By Africa Links 24
Published on 2024-04-08 07:33:59
A recent visit to Ethiopia by the International Monetary Fund (IMF) ended without a deal as the country seeks financial assistance to restructure billions of dollars of external debt. Ethiopia faced a setback in December when it failed to pay a $33 million bond coupon, making it the latest African country to default on its debt. The country’s largest creditor, China, also allowed Ethiopia to suspend debt repayments on bonds maturing in the 2023-4 fiscal year.
In November 2023, the Paris Club of international creditors announced the suspension of debt repayments until the end of 2024, contingent on Ethiopia reaching a preliminary bailout deal with the IMF by the end of March. With no deal in place, concerns arose over Ethiopia having to resume debt repayments, potentially leading to a second default. However, the Paris Club has extended its deadline for an IMF deal to the end of June.
The IMF stated that progress was made during the visit towards determining how the organization could support Ethiopia’s economic program. Discussions will continue later in Washington DC. Despite the progress, Hailemelekot Berhan, a capital markets analyst in Addis Ababa, believes Ethiopian politicians are hesitant to agree to an IMF deal that includes currency reform measures.
IMF deals often involve the introduction of free-floating currency regimes, which can result in significant currency devaluation. For countries like Egypt and Ethiopia with substantial trade deficits, a devalued currency can lead to higher inflation by increasing the cost of imported goods. Berhan noted that resistance to such measures may stem from fears of the impact on the economy, which is already facing inflationary pressures.
Berhan emphasized the importance of an IMF deal for the Ethiopian economy, pointing out the country’s dwindling foreign currency reserves. A deal with the IMF is crucial for maintaining macroeconomic stability as Ethiopia cannot afford commercial loans with high interest rates. Balancing the short-term challenges of financial liberalization with long-term economic growth is essential for the country’s economic development.
In conclusion, while the negotiations with the IMF continue, Ethiopia faces significant economic challenges that require careful consideration and strategic planning. The country’s policymakers must weigh the potential risks of financial liberalization against the benefits of implementing necessary reforms to ensure sustainable growth and stability in the long run.
