Debt, once viewed as a necessary instrument to build roads, dams, railways, and other ambitious development projects, has now become a weight dragging Ethiopia’s economy into deeper uncertainty.
The latest joint Debt Sustainability Analysis (DSA) by the International Monetary Fund (IMF) and World Bank (WB) has formally classified Ethiopia’s debt as unsustainable, placing it in debt distress.
This follows a series of defaults on its Eurobond obligations in December 2023 and again in December 2024, when coupon payments and principal worth USD 1.1 billion went unpaid.
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International financial institutions, creditors, economists and independent analysts increasingly warn that the country is in a state of debt distress, while the government insists it can manage through reforms, restructuring, and future growth. Yet, as Ethiopia’s fiscal burdens mount and its foreign exchange reserves sink to dangerously low levels, the gap between optimism and hard reality continues to widen.
Debt service costs, when measured against Ethiopia’s limited export earnings reveal the fragility of the country’s position.
Abdulmenan Mohammed (PhD), a London-based financial analyst, explains that the ratio is one of the most telling indicators in debt sustainability assessments.
“Foreign debt must be repaid in foreign exchange,” he noted. “ and this imbalance creates a major problem—eventually leading to the inability to service external debts.”
When the cost of debt repayment rises faster than export growth, a country is left without the necessary hard currency to honor its obligations.
Another critical parameter, Abdulmenan explained, is the burden of debt service relative to government revenues from taxes and grants. If the cost of repayment exceeds what a country can reasonably generate, distress becomes inevitable.
“In Ethiopia’s case, both measures point to mounting trouble. The government paid more than 300 billion Birr in foreign loan repayments in the last budget year alone, a figure that starkly illustrates the pressure,” he told The Reporter Magazine.
Looking forward, Abdulmenan sees no signs of reprieve.
“Ethiopia’s debt will undoubtedly increase,” he cautioned. “The recent devaluation of the Birr has worsened the problem. Previous debts were calculated at 58 birr to the USD, but now the exchange rate is more than double. This alone alarmingly raises the repayment burden.”
He also pointed to rising treasury bill interest rates, which have jumped to 15 percent from the single digits over the past year. Combined with the currency depreciation, the interest rate hike creates fertile ground for deeper debt dependence.
The IMF and WB recently downgraded Ethiopia’s debt-carrying capacity to “weak,” citing alarmingly low foreign exchange reserves. This downgrade has far-reaching consequences, weakening the government’s negotiating power with both creditors and potential investors.
The blow comes as Ethiopia seeks relief through debt restructuring. Talks with China, its largest bilateral creditor, resulted in a temporary suspension of payments. Similarly, the Paris Club group of creditors granted limited forbearance. But these measures, Abdulmenan explained, were short-lived.
“The suspension was for just over a year. Meanwhile, negotiations with Eurobond holders have failed entirely. Ethiopia has stopped paying interest on its Eurobond, leaving a debt of USD 1.1 billion unpaid,” he said.
Ethiopia also entered restructuring discussions under the G20 Common Framework, but progress has stalled. Each failure to reach a settlement sends damaging signals to global investors. Trust in Ethiopia’s financial credibility has eroded, and commercial loans—once a lifeline for large projects—have been paused. Even if the country were to reenter commercial markets, Abdulmenan warned, the conditions would be harsh, with steep interest rates and numerous preconditions.
The IMF estimates that Ethiopia faces a residual financing gap of USD 10.8 billion through 2028. Even with planned loans from the IMF, World Bank, and bilateral creditors, the nation’s reserves will remain perilously low, covering only 3.5 months of imports. For context, international best practice recommends at least six months.
“Even the 3.5 months coverage was only achieved thanks to IMF injections,” Abdulmenan stressed. “Without significantly increasing foreign exchange generation, Ethiopia will face repeated cycles of shortages.”
Teshome Abebe (Prof.), an esteemed economist at Eastern Illinois University, observes that the G-20 Official Creditor Committee’s decision to suspend some payments in 2023 and 2024 is only a temporary solution.
“It was a measure to give Ethiopia and creditors breathing space,” he explained. But as the IMF later injected emergency loans, the scope of the challenge became clear. Foreign debt now represents 15 percent of the Gross Domestic Product (GDP), while domestic debt accounts for 19 percent.
The IMF report outlined that total public debt as a percentage of GDP declined from 48.9 percent in 2022 to 34.8 percent in mid-2024. But this drop is largely statistical; the result of rapid nominal GDP growth and lower external disbursements, and not a sign of healthier fundamentals.
“The second phase of the Home Grown Economic Reform aims to strengthen Ethiopia’s foreign currency reserves for at least six months. However, the IMF latest figure shows reserves covering only 3.5 months, which falls short of expectations,” Teshome said. “The IMF is deeply concerned not only about the low level of reserves but also about the broader debt situation, which has been exacerbated by weak implementation—most visibly reflected in the resignation of Mamo Mihretu, former governor of National Bank of Ethiopia.”
