the overall cost and risk of the debt. That is why the overall
debt portfolio carries an average interest rate of 2.1% per annum.
On the other front the central government debt portfolio entails significant exposure to
exchange rate fluctuations as 59.7% is denominated in foreign currency. This
represents potential risk given the historical trend of ETB depreciations against major
foreign currencies. In addition, any adverse shocks in the terms of trade will aggravate
the exposure to exchange rate risks.
Exposure to interest rate fluctuations appears to be not severe with the average time to
re-fixing (ATR) of the overall central government portfolio being relatively long and
exhibited at 12.6 years. The ATM of the overall portfolio for the existing debt is 12.6
years, it means the Central government debt portfolio exhibits that ATM equals to ATR.
The longer ATM (16.5 years) of the external debt portfolio emanates from the
dominance of concessional financing. The ATM of 6.9 years for the domestic debt
portfolio is partly due to the presence of long maturities of long term bonds. On
average, the central government’s debt has relatively longer maturity. This shows that
the country has been an IDA-only country for the past two decades.
The proportion of the portfolio to be refinanced within 12 months is not particularly
large, standing at 14%. In addition, the refinancing risk of the repayment profile
indicates that larger amount of repayment obligation in 2015 and 2024, which coincide
with a rollover of treasury bills- and the bullet payment of the Euro bond in 2025. It
means the nature of the repayment profile calls for efforts to smoothen and manage
refinancing risk.
Overall analysis of the existing central government debt portfolio suggests that
reduction of exchange rate exposure and smoothening of the repayment profile over
the medium term of short term domestic debt constitute key drivers for the choice of
MTDS.
Table 2: Key Cost and Risk of Existing Central Government Debt, as at end
FY2014/15
External
Risk Indicators
Debt Domestic Debt Total Debt
Amount (In Million ETB) 205,329.00 137,215.00 342,544.00
Amount (In MUSD) 9,984.00 6,672.00 16,656.00
Nominal Debt as % GDP 15.7 10.6 26.3

PV as % GDP 9.8 10.6 20.4
Interest Payment as of GDP 03 0.3 0.6

Cost of Debt
Weighted Average Interest Rate (%) 1.7 2.8 2.1
ATM (Years) 16.5 6.9 12.6

Refinancing
Debt Refixing in 1 Year (% of Total 1.5 32.5 14.0
Risks
Fixed Rate Debt (% of Total) 0.2 3.4 3.7
ATR (Years) 16.5 6.9 12.6

Interest Rate
Debt Refixing in 1 Years (% of Total) 1.5 32.5 14.0
Risk
Fixed Rate Debt (% of Total) 100 100 100
FX Debt (% of Total Debt) 59.7

FX Risk
ST FX Debt (% of Reserves) 4.4
II. RATIONALE FOR NEW MEDIUM TERM DEBT MANAGEMENT
STRATEGY (2016-2020)
Financing the economic development program is essential for the realization of the
objectives stated in the GTP II. During the five year GTP II period allocation of the
development finance will aim to support the overriding objective of poverty reduction
given the country’s financial capacity with the maintenance of stable macroeconomic
conditions. Obviously, one of the mechanisms to raise financing for the GTP II is
borrowing from external as well as domestic sources.
In this connection, it is appropriate to design debt strategy to lead proper borrowing to

fill the gap for the implementation of the second phase of GTP. Given this national and
international circumstances the Government of Ethiopia has taken the right and timely
decision to design this medium term debt management strategy and to follow and stick
the future domestic as well as external borrowing to finance the developmental
endeavors.
As the economy of the country is growing rapidly, it is the government’s priority agenda
to maintain this trajectory by taking appropriate actions including designing debt
management strategy and implementing it to drive the course of borrowing and create
enabling conditions for the debt strategy to play a key role in the economy in the
process of gap filling. This strategy focuses only the central government borrowing
plan. However, for the sake of averting any unforeseen risks and additional costs
parallel to this strategy broad based and comprehensive debt strategy that contain the
central government and SOEs borrowing has been developed for internal purposes to
monitor and follows up the borrowing of the SOEs.
2.1 Objectives of the MTDS and Its Coverage

