INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA Joint World Bank-IMF Debt Sustainability Analysis April 2020 Prepared Jointly by the staffs of the International Development Association (IDA) and the International Monetary Fund (IMF) Approved by Marcello Estevão (IDA), Zeine Zeidane and Seán Nolan (IMF) Ethiopia: Joint Bank––Fund Debt Sustainability Analysis1 Risk of external debt distress High Risk of overall debt distress High Granularity in the risk rating Sustainable Application of judgement None Macroeconomic projection Near-term growth projections were revised downward on account of the domestic and external impact of COVID-19. Exports, in particular services exports, will contract significantly in 2019/20. Financing strategy Urgent balance of payments needs will be covered by Fund financing, donor support, debt relief, and reserves draw down. The World Bank recently approved US$82.6 million for a COVID- 19 project and is exploring modalities for additional support. Realism tools flagged Growth, exports, fiscal adjustments, and financing needs have downside risks. Mechanical risk rating under the external DSA High Mechanical risk rating under the public DSA High 1 This debt sustainability analysis (DSA) was conducted using the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries (LIC-DSF) that was approved in 2017. Ethiopia’s public and publicly guaranteed debt is deemed sustainable, but downside risks and liquidity pressures have increased due to high uncertainty surrounding the intensity and duration of the COVID- 19 outbreak and its implications for the economic outlook.2, 3 Ethiopia’s debt vulnerabilities stem from rising debt servicing needs, an overvalued exchange rate, and a small export base. The authorities have taken steps to reduce vulnerability by controlling external borrowing, debt service reprofiling, and committing to move toward market-based exchange rate and FX market liberalization, both of which should improve FX availability and boost private sector activity and exports. Under the baseline, two external debt indicators breach their thresholds. As a result, Ethiopia continues to be assessed at “high” risk of debt distress. The authorities have committed to undertaking additional reprofiling by the first review under the ECF-EFF arrangements to reduce external debt servicing needs relative to exports, with an aim of achieving a “moderate” risk of external debt distress rating. However, against the backdrop of the pandemic, the capacity to absorb shocks has declined indicating liquidity pressures. As such, a larger or more persistent impact of the COVID-19 shock than presently assumed could threaten debt sustainability. Steadfast implementation of FX reforms would reduce these pressures over the medium term and safeguard Ethiopia's capacity to repay the Fund. Monitoring of contingent liabilities, the main vulnerability of overall public debt, and continued improvement in debt management and reporting are recommended. Macroeconomic Outlook. In the context of a rapidly changing global situation due to COVID-19, the near-term macroeconomic outlook has been revised since the 2019 Article IV DSA. Growth is revised down to 3.2 percent and to 3.7 percent in 2019/20 and 2020/21, respectively, because of the expectation that the COVID-19 outbreak, including the related global slowdown, will have a significant impact on economic activity. The authorities have already put in place social distancing and other containments measures. Real GDP growth will converge to 8 percent over the medium term. Against this challenging global backdrop, exports and remittances are projected to contract significantly, but weak domestic demand and a decline in foreign direct investment will also