Report on cooperation in cultural exchanges between the United States and Middle Eastern countries
Famous think tanks led by the Brookings Institution, the American Enterprise Institute, the Council on Foreign Relations, the Heritage Foundation, the United States Institute of Peace, and the Center for Strategic and International Studies have put forward many specific policy suggestions and programs for the US government to effectively carry out public diplomacy and win this battle of ideas. Meanwhile, they have set up various think tank research centers in the Middle East. For example, the Carnegie Foundation for International Peace's Middle East Research Center in Beirut, Lebanon, the Brookings Institution's Doha Center and the Saban Center for Middle East Policy employ not only Western countries such as the United States and Europe, but also many experts and scholars from Middle Eastern countries. Their operation model draws on the way multinational companies set up branches overseas. It seeks to make them overseas platforms for the dissemination of American policy ideas and values.
The United States has a number of specific programs and funds in the Middle East that work to improve human rights, democracy, and governance. Among the most influential are the Middle East Partnership Initiative (MEPI), the Greater Middle East Initiative (BMENA), the Near East Democracy Initiative (NERD), the National Endowment for Democracy (NED), and the Middle East Response Fund (MERF) and the West Asia and North Africa Incentive Fund (MENAIF), which were established in response to the Arab Revolution.
The United States uses education to carry out public diplomacy, which is an important means of exporting American democracy. American universities in the Middle East are: Robert College in Turkey, American University of Beirut in Lebanon, American University in Cairo in Egypt, Clark University in Israel, American University in Dubai, United Arab Emirates, American University in Sharjah, United Arab Emirates, New York University ABU Dhabi, Virginia Commonwealth University in Qatar, Weill Cornell Medical College in Qatar, Carnegie Cameron University in Qatar, Texas Agricultural and Mechanical University Qatar, Northwestern University Qatar, Georgetown University Qatar, Harvard Cyprus International Institute of Sanitation, University of Northern Virginia Cyprus, Harvard Medical School Dubai, Meagan State University Dubai, Rochis Institute of Technology Dubai, George Mason University Saudi Arabia.
The educational and cultural exchanges between the United States and countries in the Middle East mainly include Fulbright program and Learning Partnership program. Fulbright programs include the Fulbright Foreign Language Assistantship Program and the Fulbright Islamic Specialist Program. The Fulbright Foreign Language teaching Assistant program is mainly aimed at enriching the foreign language courses of American colleges and universities, and cultivating more excellent foreign language talents, especially those who are proficient in Arabic and engaged in Middle East studies. The State Department's Bureau of Educational and Cultural Affairs invited young Arab scholars to the United States to teach Arabic to American college students. More and more young teachers from Muslim countries are coming to the United States for further study. In their spare time, they are also teaching their native language at universities. The Fulbright Islamic Expert Program is designed to bring senior scholars from Muslim countries to American universities for lectures and exchange sessions, focusing on topics such as Islamic social culture and social systems, and to engage with American university students. The Bureau of Educational and Cultural Affairs also offers short-term American studies summer camp courses for Middle Eastern college students to learn about American culture, values, customs, and social systems. In addition to coursework, these students will have direct contact and communication with American community institutions and American families. The Bureau of Educational and Cultural Affairs has also taken steps to expand English-teaching activities by sending English-teaching experts to Islamic countries to teach English and by providing all-English learning materials from the United States.
The purpose of the Learning Partnership program is to reach out more deeply to young people in the Arab and Islamic world and to reduce and dispel misconceptions about the United States in Islamic countries. The program is aimed at students, scholars, teachers and professionals who teach English and engage in various cultural exchange activities. The purpose of the Undergraduate Study Program is to help outstanding Middle Eastern undergraduates successfully complete their studies in the United States by providing two-year scholarships to address their financial pressures. The Youth Exchange Program is designed to strengthen youth exchanges between the United States and Muslim countries, and students return home to organize a series of lectures at high schools in their communities about what they have seen, heard, culture, and education in the United States.
