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HomeOpinionEthiopia’s Impending Default : The framework for understanding the debt crisis

Ethiopia’s Impending Default : The framework for understanding the debt crisis

Ethiopia's Debt Crisis
Image source : FPIF

Part I

The framework for understanding the debt crisis

By Worku Aberra 

December 25, 2023, marks a pivotal moment in Ethiopia’s economic history—not for Christmas celebrations, but as the anticipated day of default on its foreign debt. The Ethiopian government’s struggle to meet its financial obligations came to the forefront on December 11 when it officially informed Eurobond holders of its inability to pay the $33 million interest on its $1 billion bond issued in 2014. Despite the ongoing debt restructuring discussions with creditors since 2020, a resolution remains elusive because of differences between China and Western countries on restructuring and the reluctance of private lenders to participate in restructuring.

With the Ethiopian government already missing the interest payment deadline on December 11, it now faces a two-week grace period to make the payment by December 25. The likelihood of defaulting on the $33 million interest payment on that day is high. This imminent default is not just a concern for Ethiopia; it has consequences that will resonate throughout Africa and other developing countries. In this article, I will present a framework for understanding the underlying causes of the debt crisis for developing countries.

Before examining the causes of the debt crisis in developing countries, I would like to clarify certain terms commonly used in discussions about sovereign debt. I will define Eurobond, debt sustainability, debt structure, and debt restructuring. Despite its name, a Eurobond is not a bond denominated in Euros; it is a bond issued in a foreign currency, namely the American dollar. Sub-Saharan African countries were encouraged to issue Eurobonds beginning in the mid-2000s, with Ghana as the first country, excluding South Africa, to issue a Eurobond in 2007. 

After other countries followed suit, encouraged by the IMF and the World Bank, Ethiopia issued its $1 billion Eurobond in 2014. When the Ethiopian government entered the Eurobond market, many economists predicted that it would mark the beginning of the debt trap for Ethiopia, considering both the nature of the TPLF-controlled government and the substantial amount of money borrowed.

Debt sustainability refers to a country’s ability to repay its debt without compromising its long-term economic prosperity and the well-being of its citizens. In another article, I will discuss the various indicators used to assess a country’s capacity to meet its debt obligations. Debt structure refers to the distribution of a country’s debt between short-term and long-term loans, private and public loans, commercial and non-commercial loans, as well as loans with fixed and flexible interest rates. Debt structure affects a country’s debt sustainability. Debt restructuring is the process of reducing the interest rate, decreasing the amount of debt owed, and extending the repayment period, to allow debtors to manage their debt. For restructuring to be effective, the agreement between the debtor and the creditor must provide substantial debt relief.

Assessing the debt

A debt crisis arises when a country is unable to meet its debt obligations, interest and capital, because the debt burden becomes too overwhelming for the country. The key issue is how to assess whether a country’s debt is excessively high. We can begin by examining the absolute amount of debt a country owes, but it provides an incomplete picture of the country’s level of indebtedness. 

If we were to consider the absolute amount of debt owed by a country, the US stands as the most indebted country in the world today, yet it is not considered a risky borrower. Economists use several indicators to assess a country’s level of indebtedness, one of which is the country’s debt-to-GDP ratio. A high ratio suggests that the country may be at risk of meeting its debt obligations, while a low ratio implies that the country is less likely to face challenges in repaying its debt.

The debt-to-GDP ratio, however, falls short of providing a complete picture of a country’s debt repayment capacity. Many advanced countries exhibit high debt-to-GDP ratios, often exceeding 100%. For instance, according to the IMF data, Japan has a debt-to-GDP ratio that exceeds 260%, and yet it maintains a AAA credit rating. This anomaly exists because Japan can meet its debt obligations. Ethiopia’s debt-to-GDP ratio is 46.37%, lower than Kenya’s ratio of 67.94%, and notably lower than the debt-to-GDP ratio of most advanced countries. 

About half of Ethiopia’s debt is external debt. According to IMF data, Ethiopia’s external debt as a percentage of its GDP is 23%, lower than Kenya’s 31.2%. Yet, despite these comparatively favorable figures, the country is on the brink of default. The problem Ethiopia faces is one of liquidity — the problem of not having sufficient foreign currency to meet its debt obligations.

