China’s global goal for yuan boosted by Ethiopian hopes for loan currency swap

Ethiopia’s plan to convert its dollar-denominated Chinese loans to yuan is a “savvy financial arbitrage play” in the view of some analysts, while others warned that the move could “complicate” negotiations with bondholders over the 2023 Eurobond default.

Eyob Tekalign, governor of the Ethiopian central bank, confirmed last week that Addis Ababa had initiated talks with Chinese lenders, including the Export-Import Bank of China (China Eximbank) and the People’s Bank of China, to swap part of its US$5.38 billion loans with them into yuan.

The currency swap – which follows a similar move by Kenya earlier this month – could cut the interest from 7.25 per cent to just 3 per cent, offering a critical fiscal lifeline to the East African nation as it negotiates the restructuring of about US$15 billion of external debt.

Kenya converted US$3.5 billion of its Chinese loans into yuan, earning US$215 million in annual savings on debt-servicing costs and playing into China’s game plan to accelerate internationalisation of the renminbi.

Tekalign, who was in Washington for the annual meetings of the World Bank and International Monetary Fund (IMF), said Ethiopia had asked for the debt swap when he was in Beijing in September – continuing a trend that has also seen Sri Lanka and Hungary turn to the Chinese currency for cheaper finance.

A memorandum of understanding (MOU) was also signed to advance Addis Ababa’s debt restructuring under the G20 Common Framework – a key step towards negotiations and the alleviation of Ethiopia’s debt burden, according to its embassy in Beijing.

South China Morning Post