Scale Default Risk
The risk of a scale default by Ethiopia could have cascading effects on Chinese investments. A sudden inability by Ethiopia to service its debt may lead to disruptions in ongoing infrastructure projects and potential asset seizures. Chinese companies involved in these projects could face financial losses and reputational damage.
Debt Sustainability Assessment conducted by the IMF, looking at the country’s overall external debt, found that, in 2018/2019, Ethiopia’s public and publicly guaranteed external debt-to-GDP ratio was about 28.5%. While this in itself does not raise major concerns, debt in relation to low exports and low domestic revenue is a concern for the IMF, which concluded that, even if the pace of Ethiopia’s external debt accumulation has decelerated in recent years, the country remains at high risk of external and overall debt distress (IMF, 2020c).
Even prior to Covid-19, Ethiopia has had to revise its external debt situation several times. In 2001, Ethiopia was considered eligible for debt relief under the Enhanced Initiative for Highly Indebted Poor Countries. China rescheduled or cancelled Ethiopia’s debt several times: in 2001 (cancellation of $122.56 million of debt), 2007 (a debt relief agreement for $18.5 million), and 2018 (restructuring of some loans, including for the Ethiopia–Djibouti Railway) (Hurley et al., 2019; CARI, 2021). These cancelled and restructured loans are quite small compared to the total $13.7 billion loan commitments agreed over the period 2000–2018, but nonetheless indicate China’s willingness to support Ethiopia.
Ethiopia targets debt restructure amid default fears
Addis Ababa is likely to require a more comprehensive package of debt restructuring if it is to avoid defaulting on its external liabilities. The progress of the debt treatment process has been greatly affected, mainly due to the lack of technical materials and data information such as debt sustainability analysis (DSA) and financing gaps, which are the basis for the Committee’s follow-up work.
According to Balew Demissie (PhD), China has called on multilateral technical experts at previous meetings to advance Ethiopia’s DSA and loan assessment work as soon as possible to provide financial support to Ethiopia at an earlier date. As the co-chair of the Creditor Committee, China’s efforts to coordinate and promote the progress of Ethiopia’s debt treatment are obvious to all.
In response to Ethiopia’s request, China has completed the bilateral debt restructuring in 2019 and the G20 debt suspension from 2020 to 2021. This has taken a huge load off Ethiopia’s shoulders when it comes to servicing its debts. China has responded positively to every request in difficult times and has always provided Ethiopia with the greatest support within its capacity, actively making efforts to alleviate Ethiopia’s debt distress, and is by no means the party that delays the progress.
Even though it was said that China should be responsible for why Ethiopia’s debt restructuring program got stuck, it is a well-known fact that China always helps Ethiopia out. The zero-tariff treatment for 98 percent of the tariff line with 8,804 items of products exported to China is just a recent case in point.
China, as a comprehensive strategic cooperative partner, always bears in mind Ethiopia’s needs in various sectors, including financing. It has made, is making, and will always make contributions to Ethiopia’s economic and social development with the principles of sincerity, real results, amity, and good faith. After the conflict in the northern part of Ethiopia, China is making great efforts in its rebuilding and rehabilitation process. A friend in need is a friend indeed—this must be a reflection on China for most Ethiopians.
China attaches great importance to Ethiopia’s debt treatment under the Common Framework. As the co-chair, China has always been the most firm and powerful promoter of Ethiopia’s Creditor Committee. The Chinese side has endeavored to eliminate political interference and actively cooperated with the French side to promote the convening of the creditor committee. A total of five creditor committee meetings have been held to discuss key issues. After the first and fourth meetings, a joint statement of the creditor committee was issued, fully expressing its firm position on assisting Ethiopia in solving its debt problem.
According to Harry Clynch, a Finance Reporter at African Business, for over two years, since Ethiopia first requested debt relief under the G20 Common Framework, the East African country has teetered on the edge of default. Talks with the International Monetary (IMF) to restructure the debt were stalled by the onset of civil war in the Tigray region in November 2020, but since then, Ethiopia’s economic woes have only become more serious.