The Medium Term Debt Management Strategy 2015/16-2019/20 outlines Ethiopia’s
public debt management objectives to include the following:
 The efficient management of the country’s public debt in terms of well-diversified
and sustainable debt portfolio, supportive of government needs;
 Meeting Government’s financing needs at minimal cost and with prudent degree
of risk over the medium to long-term; and,
 Ensuring the growth and development of the country’s domestic and external
borrowing.
The Ministry of Finance including concerned Directorates, National Planning Commission

(NPC) and National Bank of Ethiopia and other concerned bodies constitute a team to
design this strategy.
A team of officials from the IMF, World Bank and WAIFEM were on the other hand to
guide the Debt Management Directorate (DMD) and the stakeholders on the application
of the Debt Management Strategy Analytical Tool.
The Strategy covers the country’s external and domestic debts and financing needs.
The Strategy is primarily concerned with how to optimally fund central government’s
primary balance (i.e., the difference between revenue and expenditure including
principal payments and excluding debt service interest payment) by taking into
account likely changes in macroeconomic and market variables, such as interest and
exchange rates, inflation level, output and external reserves.
MTDS essentially guides the composition of borrowing instruments of the government

debt to safeguard the debt sustainability status as well as continuously get access to
domestic and external sources for long time. The time horizon of the MTDS analysis is
five years, starting from fiscal year 2015/16 through 2019/20. This is in line with the
country’s second phase of Growth and Transformation plan.
2.2 Potential Financing Sources for MTDS Time Horizon
The sources of financing and instruments were expected to be used going forward. In
addition, the DMD plans to introduce new products with a view to further diversifying
the investor-base, boost financial inclusion and national savings culture for increased
gross capital formation, create more benchmarks and deepen the domestic government
securities. The new debt instruments to be introduced, of course subject to market
conditions. Similarly, the fiscal deficit decreases from 3.62% in 2016/17 to 1.95% in
2019/20.
2.2.1 Financing Options from External Sources
Ethiopia receives most of its external financing in the form of loan for the
implementation of developmental projects. In the past 10 years disbursements for
central government recorded an increasing trend, owing to improved macroeconomic
environment and enhanced cooperation with development partners. The major
development partners were the multilateral institutions constituting 67% of external
financing of which IDA contributed 64% and bilateral donors accounting for the
remaining 33%. The external sources will continue to finance a bigger proportion of
budget deficit in the medium term given the relatively low level of development in the
domestic financial market.
The Government, on the basis of the medium term financing assumptions, will continue
to access concessional loans from both multilateral and bilateral sources to implement
developmental programs and projects. Potential sources of external financing available
for the planning period for the country can be categorized into multilateral and bilateral.
Generally, multilateral loans are concessional, for example IDA with low fixed interest
rate (0.75 per cent), long maturity (38 years) and long grace period (6 years). Bilateral
loans are usually concessional with fixed interest rate with average maturity of 20 years
including grace period of 5 years. As concessional financing is insufficient and subject to
unpredictability of disbursements, financial conditionality and tied to specific projects,
the Government will consider limited semi-concessional financing for strategically viable
and those who have good return projects during the MTDS period to repay without
difficulties. In line with the government’s commitment to maintain debt sustainability,
new borrowing will only be considered on concessional terms as evaluated by the MoF.
New loans must have a grant element of at least 35 percent when calculated with an
appropriate discount rate.
These loans are assumed to be denominated in foreign currencies including Special

Drawing Right (SDR) United States Dollars (USD), EURO, Japanese Yen, Pound Sterling
and others.
Semi-concessional loans are assumed to be contracted from official bilateral creditors.

