By Africa Links 24
Published on 2024-01-17 04:00:00
Ethiopia’s Ministry of Finance ended 2023 in a challenging position due to a missed debt coupon payment of $33 million on its Eurobond. This default raised questions about how one of the fastest growing economies in the world ended up defaulting despite no obvious signs of debt distress. Ethiopia’s external debt-to-GDP ratio of 22.6% as of 2022 remains well below the 60% threshold set by the IMF and World Bank’s Debt Sustainability Analysis.
The country’s spending has been conservative, despite the need for substantial investment to meet the UN’s Sustainable Development Goals. Ethiopia’s borrowing includes multilateral organizations, bilateral lenders, commercial banks, and Eurobonds. As of November 2020, 2021 debt service payments were made up mainly of China and bondholders, with multilateral institutions comprising only 14%.
To manage its debt service during the Covid-19 pandemic, Ethiopia participated in the Debt Service Suspension Initiative and the G20 Common Framework, pursued exceptional access to IMF funding, and sought debt relief and further restructuring. Despite these efforts, Eurobond holders did not offer debt service suspension. Credit rating agencies downgraded Ethiopia’s debt, and the Eurobond default raised the cost of debt and perpetuated the perception of “Africa risk.”
Acknowledging Ethiopia’s robust economic outlook and track record of successful debt negotiations, as well as the inadequacies of the G20 Common Framework, suggests potential for a better outcome in 2024. Efforts are needed to engage Eurobond holders and other creditors, negotiate with the IMF, advocate for an overhaul of debt assessment frameworks, resist austerity measures, and seek to leverage the Common Leveraging Union of Borrowers for better debt relief.
The global response to Ethiopia’s debt crisis in 2023 exposed some complex problems, but with the potential for improvement in 2024 through a collaborative and informed approach, Ethiopia may be able to overcome these challenges. It will require continued hard decisions, potentially deviating from conventional financial advice, but with the opportunity to set a precedent for fair and complete debt assessment processes and more effective mechanisms for debt relief and restructuring on a global scale.