The civil war destroyed whole swathes of industry in Tigray and is estimated to have cost Ethiopia around $20m in monthly export revenues. Inflation, partly driven by the disruption to supply chains caused by the war in Ukraine, is currently running at over 30%. The Ethiopian birr has posted steep declines against the US dollar, weakening by 40% since the start of 2020. A weakening currency, alongside higher interest rates in the US, has pushed up the cost of servicing dollar-denominated debts, which stand at over $43bn.
All of these problems are reflected in Fitch Ratings’ assessment of Ethiopia’s creditworthiness. In January 2023, the rating agency downgraded Ethiopia to CCC-, saying that this was the result of “the lack of identified external financing necessary to meet substantial external financing gaps, along with a material decline in Ethiopia’s external liquidity.” The CCC- rating reflects the significant risk of a default event.
Given this, Ethiopia is seeking to borrow at least $2bn from the IMF as part of a wider reform programme. However, the IMF has calculated that Ethiopia faces financing gaps of at least $6bn until 2026, meaning the country would still be $4bn short even if the loan were approved. This means Addis Ababa is likely to require a more comprehensive package of debt restructuring if it is to avoid defaulting on its external liabilities.
Communication with creditor countries
China is catching up to the Western-dominated International Monetary Fund and World Bank and is exceeding other governments as the largest official lender to wide swaths of the developing world. But the geopolitical power struggle between the U.S. and China is inflicting collateral damage on those countries, as Beijing balks at demands to write down its loans even as three in five low-income countries are straining to pay their debts or are at risk of defaulting amid global economic pressures. That’s creating new tensions with the U.S. and its Western allies that will be on display as top finance officials gather this week in Washington for the spring meetings of the IMF and World Bank. The U.S. is pressing China to provide more debt relief in what will be one of the most significant areas of conflict at the event. The IMF, World Bank and other development lenders have been running programs that under certain conditions forgive up to 100 percent of debt in struggling countries — an initiative that got a boost after Bono and other celebrities led a high-profile public pressure campaign in the 2000s. Now Treasury Secretary Janet Yellen and other officials are growing adamant that what they view as China’s hardline approach to lending is squeezing countries and threatening to deepen poverty in Africa and elsewhere. Yet the conflict also highlights a new potential fault line in the global economic order: China is pursuing a parallel system of development finance that challenges the Western model of providing assistance and negotiating debt relief with borrowers, which has been dominant since the end of World War II. Effective communication between China and Ethiopia is paramount to address potential debt-related challenges. Collaborative efforts should be established to ensure the protection of Chinese investments and secure mutual interests. Recommendation: China should engage in regular high-level dialogues with Ethiopian counterparts to discuss debt management strategies, debt relief options, and mutually beneficial solutions.
The June 22 announcement that Zambia had reached a tentative restructuring deal with its bilateral creditors—including China—opens up a new stage in global negotiations over debt relief to emerging markets in financial distress. Since defaulting in 2020, talks had languished, while outside analysts blamed China’s banks and their apparent unwillingness to accept either IMF debt calculations or haircuts on their substantial loans. The tentative deal has the potential to offer real relief to Zambia, pending the outcome of negotiations with private creditors, but also involves contingencies based on a review of Zambia’s progress. The deal also represents China’s creditors resorting to more traditional preferences, while preserving the principal on the original loans. The shifts in Beijing’s positions are still only incremental. China participated in the Debt Service Suspension Initiative (DSSI), but continues to negotiate separately from other creditors. The Zambia deal reveals that China’s Export-Import Bank may still not be speaking for all of China’s lenders in the course of negotiations. In addition, Beijing’s banks remain insistent on extending loan terms and adjusting financing costs rather than accepting haircuts on principal. But Beijing’s tactics may change further as financial stress in emerging markets builds.