These loans have a maximum fixed interest rate of 2%, a maturity of 20 years including
a 5-year grace period. In the absence of concessional financing, for strategic and an
indispensable projects implementations, the Government will maintain semi-
concessional financing in accordance with the international acceptable arrangement.
2.2.2 Financing Options from Domestic Sources
An active domestic debt market provides the government with an important avenue to
secure additional financing for developmental endeavours, reduce dependence on
foreign financing and currency risk. To that end, steps have been taken by the
government to improve the primary market by introducing the 364-day treasury bills to
elongate the tenor and diversifications of the investors. In this regard, in the future
access to Direct Advance from the NBE will be diminishing and treasury bills and
treasury bonds will be the major sources for financing the government gap before the
end of MTDS period.
Naturally, the domestic debt market needs to develop continuously through introducing
various security markets to finance the budget gap. These steps will encourage private
investors to participate in the process. Subsequent actions in terms of sensitizing
potential investors, creating conducive domestic market, improvement of auction
facilities and legal domestic debt market reform as required and other related measures
will be taken in order to encourage private investors on investing in risk free
government paper (treasury bills and treasury bonds).
For the time being, as domestic debt market and demand for the security is not well
developed domestic borrowing will be undertaken through issuance of treasury bills and
treasury bonds at the ratio of 80:20. This will ensure that the maturity structure of the
portfolio is lengthened to move towards minimizing refinancing risk. In addition,
treasury bonds expected to be issued at benchmark of 3 and 5 year tenors to build
liquidity. This of course depends on the development of situation that allows the
introduction of the other instruments.
Given the projected inflows, Private Organizations Social Security Agency (POSSA) could
continue to absorb an average additional ETB 1 billion per year and the PSSSA could
mobilize close to ETB 800 million per year. The inflows in short duration Treasury bills
are expected to be strong by focusing on longer term of 364 days and depending on
market development and demand to issue 2 and 5 years treasury bonds.
2.3 Baseline Macro-Economic Environment Assumptions
The primary balance has widened due to reduced revenues, while current account is
also under pressure because the performance of external sector is not as expected.
The new strategy focuses on the utilization of all the borrowed amounts to fund the
budget deficit of course not recurrent expenditure but for capital investment like
funding identified infrastructure project implementations. Efforts are also being made to
improve governance and efficiency in fiscal operations of the government so as to
reduce wastages and leakages.
The Government, in its Macroeconomic and Fiscal Framework (MEFF), 2016-2020

envisages generating a real GDP growth rate of about of 11% in 2016 with a gradual
increase by 2020 while keeping the inflation level under control at slightly above 9
percent annually. The MEFF 2016-2020 and the 2016 Budget give room for fiscal
expansion with conservative revenue estimates.
This would create funding gaps much of which would have to be covered through debt.
The purpose of the Debt Management Strategy analyses was to explore how to
optimally fund the gap (i.e., the difference between the revenue and expenditure
estimates), thus created in view of the several funding sources and debts instruments
available to the government.
The Ethiopian economy has been growing at high rates over the past decades and the
government maintains the ambitious Growth and Transformation Plan, targeting an
average real GDP growth rate of just over 9.2% until 2019/20.
The 2015/16-2019/20 MEFF projects a moderate primary deficit in the fiscal accounts.
Ongoing discipline in recurrent spending and by strengthening revenue mobilization
through broadening of the tax base and better compliance will help to reduce the
primary deficit to about 1.95%-3% of GDP to a balance during the projection period.
On the external front, the current account is expected to remain in deficit over the time
horizon. Despite declining trends in key commodity prices (especially coffee and gold),
exports are expected to grow modestly supported by a rise in electricity exports to
neighboring countries, increased domestic gold production, and a gradual recovery in
global demand. Still, rapid growth in the import of capital goods driven by major public
investment projects in the energy and transport sectors will continue to outstrip growth
in exports.
Inflation is expected to stabilize at about 8 percent over the period, supported by lower
food and global oil prices. Continued restraint on the monetary stance is expected to
keep inflation within a single digit and help anchor inflation expectations. The exchange
rate will also continue to be managed closely by the NBE in line with the policy of
gradual depreciation. As a consequence, the real exchange rate is expected to stabilize,
with the nominal exchange rate depreciating by about 6 percent annually against the
U.S. dollar. During the MTDS period to improve export performance by enabling of the
product of the country to be competitive there is an expectation of devaluations of birr
against USD by 16.5%.
2.3.1 Principal Risks to Baseline Macroeconomic Assumptions
The robustness of the analysis is based on the resilience of the macro fundamentals
and typically the baseline assumptions for the economic growth, external and fiscal
balance, and the monetary sector. The overall budget balance assumption is also
anchored on a strong GDP growth, propelled by the strong fiscal stance which is
enhanced by the revenue coming from tax sources.
Although the baseline medium-term macroeconomic projection assumes real GDP