lead to a contraction in imports. Improved terms of trade (e.g., higher coffee and lower oil prices) will also help the trade balance. Exports of services, the main source of Ethiopia’s export earnings, are expected to be severely impacted by travel restrictions, but a concomitant reduction in services imports will cushion the impact on the services balance. Thus, the current account deficit is projected to modestly improve relative to a year ago. In 2020/21, exports are expected to recover on the back of a global recovery. Over the DSA projection horizon, staff has revised down export growth given changes in global assumptions, but significant downside risks remain. Inflation is expected to remain elevated in 2020/21 and will moderate to the central bank’s single-digit objective by late 2021. The fiscal deficit is now projected to temporarily widen 2 Public debt data includes Ethiopian Airlines, but this information is excluded from the DSA. Ethio-Telecom is included, in line with the December 2019 DSA, although the authorities view it as meeting the criteria for exclusion. 3 As reported earlier, Ethiopia owes arrears to Libya, Bulgaria, Russia, and former Yugoslavia, totaling about US$538 million, which are deemed away under the policy on arrears to official bilateral creditors, as the underlying Paris Club agreement is adequately representative, and the authorities are making best efforts to resolve the arrears. Furthermore, there are about US$8.2 million worth of external arrears (principal and interest payments combined) to commercial creditors, all pre-dating the1990s, from former Czechoslovakia, India, Italy, and former Yugoslavia. The authorities are continuing to make a good faith effort to reach a collaborative agreement with these creditors. 2 in 2019/20 and 2020/21 as the economic slowdown impacts revenues, while spending needs increase to respond to the COVID-19 shock. Financing Strategy. Urgent balance of payments needs have arisen due to the COVID-19 shock, which are expected to be covered by Fund financing — which includes requests for assistance under the Rapid Financing Instrument (100 percent of quota or SDR 300.7 million) and for debt relief under the Catastrophe Containment and Relief Trust (included under exceptional financing in Table 1 and under debt relief in Table 2) — concessional financing from donors, and lower reserves. Given delays in the first review discussions under the ECF-EFF arrangements resulting from COVID-19 and to comply with applicable normal access limits, the authorities have also requested the Fund to rephase access under the ECF-EFF arrangements and to reduce the second and third EFF purchases, resulting in a reduction of overall access by 50 percent of quota under the EFF arrangement. Under the ECF-EFF arrangements, Ethiopia is subject to continuous performance criteria applicable to contracting or guaranteeing of concessional (a non-zero limit) and non-concessional (a zero limit) external debt. Financing needs will be revisited during the first review under the ECF-EFF arrangements. The World Bank recently approved a COVID-19 project for US$82.6 million and is exploring modalities for additional support. Realism Tool. The realism tool indicates that the assumed fiscal adjustments could have downside risks. One of the objectives of the ECF/EFF-supported program is to address vulnerabilities arising from nonfinancial public sector balance sheets and there are implementation risks. However, the authorities have demonstrated in recent years that they are aware of external debt vulnerabilities and have reined in borrowing by public enterprises. On the growth projections, the realism tool implies upside risks to staff projections in the near term, but these