Ethiopia’s Debt Restructuring Dilemma: When Creditors Collide and a Nation Waits

An analysis of how geopolitical rivalry, institutional rigidity, and post-conflict fragility are prolonging Ethiopia’s path to economic recovery as fears of renewed conflict in Tigray loom

By E. Frashie Ethiopian Tribune’s Columnist

 

The rejection of Ethiopia’s preliminary Eurobond restructuring agreement by the Official Creditor Committee on January 30, 2026, represents far more than a technical setback in sovereign debt negotiations. It is a revealing moment that exposes the fundamental tensions in how the international community manages economic crises in fragile states, particularly those emerging from devastating internal conflicts.

For Ethiopia, a nation still recovering from a civil war that claimed hundreds of thousands of lives and displaced millions, the extended debt restructuring process is not an abstract financial exercise. It is a matter of survival for economic recovery, poverty reduction, and the government’s ability to rebuild shattered infrastructure and restore investor confidence.

Yet even as Ethiopia navigates these treacherous financial waters, an ominous development threatens to unravel the fragile peace achieved in 2022. Ethiopian Airlines cancelled flights to Tigray on Thursday and Friday, with customers receiving messages citing “unplanned circumstances”. A high-ranking security official confirmed the suspension was “linked to a new conflict between federal troops and regional forces,” adding that “drones are hovering in the sky and there are military movements in western and southern Tigray”. The spectre of renewed warfare casts a dark shadow over Ethiopia’s already precarious economic position.

The rejection and its immediate implications

The Official Creditor Committee formally rejected the Eurobond deal, citing violations of the principle of fair burden-sharing amongst creditors. The agreement Ethiopia reached with private bondholders in early January involved a 15% haircut on principal, leaving approximately $850 million to be repaid in new bonds starting in 2026, with an upfront payment of $350 million expected by July.

Senior economists at Addis Ababa University frame the rejection within the broader context of Ethiopia’s post-conflict economic reality. The OCC’s position, whilst technically defensible under the Common Framework’s comparability principle, fails to account for the unique circumstances of a country that has simultaneously battled a pandemic, civil war, and global economic headwinds. The question isn’t just whether private creditors are getting better terms than official creditors, it’s whether the entire restructuring framework is fit for purpose in conflict-affected economies.

The numbers tell a sobering story. Ethiopia’s total external public debt stands at roughly $28 billion, with approximately $8.4 billion covered under Common Framework negotiations. The country secured an Agreement in Principle with the OCC in March 2025 promising $3.5 billion in debt-service reduction over the IMF programme period, including $2.5 billion between 2023 and 2028. Yet the relatively modest $1 billion Eurobond, issued in 2014 at 6.625% when Ethiopia was heralded as Africa’s rising star, has become the symbolic battleground where geopolitical and institutional forces clash.

A fragile peace unravelling in real time

The timing of the renewed tensions in Tigray could not be worse for Ethiopia’s debt negotiations. Just as the country requires maximum political stability to reassure creditors and implement reforms, it faces the prospect of returning to a conflict that nearly destroyed the national economy.

Residents in Mekele queue early in the morning to withdraw cash from banks, with ATMs running out of banknotes. Some residents report being limited to withdrawing approximately $13 after waiting for hours. The scenes are grimly familiar to those who lived through the 2020-2022 war, a war that, according to some estimates, claimed over 600,000 lives when accounting for both combat deaths and casualties from famine and disease.

The geopolitical dynamics have shifted dramatically since the Pretoria Agreement of November 2022. In May 2025, Ethiopian electoral authorities deregistered the TPLF, accusing it of failing to hold a general assembly, whilst the TPLF argued this violated the 2022 peace deal. More ominously, a potential political and security alliance between the TPLF and Eritrea’s President Isaias Afwerki appears to be developing a complete reversal of the 2020-2022 configuration when Eritrea fought alongside Ethiopian federal forces against the TPLF.

