News IMF report praises commitment to Ethiopia program, warns of downward risks
February 1, 2025
Gov’t misses USD 1.1 bln coupon, principal payments on Eurobond
An International Monetary Fund (IMF) report released this week concludes that Ethiopia has developed the capacity to service its external debt, particularly debt owed to the Fund, despite lingering risks associated with the ongoing extended credit facility arrangement and related economic reforms.
The report covers the progress of the deal struck between the Fund and the federal government last July.
“Ethiopia’s capacity to repay the Fund is considered adequate, predicated on successful program implementation, securing financing assurances and debt restructuring, although there are substantial downside risks,” it reads.
Outstanding debt to the IMF constitutes over 68 percent of Ethiopia’s forex reserves in 2024/25, and debt service to the Fund is projected to peak at 2.1 percent of exports, or 7.4 of reserves this fiscal year, according to the document.
The trend will continue until 2032, with outstanding IMF credit stock peaking at 18.6 percent of exports in 2026/27. Ethiopia’s debt service to other external creditors is also expected to rise over the coming years.
“Risks to capacity to repay rise towards the end of the ten-year horizon when repayments to the Fund peak and rescheduled debt service payments recommence. Such risks are mitigated by reforms to address external imbalances and the reserve accumulation envisaged under the program,” reads the report.
Ethiopia’s total public external and domestic debt stock, including publicly guaranteed and non-guaranteed debt, had reached USD 68.8 billion by end of June 2024, representing 32.9 percent of GDP.
External debt accounted for USD 28.8 billion of the total, up slightly from USD 28.2 billion in June 2023, according to the latest report from the Ministry of Finance.
The IMF lauded Ethiopian authorities for their commitment to implement the terms of the deal reached six months ago, which includes a USD 10.7 billion finance package, of which USD 3.4 billion is slated to come from the Fund, USD 3.75 billion from the World Bank Group, and the remainder from debt treatment under the Common Framework, negotiations for which are still underway.
The IMF predicts the debt treatment agreement will be reached this year. Failure to realize it would stretch Ethiopia’s financing gap for the program, making its external debt unsustainable.
The Fund’s prescriptions range from SOE privatization, forex regime liberalization, and deregulation to lifting subsidies and an overall economic open-up. Despite its commendations for progress thus far, the IMF has also aired concerns over downward risks that might affect Ethiopia’s capacity to repay its debts.
The risks, according to the report, stem from domestic policy slippages, potential social discontent, and security challenges in the form of domestic conflict and spillover from regional conflicts such as the war in Sudan. Reform fatigue due to political and social pressures could lead to delay in or reversal of policy measures, cautions the IMF.
Inflation, recurrent volatility in global commodity prices, and potential delays in the debt restructuring process also constitute significant risks, according to the report.
The government’s failure to make a Eurobond interest payment in December 2023 has placed Ethiopia in debt distress. The authorities have been engaging with Eurobond holders in the year since the need for debt restructuring, but progress has been slow.
Three coupon payments and the principal that came due on December 11, 2024, have been missed, totaling USD 1.1 billion, according to the IMF document.
Senior officials met the Eurobond creditor committee in October, according to the report.
The IMF has urged the government to accelerate peace talks and the national dialogue process to curtail the risks. It wants to see enhanced export competitiveness and the adoption of a market-clearing exchange rate policy, as well as increased focus on accession to the World Trade Organization (WTO) and the implementation of trade agreements such as AfCFTA.
It also recommends the tightening of monetary policy to control inflation, while increasing social spending.
The Fund predicts that Ethiopia’s economy will grow by 6.6 percent in 2024/25, with the rate set to rise to eight percent in the medium term.
“The temporary fiscal spending package will help cushion the socioeconomic impact of the reforms, reducing the impact on aggregate consumption, while revenue mobilization will create space for priority spending,” reads the report.
The IMF expects inflation to peak at 25 percent in mid to late 2025, and reach single digits in 2028, according to the report. It contrasts with government data, which indicates headline inflation has fallen to around 18 percent.
Nonetheless, the IMF report states that inflation rates will continue to remain high in light of planned fuel and energy price increases as part of a slew of subsidy cuts being enacted under the program.
The concerns will be the central topic of discussions with Kristalina Georgieva, IMF managing director, during her scheduled two-day visit to Addis Ababa in a week’s time.
Georgieva will meet with Prime Minister Abiy Ahmed and other senior officials during her stay, according to a statement from the Ministry of Finance. Talks with representatives of the private sector are also on the agenda.
“This visit reaffirms the IMF’s commitment to supporting Ethiopia’s economic development and fostering dialogue on policies aimed at ensuring resilience, and shared and lasting prosperity,” reads the statement.