growth of over 11% for the full projection period, downside risks to baseline
projections that may impede the implementation of the strategy including recurrent
drought which mainly affects agricultural production, low capacity to mobilize tax
revenue, decrease in volume of private transfer, inflation, political instability and
exchange rate risks associated with the global financial environment. In view of the
main macro postulations above, the following may post risk to the macroeconomic
fundamentals.
 The enhanced economic growth not achieved resulting from delayed and
unreliable rains and the offset of economy by a rise in grants and aid-in-kind to
fund emergency measures,
 The current account deficit resulting to a prolonged shock to commodity exports

prices a global growth exports putting pressure on exchange rate and inflation
and dampening growth and a sudden stop to private transfer could require the
government to contract additional external debt to finance the current account
deficit,
 Not achieving the enhanced forecasted government revenue resulting from the
inadequate capacity and other related problems including political instability to
raise tax revenue collection rates with GDP growth and the contingent liabilities
could also pose additional fiscal risk and,
 Failure to bring real interest rates to zero by reducing inflation which could
hinder development of financial markets, limit domestic savings and reduce the
demand for Government bonds.
Any one of the above risk could jeopardize growth and economic stability that will affect
the implementation of the designed medium-term debt management strategy. In order
to keep these risks in view, the Ministry of Finance is taking appropriate measures to
monitor the total debt portfolio of the consolidated public sector so as to avoid the
occurrence of the above mentioned risks.
2.4 Description of Baseline and Alternative Stress Scenarios
The baseline exchange rate projection assumes 6% depreciation per annum over the
next five years. This is in line with the exchange rate projection used in the
government’s Macroeconomic Fiscal Framework for the period FY2015/16 through
FY2019/20. The baseline domestic interest rate assumes on the average 3% for
treasury bills, 5% for the three-year treasury bonds, and 7%-7.5% of the five-year
Treasury bonds.
The robustness of the alternative debt management strategies was assessed under
three scenarios based on interest and exchange rate shocks. The magnitude and
direction of the shocks was informed by the historical performance of Ethiopian interest
and currency exchange rates over the last ten years. It was assumed that shocks
materialize in FY2017/18, and that all shocks are sustained through FY2019/20. The
cost of all market-based borrowing increases in all years. For the purpose of this
analysis, three typical shocks stemming from exchange rate, short term interest rates
and a combination of these are considered.
Scenario 1: In the past the Ethiopian Birr has been depreciated vis-à-vis USD. It is
expected that 15% depreciation of the domestic currency against the USD in FY2017/18
over the baseline projection may materialize. As a result, the Ethiopian Birr is expected
to depreciate by 21% vis-à-vis the USD which implies a total depreciation of 21%
in 2017/18. The shock is assumed to be sustained throughout the projection period.
The cost of borrowing at all tenors is assumed to remain the same as the baseline
scenarios.
Scenario 2: This scenario assumes an upward parallel shift of the yield curve by 5%
for all the domestic instruments. This shock is consistent with the macroeconomic
target of raising real interest rates from the current level to zero.
Scenario 3: In this scenario, the Ethiopian Birr depreciates vis-à-vis USD, while all
domestic interest rates increase by reasonable margin at all maturities. This reflects the
likelihood that interest rates would likely react to an external shock that affects the
exchange rate. A combined shock of 10% depreciation of the exchange rate relative to
the 6% baseline depreciation projection (resulting in a total depreciation of 16% in
FY2017/18) and a 5% increase of domestic debt yield curve are assumed in this
scenario.
2.5 Description of Alternative Debt Management Strategies
To ensure a rigorous analysis, four medium term alternative financing strategies were
designed to be assessed under this MTDS with the aim of attaining reasonable cost and
prudent risks. The main differences in these strategies lie on the composition -of
resources expected from domestic and external sources..
The first Strategy 1 is the status quo that maintains significant access to external
concessional sources and borrowing through treasury Bills to cover the residual
financing gap. The second, third and fourth strategies consider domestic market
development and external sources with different proportions; the second strategy
oriented to domestic financing, with the introduction of 3 years bond and the IDA
blended external financing, third being largely oriented to Domestic source with the
introduction of 3 and 5 years bonds and the fourth is the same as the third one but it
introduce an IDA blended external borrowing.
The following four competitive debt management strategies were considered and their
impact on cost and risk analyzed.
Strategy 1 (S1)
The status quo the strategy relay on maximizing external concessional financing
continues to rely heavily on treasury bills from domestic source. Gross external
financing is characterized by 82% multilateral concessional and 18% bilateral
concessional loans. Gross domestic financing will be 100% in treasury bills. This
strategy is relatively more external than the remaining three.
Strategy 2 (S2)
A strategy that introduces a 3-year bond in FY2018/19 and potential introduction of IDA
blended financing. The issuance of 3 year bond with an initial percentage share of 20%
and with an increment of 5% per year throughout the projection period. Out of the
total External financing about 5% will be covered through IDA blended financing. The
introduction of the three year note reduces the treasury bill issuance by so doing this
strategy increases the ATM of domestic debt. Under strategy 2 Gross external financing
characterize by 81.6% borrowing from multilateral concessional, with a 4.6% IDA
Blended financing and 18.4% bilateral concessional. Gross domestic financing is initially
100% in treasury bills, but three-year bonds are gradually introduced with a 5%
increment per year, extending the maturities of the domestic debt. The introduction of
three year bond reflects the core debt management objectives to extend maturities in
the domestic market by introducing three year’s treasury bonds. Strategy 2 is also more
external than Strategy 3 and 4.
Strategy 3 (S3)
A strategy which further introduces a three year and five year Bonds in FY2018/19 in
equal amounts, which initially amounted to 20% each and with a 5% increment every
year for each instrument. The introduction of the three and the five year notes reduce
the treasury bill issuance by 2020 and is in line with domestic debt market development
of the government targeted as one of the objectives of this MTDS. This will extend the
maturities of domestic debt and total Central Government Debt. The gross external
borrowing characterized by 81.1% from multilateral concessional, with 18.9% bilateral
concessional. Furthermore strategy 3 is more Domestic debt strategy than other 3
strategies.
Strategy 4 (S4) is A strategy similar to S3 with respect to introduction three year and
five year’s bond including additional IDA blend terms borrowing. The strategy
introduces three and five year bonds in FY 2018/19, initially 20% of the total domestic
financing for each instruments and it will increase by 5 % every year through 2019/20.