Peace and conflict scholars note the changed strategic landscape. The 2020-2022 war saw Tigray effectively surrounded by hostile forces. This time, the TPLF could potentially secure an open supply line and support base through Eritrea, fundamentally altering the military balance. For creditors watching Ethiopia’s capacity to service debt, this represents a catastrophic risk one that threatens to obliterate any economic recovery achieved since 2022.

The Tigray war’s enduring economic shadow

Any serious analysis of Ethiopia’s debt crisis must reckon with the devastating impact of the Tigray conflict that erupted in November 2020. The war didn’t just claim lives; it obliterated economic activity across northern Ethiopia, disrupted agricultural production, destroyed infrastructure, and triggered a humanitarian catastrophe that diverted scarce resources from development to emergency response.

Economists with the Ethiopian Economics Association emphasise this connection profoundly. Ethiopia entered 2020 with challenging but manageable debt dynamics. The pandemic hit first, then came the Tigray war. Between conflict-related destruction, the collapse of foreign direct investment, export disruptions, and the suspension of international aid, the country’s debt-servicing capacity was fundamentally undermined. This isn’t about fiscal mismanagement in isolation it’s about a perfect storm of external shocks and internal crisis.

The conflict’s economic toll extends beyond immediate destruction. Tourism evaporated, remittances declined, and the Ethiopian diaspora traditionally a source of hard currency became vocal critics of the government, further complicating international relations. Manufacturing output in conflict-affected regions collapsed. The agricultural sector, which employs roughly 70% of Ethiopia’s workforce, faced displacement of farmers, destruction of farmland, and disruption of supply chains.

When the Pretoria Agreement finally brought a cessation of hostilities in November 2022, the economic damage was profound. The World Bank estimated the conflict cost Ethiopia’s economy billions in lost output, whilst reconstruction needs far exceeded available resources. This is the context in which Ethiopia approached debt restructuring not as a fiscally profligate nation seeking relief from self-inflicted wounds, but as a country attempting to rebuild whilst shouldering unsustainable debt burdens accumulated partly through circumstances beyond its control.

Now, with renewed conflict threatening, every assumption underlying Ethiopia’s debt sustainability analysis faces potential invalidation. How can creditors assess Ethiopia’s repayment capacity when the country may be sliding back into civil war?

The Common Framework’s promise versus its performance

The Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative was launched in November 2020 with considerable fanfare. Its architects envisioned a mechanism that would streamline sovereign debt restructuring by coordinating official bilateral creditors including both traditional Paris Club members and emerging creditors like China, India, and Saudi Arabia whilst ensuring that private creditors provided comparable treatment.

The reality has been far more complicated. None of the countries that applied for restructuring under the Common Framework have received the swift, predictable, and comprehensive relief the system promised . Ethiopia became the first African country to formally request treatment in February 2021. Five years later, the process remains incomplete.

Former economic advisors to the Prime Minister offer a pointed critique. The Common Framework’s fundamental flaw is that it assumes a level of coordination and good faith amongst creditors that simply doesn’t exist in practice. China wants to protect its infrastructure investments and prevent private creditors from free-riding. France wants to preserve Western influence in shaping debt norms. The IMF wants to maintain its fiscal sustainability benchmarks. And Ethiopia? Ethiopia just wants to be able to pay teachers’ salaries and import essential medicines.

The current impasse illustrates this tension vividly. The OCC argues that the private bondholder agreement offers terms that are “too generous” compared to official creditor concessions. Yet from the bondholders’ perspective, a 15% principal haircut represents a significant concession particularly when compared to their legal rights under the bond contract. The divergence reflects fundamentally different starting points: official creditors view debt relief as a policy tool for development and stability, whilst private creditors view it through the lens of contract enforcement and return maximisation.

Comparability doctrine becomes a political weapon

The “comparability of treatment” doctrine the principle that all creditors should share the burden of debt relief proportionately sounds eminently reasonable in theory. In practice, it becomes a weapon in creditor negotiations.