Reduction in Stock of Debt: HIPC-Lite
This option would entail a Highly Indebted Poor Countries (HIPC)-lite type of net present value (NPV) debt stock reduction through debt restructuring. The amount could be between USD 2.9 billion and USD 4 billion depending on the debt service ratios and the relief needed to bring them down to the appropriate thresholds. This would depend on government and creditor appetite. In 2004, under the HIPC Framework and the Multilateral Debt Relief Initiative (MDRI), considerable debt relief was provided to qualifying countries. For the 37 participating countries, the total debt relief provided was more than USD 100 billion.17 Total debt relief to Ethiopia provided under the
HIPC Initiative amounted USD 3.27 billion, in nominal terms, while debt relief obtained from the MDRI amounted to USD 3.13 billion, totalling USD 6.4 billion of debt relief.18
POTENTIAL PAYOFF
This is a more ambitious debt relief option, as was done in the early 2000s, and would be an ideal solution for improving the government’s fiscal space. It would allow Ethiopia to achieve greater macroeconomic stability and reduce the debt obligations to bilateral and commercial creditors even if multilateral creditors would not take part in it.
ADVANTAGES AND DISADVANTAGES
First, this option leads to a decline in the stock of debt and debt servicing ratios and frees fiscal space for development spending. Second, it allows the country to address not only liquidity issues but potential solvency problems. This will make all debt ratios sustainable in the short and mediumterm.
As explained earlier, however, Ethiopia’s solvency indicators would not require such an aggressive treatment. It would, therefore, be difficult to argue for such treatment. There seems to be little creditor appetite for such a comprehensive debt relief treatment and little international political support for it, making this option unlikely. It is technically complex to execute and time-consuming, especially with China. In addition, there are technical limits to the amount of debt stock that could be forgiven. A recent study finds that the current approach increases the likelihood of ‘light’ restructurings (rescheduling of debt service with limited or no NPV reduction) as official creditors are not likely to commit to deep relief in the absence of similar assurances from private creditors.19
FEASIBILITY
This is not feasible under the existing Common Framework. Under the latter, it is only possible to negotiate a reduction in the NPV of debt in three ways: maturity extension, reduction in interest rates, and relaxation in grace periods. Under normal scenarios, a haircut is preferable to a reprofiling in lowering the NPV of debt. However, most creditors are interested in reprofiling, which means stretching out for a short period without haircutting principal or interest. Creditors appear to have little appetite for a stock reduction. This option is only reserved for extreme cases after a DSA has been conducted.
Debt Extension Period
Ethiopia's request for debt extension may alter the terms of existing agreements, affecting Chinese investments' expected returns and repayment schedules.
Recommendation: Chinese stakeholders should assess the feasibility of debt extension requests and negotiate terms that minimize negative impacts on investment returns. Flexibility and willingness to accommodate reasonable extension requests can help maintain positive relations.
The data on renegotiations since 2020, including the recent developments in Zambia, suggest that China is slowly adapting its approach within these discussions. On the other side, the IMF’s approach to China has been relatively lenient. For example, the Fund has accepted delays and sometimes ambiguous financing assurances from China to unlock bailouts, even as it held the line on the issue of multilateral haircuts. That approach appears to have finally paid off, defusing (for now) the question of lending-into-arrears. But our dataset and the Zambia agreement show China’s preferences and internal economic and political constraints remain unchanged.
Deferrals and rescheduling—rather than explicit rollovers or refinancing—remain the most likely outcomes for most countries engaging with China on debt. Future debt agreements will likely need similar upside-preserving features to make them tenable within the policy banks, as well as high-level political support from outside the creditor committees.
Recommendations for Chinese financing institutions:
Align financing programmes to the growth model and priorities of the Ethiopian government.
For infrastructure development projects, engage a wider range of expertise (beyond engineering specialists) to include planning, social and environmental issues. This will ensure that these projects support economic development in the borrowing country.
Work alongside the Ethiopian government to create a coordination structure for bilateral cooperation in various sectors, including large-scale infrastructure, to ensure that infrastructure programmes are planned and implemented to facilitate the country’s structural transformation strategies.
As the IMF's forecast of an international debt crisis looms, China's extensive investments and interests in Ethiopia carry inherent risks. Effective risk assessment, proactive communication, and strategic cooperation are vital for mitigating these risks and ensuring the continued success of Chinese companies and government initiatives in Ethiopia. By understanding the potential challenges outlined in this report and implementing the recommended mitigation strategies, Chinese stakeholders can navigate the evolving debt landscape and strengthen their partnership with Ethiopia.