The IDA blended will be about 5% of the external financing. The gross external
borrowing is characterized by 81.1% from multilateral source and the remaining 18.9%
from bilateral sources.
The gross borrowing requirements and their alternative financing strategies over the
time horizon of the debt strategy are summarized in the figure below.
The Central Government nominal debt level is projected to be about 28.5% of GDP by
end FY2019/20. The introduction of the new instruments 3 and 5 year notes, which
carry higher interest rates, plus the harder IDA term, explain the increase in debt level
from 26.3 percent of GDP at end-FY2014/15 about 28.5% at end-FY2019/20.
The implementation of the four competitive borrowing strategies over the projection
period changes both the stock and composition of the central government debt as well
as the associated cost and risk in relative to those as at end-FY2014/15. The Table
below presents the cost and risk indicators resulting from the portfolio transformation
caused by the four alternative debt management strategies over FY2015/16 –
FY2019/20.
All strategies help to reduce refinancing risk. The three strategies S2, S3 and S4
considered introducing 3 or/and 5 year term notes. The result has been to extend the
average time of maturity of domestic debt to 2–3 years.
The share of foreign currency debt decrease for strategy 2, 3 and 4 from 59.7% of the
total outstanding debt at end-FY2014/15, to 58.8%, 55% and 55% respectively at end-
FY2019/20.But Exchange rate risk will increases to about 63% for strategy 1, as it is the
most external oriented debt strategy.
2.6 Methodology for Outcomes of Strategies Analysis
The strategies have been simulated in the MTDS model under the assumptions
discussed above. The different strategies considered in the MTDS would be evaluated
using three ratios: interest/GDP, debt/GDP and PV of debt/GDP. The former ratio
indicates the liquidity or the availability of resources to repay the debt while the latter
two evaluate the degree of debt sustainability of each strategy. The Debt/GDP ratio is
relevant in view of the strategic public debt-GDP ceiling of 56% of GDP and PV of Debt
is relevant given the significant share of concessional and semi-concessional debt. The
resultant values of these ratios under the stress test scenario will also be analyzed.
It should be noted that regardless of the strategy, the nominal debt to GDP ratio
increase over the projection period for all strategies and this can be partly explained by
the introduction of three year and five year bonds and the IDA blended borrowing.
Other additional measurements are also assumed in the analysis including average term
to maturity (ATM) and Average Time to Refixing (ATR) which measure interest rate and
rollover risks. The different strategies are also evaluated employing the redemption
profile in order to look into the liquidity pressure on the budget. Overall, it is envisaged
that the methodology applied and the cost-risk indicators considered will assist in
obtaining the desired portfolio mix.
2.6.1 Analysis of the Four Selected Strategies
The direct exposure to exchange rate risk is limited due to the low share of debt
denominated in foreign currencies and low interest rate at concessional terms that
apply to most of external debt. Regarding domestic debt, the large amount of short-
term securities in the portfolio implies a relatively higher exposure to an interest rate
increase, and additional high refinancing risk.
With regard to the cost measured by nominal debt to GDP at the end of FY2019/20,S2
,S3 and S4 display similar expected cost (at about 28.5%) while Strategy 1 is the
strategy with the least cost at about 28.4%. Strategy 2, 3 and 4 displayed relatively
higer debt to GDP ratio, due to the introduction of 3 years and 5 years domestic bonds
and IDA hard term external borrowing. This suggests that domestic borrowing only with
100 % treasury bills, direct advances and external concessional borrowing is cheaper
than the introduction of three and five year bonds with IDA blended external borrowing.
The strategy 1 with 100 treasury bills and direct advances from domestic source seems
advantageous in the short-term from the cost perspective. But strategy 1 will not help
the development of the domestic debt market as envisaged in the core debt
management objectives.
On the other hand, strategy 2 with the introduction of 3 year bond and external
borrowing with IDA blended, and strategy 3 with the introduction of both three year
and five year bonds will be more costly as a result of the expected higher interest for
this instruments. But these strategies will enhance domestic debt market. Strategy four
has the highest nominal debt to GDP ratio as a result of both the introduction of 3 and
5 years bond and IDA blende borrowing assessing the cost and risk of the central
government nominal debt to GDP ratio allows to quantify the contribution of each debt
management strategy on vulnerability to debt sustainability. The debt management
strategies that have a greater share in treasury bills and direct advances have the least
cost and risk measured in terms of nominal debt to GDP. Of course, it is important ti
note that there is not much difference in the ranking of cost-risk among the four
Strategies.
While measuring the cost based on PV of debt to GDP at the end of 2019/20 S1, S2,
S3 and S4 will have 21.1%, 21.9%, 22.3 and 22.5% respectively and S4 has the
highest due to the introduction of 3 and 5 years bond. Whereas due to IDA blended
borrowing S1 has relatively the least cost.
In terms of concessionality of debt, the IDA scale up facility terms has an important
impact on the PV of debt to GDP. While Strategies 1 and 3 all have the same
component of concessionality in the external financing, Strategy 2 and 4 have less
concessional terms
On the other front, the outcome measured by interest payment to GDP at the end of
FY2019/20, indicates that S1 has a lower expected cost and lower risk relative to S2,S3
and S4, that are more domestically oriented. S1 is one of the least cost strategies in
terms of the interest/GDP and it produces a lower fiscal adjustment cost to maintain
debt sustainability than the other strategies. Similarly, here it is important to note that
in terms conducted analysis the difference among alternative strategies are not big that
is 0.2%.
Overall, due to the positive outlook and the associated strong fiscal position, the debt
indicators are generally encouraging under all the strategies. Further, though a clear
ranking is observed, there is relatively little difference among the alternative strategies
on the basis of their cost-risk indicators. The difference between the highest and lowest
cost strategies is only 0.8% to 1.4% in terms of both interest/GDP and debt/GDP ratios.
On the other hand, in analyzing the strategies, other cost indicators such as the implied
average interest rate, interest/revenue ratio and other risk indicators such as the
Average Time to Maturity (ATM) and percentage of debt refixing within 12 months were
considered to analyze the alternative four strategies in conjunction with the overall core
objectives of debt management. In terms of refinancing risk Average time to maturity
(ATM) for External Borowing show an improvement while it is worsening for domestic
debt as more of the domestic finanacing will be assumed to be in treasury bills. In this
regard S1 will have a higher ATM followed by S2 and S3, S4 have the lowest ATM.
As far as Interest Rate Risk is concerned, Avarage Time to Refixing (ATR) shows the
same trend as that of ATM since there is no variable interest borrowing by the central
governmnt.
2.6.2 Selection of Appropriate Strategy
Overall, maintaining the recorded debt sustainability, minimizing exchange rate