Economists employ multiple indicators to gauge a country’s ability to meet its debt obligations. The debt payment to export ratio is one such indicator that illustrates a country’s potential to fulfill its financial commitments. Additionally, the debt service to revenue ratio provides insights into a country’s ability to pay its debt. Another crucial indicator is the debt service to foreign exchange reserve ratio, which reflects the amount of foreign currency a country has available to service its debt. These indicators suggest, as I will demonstrate in another article, that Ethiopia’s capacity to pay its debt is low due to a debt payment that is disproportionately high relative to the economic capabilities of the country.

Many analysts, including IMF and World Bank economists, have concluded that Ethiopia is at risk of default. The IMF, the World Bank, and the United Nations have indicated that Ethiopia’s ability to pay its debt is low, given its high scheduled debt payments.

Structural causes of the debt crisis 

The debt crisis is not a new phenomenon. Throughout history, countries have grappled with debt crises when economic conditions undermined their ability to meet debt obligations. There are distinct cycles of debt crises for countries, akin to economic cycles within nations. The debt crisis cycle in developing countries originates within the international monetary and financial system when they become integrated into the system.

In the twentieth and twenty fist centuries, the debt crisis facing developing countries originated in advanced nations. As the economic situation in the advanced countries changed, the flow of capital to developing nations, including loans, fluctuated. Economic booms in industrialized nations created favorable conditions for extending loans to developing countries, while recessions and high-interest rates in advanced economies hindered the ability of developing nations to repay their debts.

The current debt crisis in developing countries, as did the debt crises of the 1970s, 1980s, and 1990s, started in advanced nations during the mid-2000s and 2010s. Excess liquidity flooded the advanced countries due to the expansionary monetary policies of central banks, including quantitative easing by the Federal Reserve Bank of the US, the European Central Bank, and others. The abundance of liquidity resulted in very low, and sometimes negative, interest rates in these nations.

The excess liquidity and low interest rates in the advanced countries encouraged commercial banks and other institutions to seek higher interest rates elsewhere, in developing countries. The pursuit of higher returns led to easy lending to African nations, including Ethiopia, in the mid-2010s by private lenders in developed countries.

As expected, when the industrial countries experienced a recession during the pandemic, it had a profound impact on the ability of developing nations to pay their debt. The combination of stimulus spending, disruptions in supply chains, and later the war in Ukraine resulted in a global inflationary situation with adverse consequences for many developing countries, especially those heavily reliant on importing food and oil. 

As expected, when industrial countries experienced a recession during the pandemic, it had a profound impact on the ability of developing nations to pay their debt. The combination of stimulus spending, disruptions in supply chains, and later the war in Ukraine resulted in a global inflationary situation with adverse consequences for many developing countries, especially for those heavily reliant on importing food and oil. Their imports became more expensive, and their exports decreased, reducing substantially their foreign exchange holdings. The economic slowdown in the developed countries also reduced foreign direct investment and tourism. These effects severely handicapped the ability of the developing countries to meet debt obligations.

Furthermore, when developed countries raised interest rates to combat inflation in 2022, it had a direct negative impact on developing nations. The higher interest rates in developed countries elevated the interest rates on the short-term debt of developing nations. Capital flowed back from developing to developed countries, causing a depreciation in the values of the currencies of developing nations. The decrease in the exchange rate made imports more expensive, exacerbating the foreign exchange holdings of developing countries. Consequently, some countries, such as Sri Lanka and Lebanon, were unable to meet their debt obligations.

In short, a developing country’s debt crisis is primarily influenced by its level of integration into the international financial system, the evolving economic conditions in advanced countries, and the caliber of its policymakers—whether they are competent, dedicated, and honest. This framework serves as the foundation for comprehending the impending Ethiopian default.

Ethiopia  on the brink of default 

During the tenure of the TPLF-controlled government, Ethiopia, with the approval and encouragement of the IMF and the World Bank, borrowed excessively. The much-touted ‘double-digit’ economic growth was largely financed through external borrowing. Furthermore, it is evident that a portion of the borrowed funds was embezzled and illegally moved out of the country. It has been estimated that, during the TPLF’s rule, approximately $12 billion was illegally taken out of Ethiopia between 2000 and 2009 alone. Consequently, Ethiopian taxpayers are now burdened with the aftermath of these financial undertakings.

