Financing Trade With Ethiopia

1. If I were conducting financial trade with Ethiopia the biggest concerns would be the human oriented concern because as we figured Ethiopia is one of the most populated countries and thus it creates a great opportunity for the development of the business. Another important issue would definitely be the issue of the governmental stability. This is because when we deal with such substance as finances government usually is able to bring vital changes as to how to manage the substance.

Another great concern would be the fact that Ethiopia largely depends on financial aids and thus it would be necessary to make certain adjustments to the business plans for the organization that would be dealing with financial trade.

In the 1990s, the IMF introduced a program called the Extended Structural Adjustment Program (ESAP), designed to give eligible poor countries cheaper access to Fund credits. ESAP membership mattered not just because of cheap Fund credits, but also because cheap funds from the World Bank were conditional upon a country’s being in the Fund’s ESAP program, as also was balance-of-payments support from the European Community and aid from bilaterals. A country had to meet an array of conditions set by the Fund to be eligible and was granted membership for a three-year period. But the Fund money was tranched. After an initial grant at the start of the program, further tranches were conditional upon the country’s meeting a set of more specific, time-bound benchmark conditions of the kind “By date X you will have done Y.” The conditions related to the growth of money supply, the fiscal deficit, foreign exchange reserves, establishing a market in treasury bills, letting interest rates be determined by supply and demand, and- important for what follows- removing restrictions on flows of money in and out.

Needless to say, the annual review of a country’s progress afforded Fund officials great discretion in how they judged a country’s fulfillment of the conditions, because some of the conditions might be largely outside the control of the government, and conditions such as “establish a market in treasury bills” or “open foreign exchange bureaus” permit of degrees. Therefore Fund officials also have great power over whether a country’s ESAP program continues- not only whether a new three-year program is negotiated but whether an existing program is carried through to its conclusion- arid therefore also power over all the other sources of cheap funds that are cross-conditional on a country’s being in the ESAP program.

The board of the Fund approved an ESAP program for Ethiopia in 1996. Then in 1997 the management of the Fund decided to stop the program. No more tranches would be given to the government- the government of one of the world’s poorest countries and an obvious candidate for an ESAP program. What were the reasons for that?

After the program had been initiated in 1996, the Ethiopian government misbehaved in the eyes of the Fund, the U.S. Treasury, and a prominent American bank. Ethiopian Airlines, a state-owned enterprise, had earlier bought four Boeing aircraft with a loan from the American bank. The terms of the loan were onerous to the airline and lucrative to the American bank, because at the time Ethiopia had a very adverse risk rating. Not only was the interest rate very high, the loan terms also contained the unusual provision that all four planes would be mortgaged to the American bank until the loan was paid in its entirety. By late 1996, Ethiopian Airlines wanted to renegotiate the loan. The American bank refused. So the government lent Ethiopian Airlines the money to pay off the loan in its entirety. The American bank was furious. It complained to the U.S. Treasury that the Ethiopians had acted in bad faith.

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