Ethiopia Joins Ranks of Defaulting Nations: A Test of Financial Stability and Debt Management
Marking a distressing turn of events, Ethiopia has joined the ranks of defaulting nations in Africa, after falling short of fulfilling a scheduled interest payment post the termination of a grace period on Monday. The Ethiopian government was due to honor a $33 million coupon on December 11, a commitment it failed to meet. Ahmed Shide, the Minister of Finance representing the Ethiopian government, affirmed on state television that the decision to withhold the payment was rooted in a policy to ensure equal treatment of all creditors. This development casts a shadow on Ethiopia’s financial stability and its ability to manage debt obligations.
An Emerging Defaulter
Ethiopia is following in the footsteps of Ghana and Zambia, defaulting on interest payments within a short span. The collective bill for lower-rated emerging sovereigns is predicted to skyrocket to over $65 billion in total for 2024 and 2025 combined, a steep climb from just above $8 billion this year. Meanwhile, investors display optimism due to the U.S. Federal Reserve’s shift away from monetary tightening, but they remain conscious of the risks and challenges ahead.
A Policy of Equal Treatment
The Ethiopian government’s decision to default on the $33 million interest payment was based on its desire to treat all creditors equally. The government has already reached an agreement with bilateral creditors for the suspension of debt payments. This move situates Ethiopia among an increasing list of developing countries that have defaulted on Eurobonds in recent years.
Dealing With Debt
Ethiopia has been striving to renegotiate its obligations through the Group of 20’s Common Framework. The civil war in the northern Tigray region has played a role in affecting investor sentiment and economic growth, leading to an in-principle agreement with bilateral creditors to suspend debt payments. Despite ongoing debt restructuring discussions with creditors since 2020, a satisfactory resolution continues to be elusive. Ethiopia’s debt to GDP ratio stands at 46.37, lower than Kenya’s 67.94, and significantly lower than that of most advanced countries. Approximately half of Ethiopia’s debt is external debt, pushing the nation to the verge of default due to liquidity constraints and high debt repayments relative to its economic capabilities.