Both Abdulmenan and Teshome see the resurgence of the parallel forex market as an omen of the economic trouble ahead.
“The revival of the parallel market is the second warning sign, and the IMF has also noted a decline of USD 1 billion in international support within a year,” Teshome said.
The debt analysis warned that a shortfall in international financial backing could have serious humanitarian implications for Ethiopia, where active conflict continues to haunt two of its most populous regions.
Despite favorable gold and coffee prices temporarily boosting export revenues, Teshome warned these gains are unlikely to be repeated.
“They were driven by exceptional inventories rather than sustainable production increases. Meanwhile, domestic borrowing by the government at high interest rates—currently around 16 percent—has created a ‘crowding out,’ reducing banks’ willingness to lend to the private sector,” said the expert.
Teshome warns that fiscal discipline has also weakened.
“While the government pledged to cut spending, recent salary increment promises for teachers are lagging and the recent promotions of 66 military leaders raise questions about where additional funds will come from,” he said. “The government has lost its fiscal discipline.”
Inflation remains a pressing challenge.
Official NBE reports put the headline inflation rate at close to 15 percent, but independent estimates, including one from Professor Teshome, put the figure closer to 40 percent. The expert warns that containing inflation in the single-digits—a key target of the IMF program—is virtually impossible under current conditions.
Ethiopia’s reliance on parallel market exchange rates and the lack of market-led currency reforms compound the problem.
“The parallel market cannot be eliminated unless genuine exchange rate reforms are introduced,” Teshome argued.
The widening gap between official and parallel exchange rates, which has climbed above 25 percent from a record-low of around 10 percent immediately in the wake of the liberalization of July 2024, is another major concern.
“Even if participants in the parallel market have no intention to engage and even if its influence diminishes, its complete disappearance is unthinkable—because cheating offers higher returns, which remains a strong incentive,” Teshome explained.
Meanwhile, unemployment continues to rise, adding social and political pressures. The IMF’s reform preconditions, including broadening the tax base, are difficult to implement in a sluggish economy plagued by insecurity, unpredictable foreign exchange regime and inflation, says Abdulmenan.
Foreign direct investment (FDI), once seen as a critical pillar for growth, has been lower than expected.
“The much-celebrated entry of Safaricom, a telecom service provider, to Ethiopia’s market remains one of the few tangible successes,” he said. “Efforts to sell stakes in Ethio Telecom raised only 10 percent of what the government had hoped for from domestic investors. The banking sector liberalization has also been slow, with only two Kenyan banks showing interest so far; investors cite not only economic uncertainty but political instability such as recurrent conflicts as key deterrents though favorable laws exist.”
Even with the IMF projecting average 7.4 percent GDP growth between 2025 and 2034, experts are skeptical, arguing that growth alone cannot resolve the debt problem.
Teshome speculates that the government may be hoping for debt cancellation—a notion he described as a “crazy idea.” Hopes for a ‘haircut’ on Eurobond repayments are equally delusional, according to the expert.
Domestic banking stress adds to the long list of problems listed out in the IMF-WB debt distress analysis.
The Commercial Bank of Ethiopia (CBE), by far the largest commercial lender to the government and also among the country’s biggest state-owned enterprises (SOEs), is struggling to cope with huge non-performing loans doled out to other SOEs such as the former Ethiopian Sugar Corporation and Ethiopian Electric Power.
More than 90 percent of these debts, totaling about 900 billion Birr, have been transferred to the government’s books through the Liability and Asset Management Corporation.
“CBE’S financial health will ultimately depend on the government’s ability to honor this debt,” says Abdulmenan.
Even Ethiopia’s gold exports, once propagated as a solution to foreign exchange shortages, have faltered, observes the expert.
“Reports show that NBE has suffered significant losses in gold trade due to unsustainable pricing mechanisms,” said Abdulmenan.
Looking ahead, the government is considering non-concessional loans for Koysha Hydroelectric Dam, a USD 950 million worth project deemed critical for power generation and foreign currency generation through the export of power.
Yet Abdulmenan doubts the domestic private sector can shoulder the financing.
“Without improved political stability and credible incentives for private investors, such large projects remain risky,” he said.
He stressed the prevalence of peace and institutional reforms are prerequisites for addressing Ethiopia’s debt crisis, further suggesting that expanding infrastructure, particularly electricity, redirecting investments from commodities to manufacturing sector, and creating efficient, corruption-free bureaucracy are equally important.
However, achieving these conditions requires not only steadfast policies but also a conducive environment free of conflict and uncertainty.
The road ahead will be long and fraught with challenges, but the choices made will determine whether Ethiopia sinks deeper into crisis or begins its long climb toward financial stability.