exposure and smoothening the repayment profile over the medium term constitute key
drivers for the choice of the best strategy. In this regard, out of the four assessed, on
the basis of the outcome measured by interest payment to GDP and nominal debt to
GDP ratio and other indicators, the two strategies of S1 and S2 are feasible strategies
to implement in the MTDS period. The result of these two strategies suggest that
domestic borrowing (given, the prevailing low interest rates) and external concessional
borrowing have comparable cost and external semi-concessional borrowing is inferior to
domestic borrowing, taking into account the exchange rate effect that offsets the lower
interest cost of semi-concessional debt.
Over the time horizon, given the changing circumstances and constraints expected, it
may be imperative to select strategy 2. This strategy not only addresses the limited
access to concessional borrowing but it is also helpful to meet the overall objectives of
developing domestic debt market, increasing mobilization of domestic savings, reducing
external dependence to fill the budget gap and reducing inflationary pressure in the
economy during the MTDS period.
Indeed strategy 2 shifts the portfolio in this direction, with S2 being aggressive in
increasing the domestic share of financing by maintaining gross domestic financing as a
share of GDP at the current level of 1.5% of GDP and lengthening maturities by
introducing Three-year bonds into the domestic financing mix. In addition, strategy 2
implies maintaining a reasonable stream of new issuance in the domestic market and is
more in line with the core objective to extend maturities in the domestic market than
S1. Certainly, these depend on the shift of demand and the level of progress of
domestic debt market for treasury bonds.
Hence, out of the two strategies indicated above, on the basis of the objectives towards
developing domestic debt market priority focus areas of the country and results of cost-
risks assessments, the ideal to be selected as first choice is Strategy 2 over the time
horizon given the changing circumstances and constraints expected during the period.
However, the government will use both strategies interchangeably depending on the
reality, availability of the resources, economic growth and global situations.
III. CONCLUSION and Way Forward
The key objective for the 2015 Medium Term Debt Strategy was to assess cost and
risks of domestic and external borrowing while taking into consideration the debt
sustainability. This analysis will guide the central government to develop financing plan
by setting out among others the least cost combination of borrowing instruments with
the prudent degree of risk taking into account macroeconomic indicators and the
domestic debt market development.
The 2015 MTDS indicates that the total public debt is expected to rise substantially on
the account of large infrastructure financing projected in the medium term fiscal
framework. The PV Debt to GDP is projected to increase over the medium term. This is
on the assumption that the current real growth projections over the medium term shall
be sustained. This would nevertheless still be within the IMF debt convergence criterion
that requires a PV of debt GDP of less than 56% at all times.
Similarly, the current cost and risk analysis of debt portfolio reveals that there is higher
foreign exchange risks due to large foreign currency debt exposure and the current
underdeveloped domestic borrowing market provide an opportunity to diversify sources
of financing and further develop the domestic borrowing market.
The choice of debt strategy is guided by such objectives as maintaining debt

