Looming Debt Storm Clouds Ethiopia’s Future

Will it Rain Relief or Ruin?

Ethiopia’s debt is undoubtedly mounting. Although the debt to GDP ratio has shown some signs of decline, the debt in actual figure is increasing.

The IMF and other economic institutions project that Ethiopia’s debt-to-GDP ratio will increase in the near term, potentially reaching 50Pct by 2024. Some analysts believe Ethiopia can manage its debt burden sustainably, while others express concerns about the potential debt crisis, which is already looming as the country missed a USD33 million Eurobond coupon payment on December 5. The default on the Eurobond coupon marks a challenging economic phase for Ethiopia. This development comes amidst internal conflicts, high public debt, and ongoing discussions with the IMF for a potential financial bailout and debt restructuring with G-20 countries.

In a call, Eyob Tekalign (PhD), held on December 14 with Ethiopia’s creditors, the state minister of finance informed the over 100 private creditors that the country would not default and the missing payment didn’t happen because it was financially unable to meet its obligations. He said the government wanted to treat all creditors equally and wanted to convey a message as such.

By emphasizing the government’s intention to treat all creditors equally, Ethiopia might have wanted to signal a commitment to a transparent and inclusive debt restructuring process. It could build trust and cooperation among creditors, which is crucial for reaching a sustainable solution.

It’s also possible to take it as a deliberate action by the government as a negotiating tactic. By framing the missed payment as a deliberate action aimed at achieving fairness, Ethiopia might be trying to gain leverage in negotiations with other major creditors. The country could push for more favourable terms in a debt restructuring agreement.

On the other hand, the news about Ethiopia’s failure to meet its obligation of Eurobond coupon payment made a wave of global adverse reactions. The missed payment raises concerns about a potential sovereign default, which could have severe consequences for Ethiopia and the broader international financial system. Default could lead to reduced access to credit for Ethiopia, higher borrowing costs, and potentially even capital flight. It could also damage global confidence in Ethiopia’s economy and government. It could make it more difficult for the country to attract foreign investment and trade, further hindering its economic development.

Missing a debt obligation damages a country’s reputation in the international community. It could make it more difficult for Ethiopia to negotiate favourable terms with creditors in the future and impact its standing in international organizations. Argentina is a classic example. It is a stark reminder of the long-term consequences of debt default. Argentina’s default in 2001 had a lasting negative impact on its economy, taking years to regain the trust of international markets and investors.

The government’s intention to treat all creditors might sound a positive step, and the missed payment could be a necessary bargaining chip in debt restructuring negotiations. However, the immediate and global perception remains largely negative, highlighting the seriousness of the situation.

Ethiopia should take concrete steps to address the concerns of creditors and the international community; the country should demonstrate its commitment to responsible debt management and work towards a sustainable solution. It should restore stained relations with donors and fix the loopholes that have exacerbated internal peace and security challenges that have thwarted the country’s prospects. EBR

12th Year • December 16 2023 – January 15 2024 • No. 124