Ethiopia is on the brink of becoming the latest African nation to default on its debt obligations after failing to make a $17 million bond interest payment due on December 11th. With last-minute talks between Ethiopia and creditors unsuccessful, Africa’s second-most populous country now enters a 30-day grace period before a formal default declaration. An eventual default seems imminent without significant concessions from bondholders.
Years of Borrowing Catch Up with Ethiopia
Ethiopia has substantially increased borrowing over the past decade to finance large-scale infrastructure projects, including hydroelectric dams and highways. External debt levels have risen five-fold since 2012 to reach $31 billion according to IMF data – equal to 37% of Ethiopian GDP.
The COVID-19 pandemic and global fallout such as higher food prices have exacerbated Ethiopia’s financial troubles. But even before this crisis, observers warned of concerns around Ethiopia’s mounting debt burden and lack of transparency around Chinese loans financing big projects.
With interest rates on new borrowing now much higher compared to when funds were initially raised, Ethiopia faces untenable debt servicing costs:
| Year | External Debt Stock (USD billions) | Debt Servicing as % of Exports |
|---|---|---|
| 2012 | 6.1 | 8.9% |
| 2022 | 30.9 | 23.9% |
According to the IMF, Ethiopia is now at high risk of debt distress. The international lender projects the total external debt burden to reach 71% of GDP by 2027 absent significant relief.
Talks with Creditors Break Down
In early 2022, Ethiopia’s government indicated it wished to negotiate reprofiling existing debts under a G20 Common Framework – essentially extending debt maturities with creditor consent. Talks began in September 2022 but quickly ran into difficulties.
China, now likely Ethiopia’s largest bilateral creditor due to regional infrastructure loans, declined to actively participate citing World Bank safeguards disagreements. Coordinating Ethiopia’s diverse group of creditors including China, commercial bondholders, other governments, and multilateral institutions has proven complex.
By October talks were extended two months but no breakthrough emerged. Ethiopia criticized creditors unwillingness to provide debt relief without significant fiscal austerity commitments:
“There are worries that the common framework process and private sector creditors might not offer Ethiopia the breathing space required,” Ethiopia’s State Minister of Finance Eyob Tekalign said last month.
With the grace period expiring, Ethiopia’s Finance Ministry said on December 2nd it remained:
“hopeful that discussions will come to a speedy and successful conclusion shortly”
But this optimism vanished by December 8th, with a terse Finance Ministry statement announcing bondholder discussions had concluded without an agreement in principle. Attempts to secure interim financing from the World Bank, African Development Bank, and IMF while talks proceeded were also unsuccessful per sources.
Default Declaration Looms after 30-Day Grace Period
After failing to transfer $17 million for a 2024 Eurobond coupon payment on December 11th, Ethiopia entered a 30-day grace period before a potential selective default event.
The Finance Ministry stated they “regret that we have been unable to reach an acceptable agreement with our commercial creditors”, casting doubt on an eleventh hour deal before a default declaration in mid-January.
Based on recent G20 Common Framework experience with Chad, Ethiopia may struggle to quickly reengage creditors after a selective default, prolonging its exclusion from financial markets. Chad remained in default for over a year before creditors agreed to debt relief terms in late 2022.
If declared in default, Ethiopia would join countries like Zambia, Ghana, and Sri Lanka in debt distress. After years of easy access to financing, many poorer nations now face surging borrowing costs andquestions about longer-term solvency.
What Comes Next? Economic Challenges Remain Without Debt Relief
An eventual selective default seems likely given Ethiopia’s bleak financial position and the breakdown in creditor talks. In a letter to investors ahead of missed payment, Finance Minister Ahmed Shide made clear Ethiopia’s commitment to service debts but reiterated the economic pain brought by global crises:
“Our commitment to timely debt service is unquestionable…however our capacity has been severely eroded by exogenous shocks outside of our control”
With creditors unwilling to meaningfully ease near-term liquidity pressures, Ethiopia faces tough economic conditions and a rising risk of social unrest. Foreign exchange shortages are negatively impacting critical imports like fuel, medicines, and fertilizer.
Annual inflation reached 33.1% in November, with food inflation an alarming 65% according to data from Ethiopia’s statistics office and World Bank. Historically inflation at these levels can destabilize regimes. Opposition political parties and Tigray regional forces may seek to take advantage of economic vulnerabilities in their battle against Prime Minister Abiy’s government.
After a likely selective default, Ethiopia’s pathway back to financial markets remains unclear. Further attempts to negotiate debt relief seem inevitable. But with creditors now familiar with Ethiopia’s vulnerabilities, they may drive an even harder bargain.
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