was +9.0%. Now consider what d would have been with a r=3.0%, modest by African standards and still well below g. It would have been 61.4% of GDP instead of the 56.9% shown in Table 5.<sup>12</sup>

**Table 5: Ethiopia’s Public Debt Dynamics 2017-19**

||2017|2018|2019|
|---|---|---|---|
|Public debt/GDP %<br>|56.5|60.8|56.9|
|Primarydeficit/GDP %<br><br>|4.5|4.00|3.3|
|Real interest rate %(r<sup>c</sup>)<br><br>|-0.74|1.22|-4.98|
|---Local currency (r<sup>d</sup>)<br>|-2.40|-5.20|-6.70|
|---Foreign currency (r<sup>f</sup>)|3.21|7.74|-3.40|
|Realgrowth rate %(g)<br>**_Notes_**: Own calculations based o|10.20<br>Table 2 of the Debt Sus|7.70<br>tainability Analysis in IMF Co|9.00<br>untry Report 20/150 (IMF|

**_Notes_** : Own calculations based on Table 2 of the Debt Sustainability Analysis in IMF Country Report 20/150 (IMF 2020). See Annex 1 for the derivation of the formulas for the interest rate calculations. For 2017, the shares of birr and fx debt at the end of 2016 (not provided in the DSA table) were inferred from the real exchange rate contribution to “automatic debt dynamics”.

Consider now the impact of moving to market determined exchange rates. IMF (2020) reports the parallel market premium dropped from 35% in November 2019 to 27.5% on April 22, 2020 (IMF 2020, p. 4). We conservatively take the premium as 20% at the end of 2019. In this case, moving to a marketdetermined exchange rate would raise the $-component of public debt from 28.3% of GDP in 2019 to 34% of GDP, so the new d would be 67.1% of GDP.<sup>13</sup> Thus adopting market interest and exchange rates as part of a strategy to attract FDI and give the domestic private sector a boost could have a large adverse effect on debt levels and dynamics. _Alternatively, adverse debt dynamics have been masked by financial repression and overvalued exchange rates, fueling complacency._ Integrating Ethiopia’s public debt sustainability with its development agenda raises questions:

1. What additional development spending does the Ethiopian Government need to make?

2. How will the loss of two implicit tax instruments—the interest savings from financial repression and the implicit tax on exports via the parallel market premium—be compensated?

3. Will the large debt financed infrastructure projects pay off in terms of exports, economic growth and taxes? IMF (2020) identifies weak exports as a key source of vulnerability, calling for a hard assessment of export potential. Past IMF country reports mentioned electricity exports of $250 million by 2019 and of $1 billion by 2023 as the country becomes a “regional energy superpower”. The question is whether this is realistic. Besides, boosting exports would require eliminating the tax on exporters imposed by mispricing foreign exchange. A 20% parallel market premium amounts to a 17% implicit tax on exports.

One way of bringing the interrelationships between debt sustainability and development to the forefront is to make the public sector DSA the centerpiece of country reports instead of relegating it to an annex.

> 12 This number is obtained by recomputing “automatic debt dynamics” (ADD) for 2019 assuming r=3.0%, giving it as -3.3 instead of the -7.8 shown in the public sector DSA table in IMF (2020). All other numbers remain the same, raising d by 4.5 percentage points of GDP.

> 13 We assume that the parallel market exchange rate is the marginal cost of foreign exchange and the rate that would emerge if the birr were floated. This is an empirical question, so we take a low premium, but there is evidence from Sub-Saharan Africa from the 1980s that the equilibrium exchange rate is close to the parallel rate. See Pinto (1991).

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