Consider the dynamics at play. China, Ethiopia’s largest bilateral creditor, has extended billions for railways, industrial parks, and power generation through its Belt and Road Initiative. Beijing is acutely sensitive to scenarios where its concessional relief enables private investors to exit with minimal losses. France, co-chairing the OCC, seeks to demonstrate that the Common Framework can function credibly whilst maintaining Western influence in African debt governance. Both find common cause in rejecting the bondholder deal, despite their broader geopolitical rivalry.

Independent economists note the irony in the current situation. Official creditors are essentially saying that private creditors must suffer more pain to match the concessions that official creditors have agreed to provide. But this creates a perverse dynamic where Ethiopia is punished for reaching an agreement with one set of creditors. The longer this drags on, the more Ethiopia’s economy suffers and the less capacity it has to repay anyone.

The state-contingent features of the preliminary agreement, mechanisms that would link some payments to Ethiopia’s future economic performance, further complicated matters. Whilst such instruments are touted by development economists as innovative tools that align incentives and reduce moral hazard, official creditors view them with suspicion. The OCC argued these features would “unnecessarily complicate” the restructuring and risk creating divergent interests amongst creditor classes.

Reform efforts undermined by prolonged uncertainty and renewed conflict

Ethiopia’s debt crisis unfolds against the backdrop of an ambitious but fragile reform programme. Prime Minister Abiy Ahmed’s government has pursued liberalisation of previously closed sectors most notably telecoms, where the licensing of Safaricom marked a historic opening. Privatisation of state-owned enterprises, including Ethiopian Airlines and Ethio Telecom, was meant to generate revenue and attract investment. Currency liberalisation, though painful, was intended to address distortions in the foreign exchange market.

Yet these reforms have progressed unevenly, constrained by political resistance, capacity limitations, and the overwhelming demands of post-conflict reconstruction. The floating of the birr in July 2024, whilst necessary for IMF programme compliance, triggered inflation that eroded purchasing power and fuelled public discontent. Privatisation efforts have faced delays as potential investors balk at political uncertainty.

Research directors at the African Economic Research Consortium contextualise the challenge effectively. Ethiopia is being asked to implement textbook structural reforms whilst simultaneously managing post-conflict reconciliation, humanitarian crises in multiple regions, and now a debt restructuring that offers no clear timeline for resolution. It’s like being told to run a marathon whilst carrying a boulder and being penalised for not setting a new record.

The conflict in Tigray may have formally ended in 2022, but instability has persisted elsewhere. The Amhara region has experienced recurring violence. Intercommunal clashes in Oromia continue. The government faces the enormous task of demobilising combatants, resettling displaced populations, and rebuilding destroyed infrastructure all whilst managing a debt crisis that limits fiscal space for precisely these investments.

Now, with Ethiopian Airlines cancelling flights to Tigray and military movements reported across the region, the entire reform agenda faces potential collapse. Who will invest in Ethiopian telecoms or purchase shares in state enterprises if the country returns to civil war? What credibility do currency reforms have when residents queue desperately to withdraw cash before ATMs run dry?

The Prime Minister’s sea access ambitions complicate matters further

Adding another layer of complexity to Ethiopia’s predicament is Prime Minister Abiy Ahmed’s increasingly forceful stance on securing sea access through Eritrea. Ethiopia lost sovereign access to the Red Sea when Eritrea seceded in 1993 after decades of guerrilla warfare. In September 2024, Abiy declared that Ethiopia’s loss of sea access was a “mistake” that “will be corrected” rhetoric that many observers found provocative.

This ambition has triggered a remarkable geopolitical realignment. Eritrea and Ethiopia initially made peace after Abiy came to power in 2018, an achievement that earned him the Nobel Peace Prize. The two countries then fought together against the TPLF from 2020 to 2022. Now, that alliance has fractured. In June 2025, Eritrea accused Ethiopia of harbouring a “long-brewing war agenda” aimed at seizing its Red Sea ports, whilst Ethiopia countered that Eritrea was “actively preparing to wage war against it”.

