Finance
News
15 April 2025
Ethiopia Minister of Finance at the Horn of Africa Initiative Ministerial meeting, Brussels December 2023. Photo: Christophe Licoppe/ European Union/Wikimedia
Summary
- Private creditors refuse to participate in Ethiopia’s debt restructuring,
- Ethiopia’s experience highlights the need for urgent reform of the international sovereign debt architecture and review of the IMF’s role within it
Ethiopia is facing challenges in reaching an agreement with bondholders under the much-criticised G20’s Common Framework for Debt Treatments (CF) after its 2023 default, highlighting the need for structural reform of the current ad hoc international debt restructuring system (see Observer Spring 2023). Ethiopia defaulted on its debt obligations when it missed a $33 million payment on a $1billion bond in December 2023. Responding to the impact of the Covid-19 pandemic, the country began debt relief negotiations under the CF in 2021, however these were delayed by the country’s civil war which ended in 2022. Ethiopia made payments until 2023, giving creditors no reason to negotiate.
In July 2024, the IMF agreed a four-year $3.4 billion Extended Credit Facility Arrangement with Ethiopia after receiving assurances of a debt reprofiling agreement from a committee of bondholders. This would have resulted in a 18 per cent “haircut” while still ensuring significant profits for bondholders. However, BNN Bloomberg reported on 3 October 2024 that bondholders refused the government’s proposal, calling it “wholly inconsistent” with their assessment of the country’s ability to service its debt.
The country is the latest victim of the dysfunctional CF, which even the World Bank has criticised due in part to its inability to require the cooperation of private lenders (see Dispatch Springs 2023). As the Financial Times (FT) reported on 17 February, the bondholder committee “accused the fund [IMF] of attempting to ‘reverse-engineer’ debt relief as part of a $3.4bn bailout and also said it was reserving legal rights over the debt after it rejected a proposal by Ethiopia to write down the bond last year.” As the FT notes, the lack of private investor willingness to participate in the process reflects “one of the biggest faultlines to resolving a wave of sovereign defaults from Sri Lanka to Zambia in recent years.”
The threat of legal action…shows exactly why changes are needed to legally suspend payments during debt restructuring negotiationTim Jones, Debt Justice UK
Private lenders continue to hold up critical debt restructuring
As outlined by the FT, bondholders have accused the IMF of undue pessimism in its assessment of the sustainability of Ethiopia’s debt. This contradicts evidence provided by experts, academics, civil society organisations, UNCTAD and other UN bodies, which has repeatedly shown the Fund’s debt sustainability assessments are overly optimistic about states’ growth prospects and debt carrying capacity, causing devasting economic and human rights consequences (see Inside the Institutions, What is the WB and IMF debt sustainability framework?). In Ethiopia’s case, the IMF is projecting that exports will grow 60 per cent faster than the historical average.
In January, the African Forum and Network on Debt and Development (AFRODAD), the Horn Economic and Social Policy Institute (HESPI) and UK-based civil society organisation Debt Justice, published an analysis of Ethiopia’s debt restructuring process. It stressed, inter alia, that bondholders continue to hold out on essential debt restructuring despite having been offered a generous deal that would have enabled them to make a 31 per cent profit. A 17 February statement emphasised that, “Bondholders using the threat of legal action to push debtors into worse deals shows exactly why changes are needed to legally suspend payments during debt restructuring negotiations….Creditor governments need to do far more to make private lenders participate in debt relief, including passing laws in the UK and New York so that hedge funds, banks and asset managers cannot hold out from fair levels of debt relief.”