Options for resolving Ethiopia’s debt

Ethiopia is one of the most important economies in East Africa and is Africa’s second most populous country. While having a strong annual GDP growth rate between 2000 and 2020, it has suffered from the combined effects of economic shocks in recent years—the COVID-19 Pandemic, the Northern Ethiopia war, recurring droughts, and the Ukraine crisis. These shocks have jeopardized its macroeconomic stability and adversely impacted its human development. In 2023, real GDP growth has reduced, and inflation averaged more than 30%.¹

Adverse shocks have led to a worsening of its twin current account and fiscal deficits. In 2023, the country imported more than USD 17.7 billion of goods and exported close to USD 3.6 billion, and there is compressed fiscal space. A large portion of the budget has been going to debt servicing and defense, eclipsing social expenditure. The stock of Ethiopia’s public debt (domestic and external) at the end of December 2022 reached USD 59.3 billion equivalent, or close to 50% of GDP.² Since the debt/ GDP metric is a necessary but insufficient measure in terms of assessing debt vulnerability, another metric—debt servicing costs—has been quite high, with the debt service to export ratio at about 22% and with at least USD 7 billion due from 2023- 2025, including a USD 1 billion Eurobond principal payment in December 2024.³ The country has been classified by the IMF at a high risk of debt distress.

In early 2021, Ethiopia, applied to the Common Framework (CF) for debt relief and became one of the four African countries to request a debt treatment, together with Ghana, Zambia, and Chad. The delay in the CF has been palpable. In December 2023, Ethiopia became the latest African country to default on its external debt as it indicated to bondholders it has been unable to make a USD 33 million coupon repayment on its USD 1 billion Eurobond for a combination of liquidity constraints and strategic considerations.

Ethiopia has multiple ways to address shortfalls. On the one hand, Ethiopia has its own responsibilities for domestic resource mobilization that can be achieved through a widening tax base, improving tax efficiency, better public finance management, and mitigation of corruption. On the other hand, there are several debt relief and restructuring options and policy tools, each with their own advantages and implementation barriers, that Ethiopia can use to create extra fiscal room for post-conflict spending (including social protection and climate resilience), implementation of reforms, and restoration of peace.

Several options can be envisaged. The first option is to have a CF debt reprofiling involving maturity extension, where there is equitable burden sharing between China, the bilateral lenders, and the private creditors, together with an IMF program. The idea is to cap debt service payment at a ceiling of USD 1.75 billion per year with a payment extension until 2033.⁴ This option requires government commitment to a stable macroeconomic framework and spending aligned with SDG goals. However, this reform might not get the full support of creditors as it could be perceived as slow. Also, a realistic debt sustainability assessment might indicate that Ethiopia has a solvency problem rather than a liquidity challenge. A second option is to provide debt relief that would reduce the total volume of debt service payments between 2024 and 2033 by 20%.⁵ It implies debt haircuts on outstanding debt. This option provides a smoother path to debt and fiscal sustainability and more finance for climate adaptation, but it would require creditor appetite, which has been reluctant. A third option would be to have debt swaps involving debt exchange, in local currency, to finance development projects, but this requires government commitment, donor support, and rigorous monitoring. A final option would be to restructure its Eurobond, but there will be technical hurdles, difficulty enforcing comparability of treatment between creditors, and the need to find the right formula for Eurobond payments at a time of global escalating borrowing costs. In sum, Ethiopia has multiple options to handle its debt challenges.