Ethiopia is grappling with significant debt obligations in the next two years. According to Fich, the country faces a payment of $1 billion in interest and principal in July 2024, another $1 billion on the Eurobond in December 2024, and an additional $2 billion in 2025. State-owned companies are obligated to pay an annual sum of $1 billion. The Abiy government has signaled its inability to cover the $33 million interest on the Eurobond and is likely to default on December 25.

The current government, under the leadership of the unstable Abiy Ahmed, has exacerbated Ethiopia’s economic problems by intentionally fostering political instability and armed conflict throughout the nation. Fitch reports that Ethiopia’s foreign exchange reserves can only cover less than one month of the country’s external payments. Consequently, Ethiopia is on the brink of defaulting on its external debt, with all the adverse short-term consequences that such a default implies. Ethiopia will join the exclusive club of defaulting countries. 

Regrettably, Ethiopia finds itself on the precipice, poised to join the exclusive club of defaulting countries. The looming threat of default reflects the mismanagement of Ethiopia’s economy by the previous and current governments under the influence of the international financial system.

Worku Aberra (PhD) is a professor of economics at Dawson College, Montreal. 

Editor’s note : Views in the article do not necessarily reflect the views of 

Related Reading :
Is Ethiopia ’s Sovereign Debt Sustainable? By Seid Hassan, Minga Negash, Tesfaye T. Lemma and Abu Girma Moges


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  1. When I come across well written articles like this, all I do is sit back and get educated by dear countrymen like Obbo Worku Aberra, PhD. Keep writing sir and please for heaven’s sake, stay away indulging yourself in the pejoratives of choice of these days like ‘Neftegna, Woyane and Oromummaa’. Some should-have-known-betters among us are having fits using them at will just like a young Egyptian girl possessed with zaar.

    Right on brother, right on!!!

  2. The Orommuma tyrannical Prosperity party has taken country into backwardness and darkness situation. There is no rule of law and the economy has collapsed. Many institutions are not paying salaries and creating hardships and forcing people to demand a chance of government. Everything is done under Abiy’s sole order. Abiy is the police, judge, gardener, security guard, prison guard, spy, military leader, fake author, PhD, and economist, and paranoid sufferings from fear his own shadow.
    This man is learning that how one Abiy alone has no ability and authority to control 110 millions of Ethiopians.

  3. What I hedge my bet on is those very capable and qualified financial experts who are in charge of the ministries responsible in managing the economy of their country. For me they are not responsible for this failure to pay debts. Majority of countries that faced or currently facing the failure are those with runaway corruption that caused political instability and violence because of it. Ethiopia is one of those in the grip of the political mantle had a feast on the nations coffers in the most innovative ways. We have heard it all how that country was taken to the cleaners to the tune of 30 billion in US dollars in just a decade or so by those in charge of ruling the country and their cabals. Then those financials were asked to fix it. I said in the most innovative to describe the way the nation’s coffers were pilfered because I had challenged capable and qualified financial expert among us to trace and catch any of it. I have read stories of newly arrived ‘refugees’ buying grocery stores just a few months after they arrived here. It could be legit but to me it is a suspect. So my challenge to our experts is still alive. I dare you if you can catch one!!!

  4. I never understood the rationale for borrowing in private bond market to fund public expenditures, perhaps to purchase military hard ware and/or for personal capital flight. Even common sense dictates both countries and individuals should always balance their expenditures with capacities to pay for them, rather than relying on endless excessive borrowing as if tomorrow will never come to haunt them. Those who fail to live by that principle, as did during the era of TPLF governance, would be relegated to lives of perpetual poverty.

    Read below an article I shared in multiple domestic and international media over twenty years ago about the subject.


    The Fallacy of Foreign Aid as Engine of Economic Development

    By Teketel Haile-Mariam
    Addis Tribune
    October 4, 2002

    The World Bank and International Monetary Fund held their annual meetings in Washington, D.C. this past weekend, and repeated their promises at previous such meetings to make the poor nations of the world more prosperous. And Ethiopia had sent its own delegates to the meetings to plead for more loans. Protesters from across the globe, who believed these institutions had done (and continue to do) more damage than good through their ever increasing loans and misleading policy prescriptions, had also gathered to demonstrate their opposition to the activities of the institutions, which they also believed contributed to environmental degradation (and the changing weather pattern around the globe) and economic rape of the world’s poor.

