Ethiopia’s Debt Crisis and IMF Loan: A New Chapter?
Ethiopia, the second-most populous country in Africa, has been facing an unprecedented array of challenges in recent years. The country has been ravaged by armed conflicts, the COVID-19 pandemic, and severe climate shocks. These cumulative crises have taken a devastating toll on the country’s economy, leaving it with a staggering debt burden of $28 billion.
Ethiopia has secured a $3.4 billion loan from the International Monetary Fund (IMF), a step, according to the IMF, signifying a move towards stabilizing the country’s economy. The loan comes after extensive negotiations between Ethiopia and the IMF. On Monday last month, July 29, according to the IMF, its executive board approved a new four-year loan program for Ethiopia. The statement reads in part, “The IMF Board approved an SDR 2.556 billion (about US$3.4 billion) Extended Credit Facility (ECF) arrangement for Ethiopia. This decision will enable an immediate disbursement equivalent to SDR 766.75 million (about US$1 billion). The four-year financing package will support the authorities’ Homegrown Economic Reform (HGER) Agenda to address macroeconomic imbalances, restore external debt sustainability, and lay the foundations for higher, inclusive, and private sector-led growth.” The ECF, according to the IMF, is an arrangement that is expected to catalyze additional external financing from development partners and creditors.
Ethiopia, the second-most populous country in Africa, has been facing an unprecedented array of challenges in recent years. The country has been ravaged by armed conflicts, the COVID-19 pandemic, and severe climate shocks. These cumulative crises have taken a devastating toll on the country’s economy, leaving it with a staggering debt burden of $28 billion, according to media reports. To make matters worse, the country is grappling with sky-high inflation, which has soared to around 20%. This has eroded the purchasing power of Ethiopians, making it difficult for them to afford necessities like food and medicine. The shortage of foreign currency reserves has further heightened the crisis, making it hard for the country to import essential goods and services.
Despite these daunting challenges, Prime Minister Abiy Ahmed’s government has been pinning its hopes on a financial rescue package from international lenders, including the IMF. After months of negotiations, the IMF finally approved the loan agreement that will provide the country with around $1 billion in emergency funding. This lifeline comes at a critical moment for Ethiopia, which is struggling to stay afloat amidst the turbulent waters of the economic crisis. Financial experts believe the loan agreement is a crucial step towards economic recovery and a testament to the country’s determination to overcome its challenges and build a brighter future for its people. Attesting to this, the IMF Managing Director, Kristalina Georgieva, said in a statement, “This is a landmark moment for Ethiopia,” and the loan is a testament to the country’s “strong commitment to transformative reforms.”.
What led to the loan?
Ethiopia’s economic challenges in recent years include a severe foreign exchange shortage, high inflation, and a large budget deficit. Some critics argue that taking on more debt may further deteriorate the country’s economy rather than alleviate its woes. The country’s debt burden increased substantially, with external debt rising from $13.5 billion in 2015 to over $26 billion in 2022. The COVID-19 pandemic and the conflict in the Tigray region have further worsened these challenges. And to address these issues, the Ethiopian government embarked on an economic reform agenda aimed at promoting economic growth, reducing inflation, and improving the business environment. But to actualize these reforms, the government believes the country needs significant funding, leading to negotiations with the IMF for a new loan program.
It is worth noting that Ethiopia’s debt woes began to spiral out of control several years ago as the country embarked on an ambitious infrastructure development program, funded largely through foreign loans. Reports in December 2023 showed that the country became Africa’s third default in as many years after it failed to make a $33 million “coupon” payment on its only international government bond. Also, data from Statista revealed that the national debt in Ethiopia was forecast to continuously increase between 2024 and 2029 by 93 billion U.S. dollars (+145.97 percent). After the tenth consecutive increasing year, the national debt is estimated to reach 156.69 billion U.S. dollars and therefore reach a new peak in 2029. “The depth of Ethiopia’s debt crisis became glaring in December when it defaulted by failing to pay $33 million on a $1 billion Eurobond.”
While Ethiopia’s intention was to spur economic growth and development, the reality has been far more complex. The country’s debt burden has grown exponentially, making it difficult for Ethiopia to meet its repayment obligations. This made some question the wisdom of taking on even more debt, particularly when there are concerns about the country’s ability to repay its existing loans.
For example, Kiri Rupiah in his recently published article hinged on how Ethiopia relaxed its rules to win investment and a big IMF loan; how the Ethiopian government allowed the country’s local currency, birr, to trade freely and not at a rate fixed by the central bank. But proponents of the loan argue that it is necessary to address the country’s immediate economic needs and that the funds will be used to support critical sectors such as agriculture and healthcare. However, others worry that the country’s economic fundamentals need to be addressed before taking on additional debt.
Loan terms and conditions
The loan comes with a set of conditions aimed at supporting the country’s economic reform agenda. The loan, disbursed under the ECF arrangement, offers concessional financing with favorable terms, including a zero interest rate, a 5.5-year grace period, and a 10-year repayment period. However, the loan is conditional on Ethiopia’s implementation of specific economic reforms. The country is required to reduce its budget deficit through fiscal consolidation, which involves increasing revenue and reducing unnecessary expenditures. This requires disciplined financial management and may involve austerity measures.
Additionally, Ethiopia must implement monetary policy tightening to control inflation, which may involve raising interest rates or reducing the money supply. This may have short-term economic costs, but it is essential for long-term stability. The country must also address the foreign exchange shortage by reforming the exchange rate regime, potentially allowing for a more flexible exchange rate. This may involve devaluing the currency, which could impact imports and inflation.
Furthermore, Ethiopia must implement structural reforms to improve the business environment, increasing efficiency, transparency, and competitiveness. This may involve simplifying regulations, reducing bureaucracy, and promoting private sector growth. While the loan terms are favorable, implementing the required reforms may be challenging for Ethiopia. This is because the country is facing significant economic and political hurdles, including limited institutional capacity and economic constraints. However, if Ethiopia can successfully implement these reforms, the loan could provide a much-needed boost to its economy. The country has shown commitment to reform in the past, and with international support, it may be able to overcome its challenges and achieve economic stability.
Implications
The loan has significant implications for Ethiopia’s economy, as it aims to reduce debt burdens and improve investor confidence. The loan agreement may also attract more investors. The immediate disbursement of $1 billion may boost investor confidence and provide a sense of relief to the business community, which has been struggling to access foreign exchange. This could lead to increased investment and economic activity as investors take advantage of the improved economic conditions. Some investors may view the loan agreement as a positive step towards stabilizing Ethiopia’s economy, providing a much-needed injection of foreign exchange to support the country’s imports and alleviate the foreign exchange shortage.
However, some investors may also have concerns about the loan’s conditions, which may be challenging for Ethiopia to implement. The fiscal consolidation measures, for example, may lead to reduced government spending, which could negatively impact economic growth. Additionally, the structural reforms required by the loan may be difficult to implement, given Ethiopia’s complex political and economic landscape. These concerns may lead some investors to adopt a wait-and-see approach, waiting to see how the government implements the loan’s conditions before making any major investment decisions. In the last two months, reports emerged that some Pakistani investors expressed a strong desire to engage in various investment sectors by taking advantage of existing opportunities in Ethiopia. Investors may now see the loan as a necessary step towards addressing Ethiopia’s economic challenges and restoring stability to the economy.
However, it is left for the Ethiopian government to do the right things and to work on its commitment to implement the required reforms, which will appear as positive signs—to the extent that many investors may be hopeful that the loan will mark a turning point in Ethiopia’s economic fortunes.
Educator, writer and legal researcher at Alafarika for Studies and Consultancy.