results reflect past high debt-financed rates of growth that have now become unsustainable, and do not account for the COVID-19 shock. Given the considerable uncertainty around the impact of COVID-19, staff believes there are downside risks to growth in the near term. DSA Baseline and Alternative Scenarios. The DSA baseline includes the first phase of debt reprofiling under the ECF-EFF arrangements for which firm assurances were received at the time of the approval of the arrangements in December 2019. This phase of reprofiling is expected to generate savings of about US$1.65 billion over 2019/20–2022/23. The authorities intend to request debt service relief under the G20 initiative, but these are not yet included in the DSA baseline, pending a formal request and clarification on the underlying technical details. Similarly, the second phase of debt reprofiling under the ECF-EFF arrangements will be included once specific and credible assurances are received, expected by the first review of the ECF-EFF arrangements. 3 Table 1. Ethiopia: External Debt Sustainability Framework, Baseline Scenario, 2017–39 (In percent of GDP, unless otherwise indicated) Actual Projections Average 8/ Historical Projections 2017 2018 2019 2020 2021 2022 2023 2024 2025 2030 2039 External debt (nominal) 1/ 30.6 34.3 31.1 32.2 34.4 35.8 33.1 29.7 26.0 16.1 10.9 27.3 26.2 Definition of external/domestic debt Residency-based of which: public and publicly guaranteed (PPG) 28.2 31.6 28.3 29.5 31.3 32.6 29.9 26.7 23.1 14.3 10.1 24.7 23.6 Is there a material difference between the No two criteria? Change in external debt -0.8 3.7 -3.2 1.1 2.2 1.4 -2.7 -3.4 -3.8 -1.3 -0.3 Identified net debt-creating flows -0.5 0.9 -2.2 1.6 -0.9 -2.8 -3.0 -3.4 -3.6 -1.2 -0.4 0.1 -2.0 Non-interest current account deficit 7.3 5.6 4.4 3.7 4.0 4.1 3.9 3.1 2.7 2.8 3.3 5.9 3.3 Deficit in balance of goods and services -31.1 -31.2 -28.7 -21.8 -25.8 -30.3 -31.3 -30.5 -29.8 -26.7 -22.2 -38.7 -28.1 Exports 7.6 8.4 7.9 5.8 7.6 9.6 10.2 10.3 10.3 9.3 7.6 Debt Accumulation Imports -23.5 -22.8 -20.8 -16.0 -18.1 -20.7 -21.1 -20.2 -19.5 -17.4 -14.5 3.0 60 Net current transfers (negative = inflow) -8.5 -8.7 -8.4 -6.6 -6.8 -7.3 -7.4 -6.9 -6.5 -5.0 -3.6 -10.9 -6.3 of which: official -1.7 -1.5 -2.2 -2.0 -1.3 -1.4 -1.4 -1.2 -1.2 -0.9 -0.8 2.5 Other current account flows (negative = net inflow) 46.9 45.5 41.6 32.0 36.6 41.7 42.6 40.5 39.1 34.5 29.0 55.5 37.6 50 2.0 Net FDI (negative = inflow) -5.1 -4.4 -3.1 -1.7 -4.0 -4.1 -4.3 -4.6 -4.5 -3.6 -3.3 -3.5 -3.9 Endogenous debt dynamics 2/ -2.7 -0.4 -3.5 -0.3 -0.9 -2.8 -2.6 -1.9 -1.8 -0.4 -0.4 1.5 40 Contribution from nominal interest rate 0.7 0.6 0.7 0.6 0.3 0.2 0.1 0.5 0.4 0.6 0.1 Contribution from real GDP growth -2.9 -2.3 -2.7 -0.9 -1.2 -3.0 -2.7 -2.4 -2.1 -1.0 -0.5 1.0 30 Contribution from price and exchange rate changes -0.5 1.4 -1.5 … … … … … … … … 0.5 Residual 3/ -0.3 2.8 -0.9 -0.5 3.1 4.2 0.2 0.0 -0.2 -0.1 0.1 1.6 0.6 of which: exceptional financing -0.1 -0.1 -0.1 1.4 1.6 1.9 1.5 0.1 0.0 -0.2 0.0 0.0 20 -0.5 Sustainability indicators 10 PV of PPG external debt-to-GDP ratio ... ... 19.4 18.6 19.8 21.4 21.1 18.8 15.9 8.6 5.9 -1.0 PV of PPG external debt-to-exports ratio ... ... 