    What roles did the international financial institutions play (and continue to play) in Ethiopia? Did their policy prescriptions and loans have significant and sustainable impact on improving macroeconomic performance and standards of living of ordinary citizens?

    Ethiopia had (and continues to have) a history of dependency on foreign assistance, whether that be in the form of food donations, military hardware, or loans for public investment. Although this history applies to all three recent successive regimes, non-military loans contracted by the current government over the last eleven years exceeded similar loans obtained over a span of about sixty years by the two prior regimes combined. And there had been negative correlation between the ever increasing loans and the levels of poverty. As loans increased, the per capita income (brute measure of the level of economic development) had stayed virtually unchanged, poverty had spread and deepened, and even by African standards, Ethiopia had lagged miserably and had become an example of most things wrong in that unfortunate continent, rather than being a symbol of freedom, unity, and prosperity.

    Then why borrow more? And why do international lending institutions want to repeatedly extend additional loans (often for the same intended purposes) when previous loans did not have much positive impact?

    The most common explanation given by the Ethiopian government to justify more borrowing is a fight against poverty. It usually quotes common statistics on widespread poverty, hunger, diseases, low level of agricultural technology, the AIDS epidemic, high level of unemployment, and such other indicators of a seriously ailing economy, and how foreign loans help in the fight against those ailments. Rarely does the government mention whether or not past loans had generated more benefits than their costs. It also does not mention the recent catastrophic consequences of high external indebtedness in countries with much more powerful economies like Argentina and Brazil, and other states in Latin America and Africa.

    There is another less obvious explanation as to why countries like Ethiopia need to borrow more despite the poor records of past loans, which is rooted in inferiority complex. Insecure governments usually consider their relationships with international lending institutions as forms of legitimization of their regimes, and they believe those perceptions would help them prolong their hold on to power. They get opportunities to attend international meetings organized by such institutions to be seen as legitimate members of the international community, and use such forums to lash out at their domestic opponents. They also use the staff of the international institutions to write reports favorable to their policies (similar to recent scandals in the United States securities industry where research analysts have been caught writing favorable but misleading reports on companies in the hope that would give their brokerage firms competitive edges in accessing investment banking businesses with the companies), and use those reports as affirmations of their repressive political and economic policies. We have heard and read this many times before, where the Ethiopian regime proudly stated the approval it had received from international financial institutions (such as the World Bank and International Monetary Fund) about the soundness of its policies of state ownership of land as well as ethnic regionalization under cover of decentralized administration.

    The international financial institutions know all too well that they have the upper hand in their dealing with insecure governments (and their employees), and are prepared to capitalize on the insecurity to advance their own agenda; the more insecure a government (and its employees), the better for the lenders. They are interested primarily to lend more for their own survival and to promote exports from the industrialized countries, rather than to help promote the economic development in the borrowing poor countries. They use academic, professional, and intellectual discourse and reports as covers to advance their real and hidden agenda of lending more, often by replicating previous programs under different name designations (such as policy adjustment, structural adjustment, sector adjustment, numerous variations of sub-sector rehabilitations, emergency recovery, emergency demobilization, and multiple variations of same project investment programs across all sectors and sub-sectors under different nomenclatures).

    As amply demonstrated in Ethiopia, the long record of borrowing by successive regimes had been ineffective in promoting sustainable development and in alleviating poverty. In fact, the reverse might have been true where more lending had driven the country into deeper poverty. As export earnings from traditional sources (such as coffee) decline, ever increasing shares of those earnings would be used to pay the rising debt services, thus leaving ever diminishing proportions of foreign exchange earnings for economic development (and poverty reduction). To add insult to injury, the loans can be used as instruments of foreign policy, as demonstrated during the Ethio-Eritrean conflict when donors (led by the above mentioned international financial institutions) attempted to withhold their funding as a leverage to get political concessions from Ethiopia. The more the dependency, the more the exposure to international political arm twisting and blackmailing.

    The typical and predictable response of the Ethiopian government to the above would be: you are only criticizing us for what we are trying to do, but what alternatives do you have to offer? Here are my suggestions.