sustainability, minimizing costs and risk exposure and viability of the strategies. In this
regard, four alternative strategies were assessed using the MTDS Analytical Tool, based
on debt management objectives of the government. The analysis indicates that strategy
1 and 2 that assume borrowing from concessional and semi-concessional sources while
elongating domestic debt maturity seem more practical to implement than other
strategies. It should be noted that both strategies could be implemented
interchangeably based on the development of economic situation of the country.
Accordingly, taking into account that fact and the cost/risk tradeoffs, Strategy 1 (S1) is
judged to be the most realistic strategy over the medium term. It means Strategy one
was selected to be the first preferred strategy among the four alternative strategies.
This strategy assumes a gradual reduction in the concessional envelope over the
medium-term, replaced by semi-concessional borrowing. The strategy not only has
relatively low risk and cost but also more feasible in implementation given the recent
trends of reduced concessional borrowing while increasing reliance on non-concessional
borrowing. Nonetheless, the preferred strategy is likely to pose a number of debt
management risks as observed above of which one of it is exchange risks. Whereas
strategy 2 may appears to dominate the alternative borrowing strategy if its constrained
by the underdeveloped level of domestic debt market and limited availability of demand
from the side of participants improved to meet the financial requirement for
infrastructure development.
In conclusion, the assessment of the MEFF indicates high sensitiveness of the solvency
indicators of Debt to GDP, PV Debt to GDP and GDP growth assumptions. Proactive
actions as required are therefore necessary to ensure that the current public debt
position is not worsened over the medium term. Therefore, attaining the programmed
economic growth assumptions and the efficient use of borrowed funds are highly critical
in maintaining the solvency indicators below the projected levels to create room for any
future external borrowing and to ensure emplacing the long term debt sustainability in
the country. The borrowing envisaged under the MTDS 2015 therefore, shall be
undertaken with caution taking into account the above factors.
Going forward, an annual review of potential strategies shall be carried out to establish
their feasibility and relative merits. Similarly, publication of the strategy is an important
mechanism for enhancing accountability of debt management, as well as transparency
of debt management operations in the country.