244.9 320.7 259.8 223.3 206.4 182.7 153.7 93.1 77.9 -1.5 0 PPG debt service-to-exports ratio 20.3 18.5 24.5 26.3 20.3 15.7 14.0 15.9 23.0 14.0 4.9 2020 2022 2024 2026 2028 2030 PPG debt service-to-revenue ratio 11.0 12.6 16.8 14.2 12.7 11.2 10.2 11.3 16.5 8.9 2.5 Gross external financing need (Million of U.S. dollars) 3366.7 2638.9 3442.3 4107.3 2015.7 1961.4 1587.6 651.2 1311.3 1574.3 2247.2 Debt Accumulation Grant-equivalent financing (% of GDP) Key macroeconomic assumptions Grant element of new borrowing (% right scale) Real GDP growth (in percent) 10.2 7.7 9.0 3.2 3.7 8.7 8.0 8.0 8.0 6.0 5.0 9.6 6.6 GDP deflator in US dollar terms (change in percent) 1.7 -4.3 4.7 7.9 -4.8 -9.7 -2.2 3.2 2.7 2.9 2.9 2.1 1.0 Effective interest rate (percent) 4/ 2.4 1.9 2.3 2.0 0.8 0.6 0.4 1.6 1.4 3.8 1.0 1.7 1.6 External debt (nominal) 1/ Growth of exports of G&S (US dollar terms, in percent) 2.9 13.1 7.9 -18.5 30.0 23.2 12.5 12.1 11.7 6.9 5.4 8.9 9.8 of which: Private Growth of imports of G&S (US dollar terms, in percent) -4.8 0.2 4.1 -14.3 11.7 11.9 7.6 7.1 6.8 7.0 6.0 8.6 6.1 40 Grant element of new public sector borrowing (in percent) ... ... ... 39.8 38.4 37.9 42.9 50.8 53.0 52.3 50.2 ... 47.8 Government revenues (excluding grants, in percent of GDP) 14.1 12.3 11.5 10.7 12.2 13.4 14.0 14.4 14.4 14.7 15.3 35 13.7 13.8 Aid flows (in Million of US dollars) 5/ 556.8 686.4 1198.8 3528.8 2398.2 2224.2 2457.3 2045.0 2552.4 2898.8 4812.2 30 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 2.8 1.9 1.9 1.8 1.3 1.4 1.0 0.8 ... 1.5 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 60.6 54.8 53.1 59.8 70.4 72.9 69.7 67.3 ... 66.0 25 Nominal GDP (Million of US dollars) 81,788 84,298 96,140 107,120 105,716 103,685 109,513 122,089 135,345 215,299 446,414 Nominal dollar GDP growth 12.1 3.1 14.0 11.4 -1.3 -1.9 5.6 11.5 10.9 9.1 8.1 11.9 7.7 20 15 Memorandum items: PV of external debt 7/ ... ... 22.2 21.3 22.9 24.7 24.3 21.8 18.8 10.4 6.8 10 In percent of exports ... ... 280.4 367.6 300.1 257.5 237.6 212.4 181.7 112.1 89.0 5 Total external debt service-to-exports ratio 24.9 22.7 28.7 32.0 24.8 19.4 17.7 19.8 26.8 16.7 6.7 PV of PPG external debt (in Million of US dollars) 18651.7 19901.9 20956.1 22193.6 23083.0 22896.0 21523.4 18615.3 26541.1 0 (PVt-PVt-1)/GDPt-1 (in percent) 1.3 1.0 1.2 0.9 -0.2 -1.1 -0.5 0.3 2020 2022 2024 2026 2028 2030 Non-interest current account deficit that stabilizes debt ratio 8.1 2.0 7.6 2.6 1.8 2.7 6.7 6.5 6.5 4.0 3.6 Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. Presented on fiscal year basis (e.g., 2020 referes to fiscal year ending in June 2020). 2/ Derived as [r - g - ρ (1+g) + Ɛα (1+r)]/(1+g+ρ +gρ ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 4 Table 2. Ethiopia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–39 (In percent of GDP, unless otherwise indicated) Actual Projections Average 6/ 2017 2018 2019 2020 2021 2022 2023 2024 2025 2030 2039 Historical Projections Public sector debt 1/ 56.5 60.8 56.9 56.6 55.7 53.7 48.5 44.2 40.0 23.9 9.7 49.3 40.5 Definition of external/domestic Residency- of which: external debt 28.2 31.6 28.3 29.5 31.3 32.6 29.9 26.7 23.1 14.3 10.1 24.7 23.6 debt based of which: local-currency denominated Change in public sector debt 2.1 4.3 -3.9 -0.4 -0.8 -2.1 -5.2 -4.3 -4.2 -2.1 -1.5 Is there a material difference Identified debt-creating flows -1.5 0.2 -4.5 -3.7 -4.1 -4.3 -4.5 -3.6 -3.5 -1.6 -1.2 -3.7 -3.3 No between the two criteria? Primary deficit 4.5 4.0 3.3 4.1 2.9 0.3 -0.2 -0.4 -0.8 -1.0 -0.8 2.4 0.0 Revenue and grants 14.7 13.1 12.8 12.3 13.1 14.3 14.9 15.2 15.2 15.2 15.7 15.2 14.6 of which: grants 0.7 0.8 1.2 1.6 0.9 0.9 0.9 0.7 0.8 0.5 0.4 Public sector debt 1/ Primary (noninterest) expenditure 19.2 17.0 16.1 16.4 16.0 14.6 14.7 14.8 14.4 14.2 14.9 17.5 14.6 Automatic debt dynamics -5.4 -3.4 -7.8 -7.8 -5.9 -4.3 -4.3 -3.2 -2.7 -0.6 -0.4 of which: local-currency denominated Contribution from interest rate/growth differential -16.9 -11.0 4.6 -7.8 -5.9 -4.3 -4.3 -3.2 -2.7 -0.6 -0.4 of which: foreign-currency denominated of which: contribution from average real interest rate -11.9 -6.9 9.6 -6.0 -3.9 0.2 -0.3 0.4 0.6 0.9 0.1 of which: contribution from real GDP growth -5.0 -4.0 -5.0 -1.8 -2.0 -4.4 -4.0 -3.6 -3.3 -1.5 -0.5 60 Contribution from real exchange rate depreciation 11.5 7.6 -12.5 ... ... ... ... ... ... ... ... 