Ethiopia’s Debt Reaches $68.86 Billion: What’s Next

Ethiopia’s Debt Reaches $68.86 Billion: Insights from the Ministry of Finance

Ethiopia’s public debt has reached a total of $68.86 billion by June 2024, according to the Ministry of Finance’s recently released Public Sector Debt Portfolio Analysis No. 25. This figure represents 32.9% of the nation’s GDP, marking a decline from 57.2% in 2019, signaling progress in managing debt levels. However, the report highlights ongoing challenges that demand careful attention as Ethiopia balances its development goals with fiscal sustainability.

Shifts in Debt Composition

The composition of Ethiopia’s debt has shifted significantly over the last five years. Domestic debt has grown by 51.9%, driven by the government’s increased reliance on Treasury bills, long-term bonds, and advances from the National Bank of Ethiopia. As a result, domestic debt now accounts for 57.7% of the total, up from 47.7% in 2019/20.

In contrast, external debt growth has slowed, with a current total of $28.89 billion, reflecting a deliberate pivot toward concessional borrowing. Multilateral creditors, such as the World Bank and IMF, now hold 54% of Ethiopia’s external debt stock, providing funds on favorable terms. Meanwhile, borrowing from bilateral sources, especially non-concessional loans from Chinese policy banks, has declined due to Ethiopia’s “zero non-concessional borrowing” policy for state-owned enterprises (SOEs).

Rising Debt Service Costs

The cost of servicing Ethiopia’s debt remains a significant burden. Total debt service payments for 2023/24 amounted to $2.2 billion, with external debt service making up $1.27 billion of this total. The external debt service-to-export ratio stands at 11.3%, exceeding the 10% threshold for low-income countries. This breach reflects the pressure on Ethiopia’s foreign currency reserves, driven by underperformance in the export sector.

Currency risks further compound Ethiopia’s fiscal challenges. Approximately 45.8% of external debt is denominated in U.S. dollars, exposing the country to fluctuations in exchange rates. A stronger dollar increases repayment costs, particularly for SOEs reliant on variable-rate loans.

Strategic Investments and Delays

Ethiopia’s borrowing has primarily focused on infrastructure development, particularly in transport and energy. Projects such as highways, railways, and power generation facilities aim to stimulate economic growth and improve trade connectivity. However, delays in project execution have hampered progress. As of June 2024, undisbursed loan balances amounted to $7.38 billion, reflecting inefficiencies in project implementation and administrative challenges.

Policy Measures and External Support

The government has taken several measures to mitigate debt risks. These include limiting non-concessional borrowing, re-profiling existing loans to extend maturities, and leveraging public-private partnerships (PPPs) to fund infrastructure projects without adding to public debt. Additionally, Ethiopia is actively engaging with the G20’s Common Framework for Debt Treatment to restructure external liabilities.

Ethiopia’s reform efforts are supported by international development partners. The IMF has committed $3.4 billion to support the country’s medium-term program, while the World Bank has pledged $3.75 billion in budgetary support. These funds aim to close a $10.7 billion financing gap projected for 2024/25 to 2027/28.

Outlook: Balancing Growth and Fiscal Discipline

Ethiopia’s reduction in its debt-to-GDP ratio is a notable achievement, but the road ahead is fraught with challenges. Expanding the export base, improving project execution, and strengthening debt management practices will be critical for maintaining fiscal sustainability.

The Ministry of Finance’s report underscores the importance of aligning borrowing strategies with broader economic goals. With careful planning and continued international support, Ethiopia has the potential to leverage its debt for growth while maintaining fiscal discipline. However, without addressing structural vulnerabilities, such as low export revenues and currency risks, the progress made could face setbacks.

As Ethiopia moves forward, its ability to implement reforms and manage debt effectively will play a decisive role in shaping its economic future. The $68.86 billion figure represents not just a debt burden but also an opportunity to build a foundation for long-term growth.