Facing the Fate of a Fiscal Reckoning: An Analysis of Ethiopia’s Debt Restructuring Efforts
Ethiopia’s recent debt restructuring aims to counterbalance mounting economic pressures. Once showing promises of unrelenting growth, Ethiopia's growth domestic product (GDP) slowed to an average of 6% from the 9% growth rates seen in 2017-2019. This reduction coincides with a widening fiscal deficit, which increased from 3.3% of GDP in 2021 to 4.2% in 2022. Adding default to injury, Ethiopia’s missed Eurobond payment in December 2023 made it Africa’s third defaulter in as many years.
Such trends reveal underlying vulnerabilities: a narrow export base and high dependency on imports that have driven Ethiopia to rely heavily on external borrowing. Nearly 20% of the government budget is financed through domestic and external debt. As of September 2022, Ethiopia’s public debt stood at $57.15 billion or approximately 50.1% of GDP and the country’s debt-carrying capacity was downgraded to ‘weak’ in 2022.
The Restructuring: Debt Profile
Ethiopia has faced severe challenges to economic stability due to significant internal conflicts, particularly in the Tigray region since November 2020. This conflict has damaged infrastructure, displaced millions, and strained international relationships. As of early 2024, the UN Office for the Coordination of Humanitarian Affairs (OCHA) reports that over 9 million people in Northern Ethiopia need humanitarian assistance, with agricultural disruptions worsening food shortages and economic conditions. Despite a fragile peace deal in Tigray, ongoing instability in the Amhara and Oromia regions in 2024 have further aggravated domestic tensions. While reforms in privatisation and liberalisation may stimulate some GDP growth, Ethiopia’s recent downgrades by Fitch to a ‘C’ rating underscore the toll of political instability on its financial standing.
Ethiopia’s debt structure comprises 41% multilateral debt, 31% bilateral debt, and 28% from private creditors. Notably, Chinese loans exacerbate this position due to Ethiopia’s involvement in the Belt and Road Initiative, receiving approximately $13.7 billion from China between 2000 and 2018. This debt structure has pressured Ethiopia's fiscal space, limiting its ability to allocate funds towards pressing development needs, given the high proportion of multilateral and Chinese debt that requires servicing.
Figure 1. Graph showing the total stock of Ethiopia’s external debt 1973-2022 (billions $). Source
Currently, the government aims to reduce its debt distress risk through a series of relief measures under the G20 Common Framework. This initiative, supported by an International Monetary Fund (IMF) programme, envisages $3.5 billion in external debt restructuring from 2024 to 2028, requiring a balanced approach to both official and private creditors. The G20 Common Framework also suspended debt service due in 2023 and 2024, allowing temporary relief while Ethiopia works toward long-term economic stability.
Furthermore, the majority of Ethiopia’s external debt lies with official creditors, with 41.7% from the International Development Association (IDA) and 35.1% from non-Paris Club official creditors. This has compounded as IDA has increased its net transfers to Ethiopia, with a recent rise to $1.7 billion in 2022/23. Additionally, the IMF has provided support through a blended ECF–EFF arrangement and emergency funds following the COVID-19 crisis. Reprofiling of bilateral deposits at the National Bank of Ethiopia has provided $1.3 billion in relief from 2022 to 2026.
Figure 2. Breakdown of Ethiopia’s total external debt by creditors. Source
Ethiopia’s ongoing engagement with the G20 Common Framework reflects both the challenges and potential benefits of structured debt restructuring. The Common Framework aims to enhance liquidity and debt sustainability, yet the principle of net present value (NPV) neutrality means that while debt service payments are deferred, Ethiopia’s overall debt remains unchanged. In the short term, this suspension provides essential liquidity. However, Ethiopia’s bond default and inability to meet a $33 million interest payment in December 2023 emphasises the need for a comprehensive solution.
The Restructuring: Risks and Rewards
Debt restructuring aims to help Ethiopia navigate financial pressures, bolster investor confidence, and establish a foundation for sustainable economic growth. Ethiopia’s debt burden is substantial, with the IMF identifying a $10.7 billion financing gap, excluding deferred bilateral debt service obligations. To bridge this gap, Ethiopia is undertaking a multilateral debt restructuring approach, drawing on commitments from the IMF ($3.4 billion) and a projected $3.5 billion in debt restructuring through the 2024-2028 fiscal period. This restructuring is intended to bring Ethiopia’s debt-to-exports ratio down to 154% by 2028, though still above the moderate-risk threshold of 140%.