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ETHIOPIA’S MEDIUM TERM DEBT

Debt Management Directorate of Ministry of Finance

Table 1: Stock of Public Debt, as at end of 2014/15……………………………………………….13

Chart 1: Total Debt Portfolio by Source as at end of June 2015………………………………13

Chart 2: Currency Composition of Public Debt Portfolio as at end of June 2015…….....14

Chart 3: External Debt Movement 2005/06 – 2014/15…………………………………………….15

Chart 4: External Debt Composition by Creditor Category as at end of June, 201………16

Chart 5 External Debt Portfolio by Interest Type as at end June, 2015…….……………….17

Chart 6: Government Domestic Debt by Holder Category as at end June, 2015……..….18

ADB - African Development Bank

ADF - African Development Fund

ATM - Average Time to Maturity

ATR - Average Time to Refixing

BADEA – Arab Bank for Economic Development in Africa

BoP - Balance of Payments

DBE – Development Bank of Ethiopia

DMD - Debt Management Directorate

DSA - Debt Sustainability Analysis

EEP – Ethiopian Electric Power

EEPCO - Ethiopian Electric Power Corporation

EEU - Ethiopian Electric Utility

EIB - European Investment Bank

EMTDS - Ethiopia’s Medium Term Debt Management Strategy

ETB - Ethiopian Birr

EAL - Ethiopian Air Lines

ERC – Ethiopian Railway Corporation

GDP - Gross Domestic Product

IDA - International Development Association

IFAD – International Fund for Agricultural Development

IMF - International Monetary Fund

MTEF - Medium Term Expenditures Framework

NBE - National Bank of Ethiopia

NDF - Net Domestic Financing

OPEC Fund – OPEC Fund for International Development

SDR – Special Drawing Rights

SOE - State Owned Enterprises

USD – United States Dollars

 An increase in external financing with a view to rebalancing the public debt

End of June 2015 ETB Millions US$ Millions

Chart 1: Total Debt Portfolio by Source as at end of June 2015

1.1.1 Financing Options from External Sources

Chart 2: Currency Composition of Public Debt Portfolio as at end

Chart 3: External Debt Movement 2005/06 – 2014/15

Source: Ministry of Finance

Similarly, in FY2014/15 it obtained 65% of total external credit from concessional

Source: Ministry of Finance

1.1.2 Financing Trends from Domestic Sources

Chart 7: Government Domestic Debt by Holder Category as at end June, 2015

1.2 Ethiopia’s Cost and Risk Analysis of Public Debt Portfolio

1.2.1 Cost and Risk of the Central Government Debt Portfolio

Nominal Debt as % GDP 15.7 10.6 26.3

Interest Payment as of GDP 03 0.3 0.6

ATM (Years) 16.5 6.9 12.6

ATR (Years) 16.5 6.9 12.6

FX Debt (% of Total Debt) 59.7

In this connection, it is appropriate to design debt strategy to lead proper borrowing to

2.1 Objectives of the MTDS and Its Coverage

The Ministry of Finance including concerned Directorates, National Planning Commission

MTDS essentially guides the composition of borrowing instruments of the government