    The first suggestion concerns principle. The key principle must be that government control of resources and micromanagement of economic activities by the public sector have not worked anywhere in the world, and there are no convincing reasons to believe such a policy framework would work in Ethiopia. Instead, private sector based economic policy framework is a superior prescription for economic success. That key principle must be modified slightly while dealing in international trade, which these days is commonly referred under the general term of globalization.

    While recognizing that exports are the key to future economic prosperity (and hence policies should focus on improving the country’s international competitiveness), allowing indiscriminately imports of goods that unfairly kill domestic manufacturers would not be prudent. The most prudent approach should be to first promote competition among domestic producers while protecting them initially from outside competition. As the domestic producers mature, protection can be lifted gradually. All developed economies have used this approach (and are still using it) under cover of “infant industry protection” or some other similar justification. Just see how the domestic textile and leather manufacturers are being decimated by cheap imports from Asia and second hand products from North America and Europe. Of course, the lending institutions would not support protection to be extended to the domestic manufacturers, often at the urging of exporting nations from behind, because that would undermine the market in Ethiopia for such imports.

    And the second suggestion concerns fundamental policy measures the government should take to promote rapid economic development and poverty reduction. Without being exhaustive, such policy measures should include:

    (a) letting the private sector be the engine of growth,

    (b) privatizing all land ownership, including agricultural land, which is the foundation of the economy and a source of employment for about 80 percent of the labor force,

    (c) purging all other policies that have been designed to stifle entrepreneurship, such as political parties’ ownerships of businesses and their involvement in commerce,

    (d) building strong financial system to promote saving, borrowing and investment. The nucleus for this exists since there are already many private banks which can be used as a base for strengthening the system,

    (e) maintaining small groups of highly paid professionals to manage the normal functions of government under a free market environment, and reducing the number of people working as government employees. These managers should contract with the private sector to handle as much as possible of the government’s work,

    (f) restructuring the federal system of government to organize regional administrations along geographic rather than ethnic groupings, with strong federal laws to protect the interests of minorities anywhere. This will promote free movements of capital and labor, and exchanges of ideas, as these are essential features of private sector based economy,

    (g) strengthening the rule of law to protect civil liberties and private property rights, and to strengthen commercial transactions,

    (h) aggressively containing the population explosion, and

    (i) making it easier for citizens to manage their own affairs by, for example, eliminating bureaucratic bottlenecks that encourage corruption and taking other small but tangible pro-citizenry actions.

    In summary, Ethiopia should proceed with vigorous programs of economic growth (which in due course would also reduce poverty) by harnessing her own resources first, supplementing those with foreign grants to the extent possible rather than with foreign loans. The government should refrain from investment in directly productive activities and engaging in commerce, and leave such undertakings to the private sector. Public investment should focus on improvement of infrastructure that would promote private sector investment and economic growth (such as in telecommunications, power, and transportation) and education. Under no circumstances should foreign loans be used to finance items that have dubious investment merit such as vehicles, studies by foreign “experts”, and any items that can and should be financed using domestic human, material, and financial resources. Local capacity building should be given top priority by giving preferences to domestic rather than foreign consults and contractors, and by strengthening local training institutions rather than sending trainees abroad. If necessary, foreign experts should be contracted to conduct their training in such local institutions rather than sending the trainees abroad since that would be more cost effective, sustainable, and best for building the human resource base.

    The above suggestions, if implemented, would surely reduce the need for heavy external borrowing, while at the same time promoting domestic resource mobilization, local capacity building, and the emergence of critical mass of middle class entrepreneurs. The suggestions would also provide a more solid basis for well-anchored, gradual, and sustainable development that would reduce poverty.

    • Excellent and telling article from 21 years ago. Thank you brother for giving us the chance to read it. It still resonates pretty well. Btw, I googled Addis Tribune and I found one with no current news and everything is authored by a person named Cynthia Tam. The news paper might have been shuttered already.

  5. Okay, here’s my idea.

    Use social media to trap Kim Kardashian and a scenario where she pays the debt because it’s literally pocket change to her. She’s not that bright so we can probably figure out a way to do it where she doesn’t even realize that’s what she’s agreeing to until she’s fully committed.

  6. Thank you sir!
    This a well composed and professionally written article.
    I wish if you a bit elaborate it further using quantitative assessment of the Ethiopia’s situation of debt servicing ability, against its balance of payment; currency generation; and other macro and micro parameters.

    Many thanks,


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