Therefore, Ethiopia’s fiscal space may restructure reform and investment in both infrastructure and private sector development, reducing the country’s dependence on external financing. Additionally, coordination with official creditors under the IMF’s new ‘credible official creditor process’ sends a signal to investors of Ethiopia’s commitment to stabilising its economic outlook, potentially strengthening foreign direct investment (FDI) flows. In the past decade, FDI inflows have contributed significantly to Ethiopia’s industrial and agricultural sectors, with annual FDI reaching around $3 billion. It can therefore be inferred that a more stable debt environment could attract even more investment in the coming years.
Through an IMF-supported Extended Credit Facility (ECF), Ethiopia seeks to restore external debt stability by gradually bringing down debt-to-GDP levels. However, the debt-to-GDP ratio is projected to stay elevated, reflecting the country’s ongoing fiscal vulnerability. The programme prioritises securing agreements with official creditors through the G20 Common Framework, complemented by private sector involvement, particularly concerning the Eurobond. Nevertheless, Ethiopia’s restructuring programme carries both significant risks and potential rewards. On the rewards side, a shift to a market-determined exchange rate and improved fiscal control are expected to alleviate foreign exchange (FX) shortages, address macroeconomic imbalances, and lay the groundwork for sustainable growth. However, this could potentially result in inflation spikes from currency liberalisation and a rising cost of imports, which could heighten social discontent and strain the fiscal budget, even as social safety nets are expanded to mitigate impacts. Persistent challenges in mobilising domestic revenue and sustaining creditor alignment under the G20 Common Framework also introduce risks to debt sustainability and overall programme success.
A Note on Financial Sovereignty
Ethiopia’s reliance on external debt has significant implications for its economic sovereignty, constraining policy flexibility and limiting the country’s ability to independently direct its fiscal and monetary strategies. Chinese-funded projects, particularly through the Belt and Road Initiative, have been prominent in Ethiopia's debt structure, as previously discussed. While these investments have boosted Ethiopia's rail and road networks, they also exacerbate debt vulnerability, as many Chinese loans have shorter maturities and higher interest rates than multilateral financing. As Ethiopia’s debt service obligations to China grow, its fiscal autonomy narrows, forcing it to prioritise repayment over domestic economic objectives.
This dependency reflects broader regional challenges, with Zambia and Ghana recently restructuring debt under similar conditions. As a result, Ethiopia’s restructuring outcomes could set a precedent, influencing creditor expectations and restructuring norms across the continent. Unfortunately, Ethiopia’s situation is worsened by its political instability and high risk of debt distress, which may lead to increased borrowing costs and limit future market access. Credit downgrades, including the recent ‘C’ rating, already reflect investor wariness, potentially heightening financing costs and restricting Ethiopia’s access to capital for development projects unless the restructuring leads to sustained fiscal improvement.
The Restructuring: Outcomes
Ethiopia’s multilateral debt restructuring efforts aim to bring short-term liquidity relief and potentially reduce its medium-term debt service costs. With IMF support and the G20 Common Framework suspension of debt payments through 2024, Ethiopia could create fiscal space for critical development needs. The restructuring plan seeks to reduce Ethiopia’s debt-to-exports ratio, which attract FDI as fiscal stability improves and streamline fiscal practices. By aligning its debt management with IMF standards, Ethiopia may lower borrowing costs in the future as perceived default risk diminishes.
However, extending repayment timelines for Ethiopia’s debt provides immediate relief and risks an increase in total interest obligations over time. This accumulation could exacerbate long-term debt burdens, delay sustainable fiscal balance and create a cycle of recurrent borrowing. Moreover, prolonged dependence on foreign debt weakens economic sovereignty as foreign creditors gain leverage in dictating economic terms. Furthermore, Ethiopia’s commitment to market-determined exchange rates, part of the IMF-supported ECF, could trigger inflation, particularly if currency liberalisation leads to sharp depreciation. As such, persistent debt dependency and an elevated inflation risk complicate Ethiopia’s path to debt sustainability, making structural reforms crucial to mitigating these risks.
The Path Forward
To reduce reliance on foreign debt, Ethiopia could consider alternatives through African institutions like the African Development Bank (AfDB), which offers concessional financing aligned with sustainable development goals. Working with the AfDB would give Ethiopia access to funding that matches its development needs without the strict repayment schedules of bilateral or commercial debt. Regional mechanisms could also be expanded to promote infrastructure investments that support cross-border integration and reduce external debt dependency. Additionally, sovereign bonds marketed to the Ethiopian diaspora could fund infrastructure projects domestically. The private sector may support energy and road projects through public-private partnerships and tax reliefs while strengthening non-agricultural exports increases earnings and reduces vulnerabilities.