50 Other identified debt-creating flows -0.6 -0.4 0.0 0.0 -1.1 -0.4 0.0 0.0 0.0 0.0 0.0 -0.2 -0.1 Privatization receipts (negative) -0.6 -0.4 0.0 0.0 -1.1 -0.4 0.0 0.0 0.0 0.0 0.0 40 Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 30 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other debt creating or reducing flow (liquid financial asset) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20 Residual 3.7 4.2 0.6 3.3 3.2 2.3 -0.6 -0.7 -0.7 -0.6 -0.3 6.4 0.3 10 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 48.6 47.6 46.4 44.3 40.2 36.7 33.3 18.5 5.7 2020 2022 2024 2026 2028 2030 PV of public debt-to-revenue and grants ratio … … 380.0 386.4 353.5 309.4 269.0 242.3 218.7 121.4 36.4 Debt service-to-revenue and grants ratio 3/ 78.0 93.8 102.1 29.9 39.6 39.3 56.9 55.6 64.1 49.3 1.8 Gross financing need 4/ 15.4 15.8 16.4 7.8 7.0 5.5 8.3 8.0 8.9 6.5 -0.5 of which: held by residents of which: held by non-residents Key macroeconomic and fiscal assumptions 60 Real GDP growth (in percent) 10.2 7.7 9.0 3.2 3.7 8.7 8.0 8.0 8.0 6.0 5.0 9.6 6.6 Average nominal interest rate on external debt (in percent) 2.5 1.8 2.3 1.9 0.6 0.4 0.1 1.5 1.2 4.0 0.8 1.6 1.5 50 Average real interest rate on domestic debt (in percent) -2.4 -5.2 -6.7 -12.9 -11.0 -2.6 -1.3 0.9 2.0 3.3 4.6 -7.6 -1.0 40 Real exchange rate depreciation (in percent, + indicates depreciation) 78.7 36.9 -30.8 … ... ... ... ... ... ... ... 16.1 ... 30 Inflation rate (GDP deflator, in percent) 7.9 11.5 12.5 20.4 18.8 9.5 8.5 8.4 7.9 8.1 8.1 12.6 10.4 Growth of real primary spending (deflated by GDP deflator, in percent) 9.8 -4.6 3.1 5.3 1.0 -0.7 8.6 8.6 5.2 7.9 5.2 9.5 5.5 20 Primary deficit that stabilizes the debt-to-GDP ratio 5/ 2.3 -0.4 7.2 4.4 3.7 2.4 4.9 3.9 3.3 1.2 0.7 3.1 3.0 10 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 2020 2022 2024 2026 2028 2030 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: general government, SOEs (excl. Ethiopian airlines), and the central bank . Definition of external debt is Residency-based. Presented on fiscal year basis (e.g., 2020 referes to fiscal year ending in June 2020). 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 5 Figure 1. Ethiopia: Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2020–30 PV of debt-to GDP ratio PV of debt-to-exports ratio 45 450 40 400 35 350 30 300 25 250 20 200 15 150 10 100 5 Most extreme shock: One-time depreciation 50 Most extreme shock: Exports 0 0 2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030 Debt service-to-exports ratio Debt service-to-revenue ratio 45 30 40 35 25 30 20 25 20 15 15 10 10 5 5 Most extreme shock: Exports Most extreme shock: One-time depreciation 0 0 2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030 Baseline Historical scenario Most extreme shock 1/ Threshold Borrowing assumptions on additional financing needs resulting from the Customization of Default Settings stress tests* Size Interactions Default User defined Shares of marginal debt No No External PPG MLT debt 100% Tailored Stress Terms of marginal debt Combined CL Yes Avg. nominal interest rate on new borrowing in USD 0.9% 0.9% Natural disaster n.a. n.a. USD Discount rate 5.0% 5.0% Commodity price n.a. n.a. Avg. maturity (incl. grace period) 33 33 Market financing No No Avg. grace period 5 5 Note: "Yes" indicates any change to the size or * Note: All the additional financing needs generated by the shocks under the interactions of the default settings for the stress tests are assumed to be covered by PPG external MLT debt in the external stress tests. "n.a." indicates that the stress test DSA. Default terms of marginal debt are based on baseline 10-year projections. does not apply. 