The prospect of a TPLF-Eritrea alliance against Ethiopian federal forces represents a dramatic inversion of the previous conflict’s alignments. For creditors, this introduces yet another source of profound uncertainty. A government pursuing territorial expansion whilst simultaneously seeking debt relief and implementing painful economic reforms presents a coherent vision to no one,,least of all to bondholders and bilateral lenders being asked to accept significant losses.

The IMF’s circular predicament

The International Monetary Fund sits at the centre of this complex web, both facilitator and enforcer. Ethiopia’s four-year Extended Credit Facility arrangement, approved in December 2023 for $3.4 billion, is conditional on achieving debt sustainability, which requires agreements with both official and private creditors.

The IMF’s debt sustainability analysis sets parameters for what constitutes acceptable restructuring. But this creates a circular problem: the IMF programme depends on debt relief, debt relief depends on creditor agreement, and creditor agreement depends on satisfying competing demands for comparability whilst the country’s economy deteriorates in the waiting.

Senior economists at the Ethiopian Development Research Institute identify the bind clearly. The IMF is technically correct that Ethiopia needs deep relief to restore sustainability. But the Framework they endorsed has proven incapable of delivering that relief in a timely manner. Meanwhile, Ethiopia makes difficult policy choices, currency depreciation, subsidy removal, fiscal consolidation, that exact real social costs, whilst the promised benefits of restructuring remain perpetually deferred.

The human cost of delay is tangible. Inflation erodes wages. Import restrictions create medicine shortages. Infrastructure projects stall. The longer restructuring takes, the more Ethiopia’s growth potential diminishes ironically making debt less sustainable even as negotiations continue.

Now, with renewed conflict threatening, the IMF faces an impossible position. How can it certify debt sustainability when the fundamental assumption that peace will hold appears increasingly questionable? Every projection, every reform benchmark, every debt-service calculation rests on the continuation of peace. If that foundation crumbles, the entire edifice of the restructuring collapses.

Understanding private creditor behaviour

It would be simplistic to cast private bondholders as villains in this drama. They are fiduciaries managing other people’s money—pension funds, insurance companies, sovereign wealth funds with legal and contractual obligations. Their behaviour, whilst frustrating to debt-burdened nations, is entirely rational within the incentive structures they face.

Bond contracts include collective action clauses requiring supermajority approval for modifications. Bondholders who believe others will eventually accept deeper concessions have incentives to hold out. Those who purchased bonds at distressed prices may prefer default and litigation to negotiated haircuts. Asset managers who face quarterly performance evaluations cannot easily accept losses that competitors might avoid.

Yet this rational individual behaviour produces collectively irrational outcomes. As the Ethiopian case demonstrates, protracted negotiations damage recovery prospects for everyone. A restructuring that takes five years achieves less actual relief than a faster process that enables economic recovery.

Finance professors at Addis Ababa University argue for perspective on this matter. We should be clear-eyed about bondholder motivations without demonising them. The real question is whether the international architecture for sovereign debt restructuring is fit for purpose. When individual rationality produces collective dysfunction, the problem is systemic, not behavioural.

Moreover, bondholders now face a fundamentally altered risk calculus. The preliminary agreement was negotiated under the assumption that peace would hold and reforms would progress. With flights to Tigray cancelled and military movements reported, bondholders must reconsider whether even the rejected 15% haircut adequately compensates for the heightened risk of complete default.

China’s strategic positioning in African debt

China’s role as Ethiopia’s largest bilateral creditor and OCC co-chair deserves particular scrutiny. Beijing’s Belt and Road Initiative transformed Ethiopia’s infrastructure, the Addis Ababa-Djibouti railway, industrial parks, power generation, but also contributed significantly to the country’s debt burden.