6 Figure 2. Ethiopia: Indicators of Public Debt, Baseline Scenario, 2020–30 (In percent) PV of Debt-to-GDP Ratio 60 50 40 30 20 10 Most extreme shock: Combined contingent liabilities 0 2020 2022 2024 2026 2028 2030 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 450 80 400 70 350 60 300 50 250 40 200 30 150 20 100 50 Most extreme shock: Combined 10 Most extreme shock: Combined contingent liabilities contingent liabilities 0 0 2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030 Baseline Most extreme shock 1/ TOTAL public debt benchmark Historical scenario Borrowing assumptions on additional financing needs resulting from the Default User defined stress tests* Shares of marginal debt External PPG medium and long-term 21% 34% Domestic medium and long-term 14% 54% Domestic short-term 65% 12% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 0.9% 0.9% Avg. maturity (incl. grace period) 33 33 Avg. grace period 5 5 Domestic MLT debt Avg. real interest rate on new borrowing 3.5% 3.5% Avg. maturity (incl. grace period) 10 10 Avg. grace period 3 3 Domestic short-term debt Avg. real interest rate 1.0% 1.0% * Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 7 Table 3. Ethiopia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2020–30 (In percent) Projections 1/ 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 PV of debt-to GDP ratio Baseline 19 20 21 21 19 16 14 13 11 10 9 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 19 19 19 19 19 18 19 18 18 18 18 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 19 20 22 22 19 17 15 13 12 10 9 B2. Primary balance 19 20 22 22 20 17 15 14 12 11 9 B3. Exports 19 21 25 24 22 19 17 15 13 12 10 B4. Other flows 3/ 19 22 25 25 23 19 18 16 14 12 11 B5. Depreciation 19 29 37 36 33 28 25 23 20 18 16 B6. Combination of B1-B5 19 22 26 25 23 19 18 16 14 12 11 C. Tailored Tests C1. Combined contingent liabilities 19 21 23 23 21 18 16 15 13 12 11 C2. Natural disaster … … … … … … … … … … … C3. Commodity price … … … … … … … … … … … C4. Market Financing 19 22 24 24 21 18 16 14 12 11 10 Threshold 40 40 40 40 40 40 40 40 40 40 40 PV of debt-to-exports ratio Baseline 321 260 223 206 183 154 140 128 116 104 93 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 321 247 199 186 185 178 183 187 189 189 189 0 B. Bound Tests B1. Real GDP growth 321 260 223 206 183 154 140 128 116 104 93 B2. Primary balance 321 263 234 216 192 162 149 137 124 113 101 B3. Exports 321 362 426 394 351 299 276 254 230 208 186 B4. Other flows 3/ 321 285 266 246 219 188 174 160 145 131 117 B5. Depreciation 321 260 267 247 220 189 174 161 146 132 119 B6. Combination of B1-B5 321 359 261 361 322 276 254 234 212 191 172 C. Tailored Tests C1. Combined contingent liabilities 321 281 244 226 202 173 161 149 138 127 116 C2. Natural disaster … … … … … … … … … … … C3. Commodity price … … … … … … … … … … … C4. Market Financing 321 260 224 207 183 154 140 127 115 103 92 Threshold 180 180 180 180 180 180 180 180 180 180 180 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI. 8 Table 3. Ethiopia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2020–30 (concluded) (In percent) Projections 1/ 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Debt service-to-exports ratio Baseline 26.3 20.3 15.7 14.0 15.9 23.0 14.2 13.0 13.7 13.9 14.0 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 26 18 12 11 12 17 11 11 12 12 13 0 B. Bound Tests B1. Real GDP growth 26 20 16 14 16 23 14 13 14 14 14 B2. Primary balance 26 20 16 14 16 23 15 13 14 14 15 B3. Exports 26 27 26 24 27 39 24 23 26 26 26 B4. Other flows 3/ 26 20 16 15 16 24 15 14 16 16 16 B5. Depreciation 26 20 16 15 16 24 15 14 16 16 16 B6. Combination of B1-B5 26 25 24 22 25 35 22 21 23 23 23 C. Tailored Tests C1. Combined contingent liabilities 26 20 16 14 16 23 15 13 14 