China’s insistence on strict comparability reflects multiple motivations. Protecting Chinese taxpayers’ interests is one factor. Preventing Western bondholders from benefiting from Chinese concessions is another. But there’s also a broader strategic dimension: Beijing is actively shaping norms for sovereign debt restructuring in a multipolar world where it plays a central role.

Specialists in China-Africa economic relations explain this dynamic clearly. China is not simply a creditor seeking maximum recovery. It’s a rising power establishing precedents for how debt crises will be managed in the Global South for decades to come. The Common Framework represents the first major multilateral debt initiative where China has equal standing with Western powers. Beijing will not allow that framework to fail but neither will it allow terms that subsidise private Western capital.

This creates complex dynamics. China and France, despite vast differences in economic systems and geopolitical orientation, find common cause in enforcing comparability against private creditors. Yet this tactical alignment masks deeper competition over African economic influence. Ethiopia becomes terrain where this great power competition plays out regardless of Ethiopian interests.

China’s calculations may now shift considerably. Beijing has invested heavily in Ethiopian infrastructure investments that could be threatened or destroyed by renewed conflict. Does China pressure for a swift debt resolution to stabilise Ethiopia politically? Or does it use the crisis to extract additional concessions and deepen Ethiopia’s dependence on Chinese support? The answers will shape not just Ethiopia’s trajectory but the broader landscape of China-Africa relations.

Negotiating a viable compromise if peace holds

The rejection of the preliminary Eurobond agreement returns Ethiopia to negotiations with diminished leverage and mounting pressure. The government will go back to the negotiating table with bondholders to revise financial terms, likely demanding deeper concessions including higher principal haircuts, lower interest rates, and longer repayment periods .

For this to succeed, all parties must move beyond their current positions. Private bondholders must recognise that Ethiopia’s economic reality, shaped by conflict, pandemic, and global shocks, necessitates meaningful relief beyond modest haircuts. Official creditors must balance their legitimate concerns about comparability with the urgent need for timely resolution. And Ethiopia must continue difficult domestic reforms whilst managing realistic expectations about what restructuring can achieve.

Policy advisors offer cautious optimism tempered by realism. Ethiopia has already secured significant commitments from official creditors, over $3.5 billion in relief. The Eurobond, though symbolically important, represents a fraction of the total debt picture. A revised agreement is achievable if bondholders accept that their recovery value in a protracted default scenario is likely worse than accepting deeper but negotiated concessions now. The question is whether we reach that conclusion through wisdom or through pain.

Yet this analysis assumes peace. With Ethiopian Airlines grounding flights to Tigray, with residents rushing to withdraw cash, with drones reportedly hovering over the region these assumptions look increasingly fragile. Even residents of Addis Ababa express worry, with one stating: “This time Ethiopia deserves peace. No one will benefit from war”.

The alternative to successful restructuring is grim. A formal default on the Eurobond would trigger credit events, complicate future market access, and potentially unravel official creditor agreements. Ethiopia would join a growing list of sovereign defaults in recent years, Sri Lanka, Ghana, Zambia, each demonstrating the enormous economic and social costs of prolonged debt distress. And if default coincides with renewed civil war, Ethiopia faces economic catastrophe on a scale that dwarfs the challenges of the past five years.

Implications for African sovereign financing

Ethiopia’s experience offers sobering lessons for other African nations contemplating Eurobond issuance or Common Framework engagement. The promise of market access comes with risks that can materialise suddenly when circumstances change. The Common Framework, despite its inclusive design, remains slow, politically complex, and vulnerable to great power politics that may have little connection to debtor country circumstances.

Economists and former officials at the African Development Bank draw broader conclusions from this experience. African countries need to fundamentally rethink their financing strategies. Eurobonds were attractive when yields were low and risk appetite was high. But we’re in a different world now. Borrowing costs have risen, and the restructuring architecture has proven inadequate. We need financing mechanisms that better account for volatility, conflict risk, and climate shocks, not instruments designed for stable, predictable economies.

This might include greater emphasis on domestic resource mobilisation, South-South financing arrangements with more flexible terms, and multilateral mechanisms that provide automatic debt relief when countries face shocks beyond their control. The current system,

where countries borrow during good times and face protracted restructuring during crises, is simply not working.

Ethiopia’s case demonstrates the particular vulnerability of post-conflict states. The international community encouraged Ethiopia to access commercial markets in 2014, when the country appeared stable and fast-growing. When conflict erupted six years later, those same markets proved unforgiving, and the mechanisms designed to facilitate restructuring proved woefully inadequate. African nations emerging from conflict or facing fragile peace should absorb this lesson carefully.

The human cost of institutional paralysis

As Ethiopia awaits the next phase of bondholder negotiations, its people face the daily reality of an economy constrained by debt overhang and reform fatigue, now compounded by the terrifying prospect of renewed war. Teachers wait for salary payments. Hospitals lack essential medicines. Infrastructure projects remain incomplete. The promise of peace dividends from the Tigray agreement remains largely unfulfilled, as scarce resources service debt rather than rebuild communities.

In Tigray, residents flee by car as flights remain suspended, with some finding bus bookings at full capacity until Tuesday, desperate to avoid reliving the hardships of the previous war. These are not abstract statistics about debt-to-GDP ratios or net present value calculations. These are human beings making desperate decisions about survival whilst international creditors debate the finer points of comparability doctrine.

The international community faces a choice in how it engages with Ethiopia’s crisis. It can insist on technical compliance with comparability principles whilst the restructuring drags on indefinitely, imposing mounting human costs. Or it can recognise that Ethiopia’s circumstances a fragile post-conflict state attempting simultaneous political reconciliation, economic reform, and debt restructuring whilst teetering on the brink of renewed conflict, require pragmatism and flexibility alongside principle.

Opposition economists and former ministers conclude pointedly: “The question before the international community is whether the Common Framework exists to serve the interests of creditors or to serve the development needs of borrowing nations. Ethiopia’s case will answer that question. And Africa is watching.”

A nation at the precipice

The stakes extend far beyond Ethiopia’s borders. How the international community resolves this restructuring will set precedents for sovereign debt management in an era of frequent shocks, fragile states, and multipolar geopolitics. Ethiopia, like so many African nations before it, finds itself navigating between the competing demands of creditors who hold its economic future, whilst its people simply want to rebuild their lives and their country.

But Ethiopia’s predicament now transcends even these profound challenges. The country stands at a precipice where debt distress and potential conflict reinforce each other in a vicious cycle. Prolonged debt restructuring undermines economic recovery, which weakens state capacity, which heightens political tensions, which threatens renewed conflict, which makes debt even less sustainable.

Breaking this cycle requires urgent action. Creditors must recognise that their interests are not served by prolonging negotiations whilst Ethiopia slides toward chaos. A swift, comprehensive restructuring that provides genuine fiscal relief could strengthen the government’s capacity to address grievances, fund reconstruction, and demonstrate that peace delivers tangible benefits. Conversely, continued delays risk creating conditions where no amount of debt relief will matter because the state itself has fractured.

The coming days and weeks will reveal whether wisdom, compromise, and genuine multilateral cooperation can prevail or whether Ethiopia becomes another cautionary tale of a broken system that serves creditors better than it serves sustainable development. More urgently, they will reveal whether the fragile peace of 2022 can hold, or whether Ethiopia returns to a conflict that could consume not just its economic future but its very existence as a unified state.

As drones hover over Tigray and residents queue desperately for cash, as creditors debate comparability in distant capitals, and as the promise of peace fades into renewed fear, Ethiopia waits. Its people deserve better than this paralysis. They deserve peace. They deserve development. They deserve a restructuring process that serves human flourishing rather than institutional rigidity.

Whether they receive it may determine not just Ethiopia’s fate, but the credibility of the entire international system for managing sovereign debt crises in fragile states.

E. Frashie is a columnist for the Ethiopian Tribune specialising in economic policy and development finance.