14 14 C2. Natural disaster … … … … … … … … … … … C3. Commodity price … … … … … … … … … … … C4. Market Financing 26 20 16 14 16 24 16 14 14 13 14 Threshold 15 15 15 15 15 15 15 15 15 15 15 Debt service-to-revenue ratio Baseline 14 13 11 10 11 17 10 9 9 9 9 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 14 11 9 8 9 12 8 7 8 8 8 0 14 12 9 8 10 15 9 8 8 8 8 B. Bound Tests B1. Real GDP growth 14 13 12 11 12 17 10 9 9 9 9 B2. Primary balance 14 13 11 10 12 17 10 9 9 9 9 B3. Exports 14 13 11 11 12 17 10 9 10 10 10 B4. Other flows 3/ 14 13 11 11 12 17 10 10 11 10 10 B5. Depreciation 14 18 16 15 17 24 15 13 15 15 15 B6. Combination of B1-B5 14 13 12 11 12 17 11 10 11 10 10 C. Tailored Tests C1. Combined contingent liabilities 14 13 11 10 11 17 10 9 9 9 9 C2. Natural disaster … … … … … … … … … … … C3. Commodity price … … … … … … … … … … … C4. Market Financing 14 13 11 10 11 17 11 10 9 9 9 Threshold 18 18 18 18 18 18 18 18 18 18 18 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI. 9 Table 4. Ethiopia: Sensitivity Analysis for Key Indicators of Public Debt, Baseline Scenario, 2020–30 (In percent) Projections 1/ 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 PV of Debt-to-GDP Ratio Baseline 48 46 44 40 37 33 30 26 23 21 18 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 48 46 43 39 35 32 28 26 23 21 20 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 48 47 46 43 39 36 33 30 27 24 22 B2. Primary balance 48 48 47 43 39 35 32 28 25 22 20 B3. Exports 48 48 48 43 40 36 32 29 26 23 20 B4. Other flows 3/ 48 49 49 44 41 37 33 30 26 23 21 B5. Depreciation 48 49 46 41 36 32 28 24 21 17 15 B6. Combination of B1-B5 48 45 43 39 36 32 29 25 22 19 17 C. Tailored Tests C1. Combined contingent liabilities 48 54 51 47 43 39 35 31 28 25 23 C2. Natural disaster … … … … … … … … … … … C3. Commodity price … … … … … … … … … … … C4. Market Financing 48 46 44 40 37 33 30 26 23 21 18 TOTAL public debt benchmark 55 55 55 55 55 55 55 55 55 55 55 PV of Debt-to-Revenue Ratio Baseline 386 354 309 269 242 219 197 175 154 137 121 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 386 351 304 261 232 210 190 172 156 144 132 0 30 25 26 42 45 55 57 56 56 57 57 B. Bound Tests B1. Real GDP growth 386 361 324 285 259 237 217 196 177 161 147 B2. Primary balance 386 362 328 285 257 233 210 187 166 148 132 B3. Exports 386 362 333 290 261 236 214 191 168 150 133 B4. Other flows 3/ 386 370 340 297 268 243 219 196 173 154 137 B5. Depreciation 386 372 322 275 242 212 186 160 136 115 96 B6. Combination of B1-B5 386 342 304 263 236 212 189 167 146 128 112 C. Tailored Tests C1. Combined contingent liabilities 386 410 358 312 282 256 232 208 185 166 149 C2. Natural disaster … … … … … … … … … … … C3. Commodity price … … … … … … … … … … … C4. Market Financing 386 354 310 269 243 219 196 174 153 136 121 Debt Service-to-Revenue Ratio Baseline 30 40 39 57 56 64 63 58 54 53 49 A. Alternative Scenarios A1. Key variables at their historical averages in 2020-2030 2/ 30 40 38 52 49 53 49 43 38 35 31 0 30 25 26 42 45 55 57 56 56 57 57 B. Bound Tests B1. Real GDP growth 30 40 41 60 58 67 67 62 58 57 54 B2. Primary balance 30 40 41 59 57 66 65 60 56 54 51 B3. Exports 30 40 39 57 56 64 63 59 55 54 50 B4. Other flows 3/ 30 40 40 57 56 64 64 59 56 54 50 B5. Depreciation 30 38 39 55 54 63 60 55 52 50 47 B6. Combination of B1-B5 30 38 39 57 55 63 62 57 53 51 48 C. Tailored Tests C1. Combined contingent liabilities 30 40 50 62 59 70 69 64 59 57 54 C2. Natural disaster … … … … … … … … … … … C3. Commodity price … … … … … … … … … … … C4. Market Financing 30 40 39 57 56 65 64 59 54 52 49 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the benchmark. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includes official and private transfers and FDI. 10 Figure 3. Ethiopia: Drivers of Debt Dynamics - Baseline Scenario, External Debt Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Current DSA 30 80 Residual 20 DSA-2018 proj. Interquartile 70 DSA-2014 20 15 range (25- Price and 75) 60 exchange rate 10 50 10 Real GDP Change in growth 5 PPG debt 3/ 40 0 0 Nominal 30 interest rate -5 Median 20 -10 Current 10 account + -10 FDI 0 -20 Contribution of Change in -15 Distribution across LICs 2/ PPG debt 5-year 5-year unexpected 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 3/ historical projected changes change change Public debt Gross Nominal Public Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Residual 100 Current DSA DSA-2018 proj. 40 Interquartil DSA-2014 e range 80 Other debt 30 creating flows (25-75) 70 50 20 60 Real Exchange 10 50 rate Change in depreciation 0 40 Real GDP debt growth 0 -10 30 20 Real interest -20 rate 10 -30 Median 0 Primary deficit -50 5-year 5-year -40 Contribution of 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 unexpected Distribution across LICs 2/ historical projected changes change change 1/ Difference between anticipated and actual contributions on debt ratios. 2/ Distribution across LICs for which LIC DSAs were produced. 3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. 11 Figure 4. Ethiopia: Realism Tools, Baseline Scenario 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) 12 2 14 Distribution 1/ 10 12 Projected 3-yr In percentage points of GDP adjustment 3-year PB adjustment 8 1 greater than 2.5 percentage 10 In percent points of GDP in approx. top 6 quartile 8 4 0 6 2 4 0 -1 2 2014 2015 2016 2017 2018 2019 2020 2021 Baseline Multiplier = 0.2 Multiplier = 0.4 0 Multiplier = 0.6 Multiplier = 0.8 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the possible real GDP growth paths under different fiscal multipliers (left-hand side scale). percent of sample is found on the vertical axis. Public and Private Investment Rates Contribution to Real GDP growth (percent of GDP) (percent, 5-year average) 64 10 56 9 8 48 7 40 6 32 5 4 24 3 16 2 8 1 0 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Historical Projected (DSA-2018) Projected (Curr. DSA) Gov. Invest. - DSA-2018 Gov. Invest. - Curr. DSA Contribution of other factors Priv. Invest. - DSA-2018 Priv. Invest. - Curr. DSA Contribution of government capital 12 Figure 5. Ethiopia: Market-Financing Risk Indicators, Baseline Scenario GFN 1/ EMBI 2/ Benchmarks 14 570 Values 8 869 Breach of benchmark No Yes Potential heightened liquidity needs Moderate 1/ Maximum gross financing needs (GFN) over 3-year baseline projection horizon. 2/ EMBI spreads are as of April 20, 2020. 45 PV of debt-to GDP ratio PV of debt-to-exports ratio 350 40 300 35 30 250 25 200 20 150 15 10 100 5 50 0 0 2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030 Debt service-to-exports ratio Debt service-to-revenue ratio 30 20 18 25 16 14 20 12 15 10 8 10 6 4 5 2 0 0 2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030 Baseline Market financing Threshold Sources: Country authorities; and staff estimates and projections. 13 Figure 6. Ethiopia: Qualification of Moderate Category, Baseline Scenario, 2020–301/ PV of debt-to GDP ratio PV of debt-to-exports ratio 45 350 40 300 35 250 30 Threshold 25 200 (1-X)*Threshold 20 150 15 (1-Y)*&Threshold 100 10 5 50 0 0 2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030 Debt service-to-exports ratio Debt service-to-revenue ratio 30 20 18 25 16 14 20 12 15 10 8 10 6 4 5 2 0 0 2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030 Threshold Substantial Limited space Some space space Baseline Sources: Country authorities; and staff estimates and projections. 1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent. 14