Issue No. 217

Ethiopia's sovereign default

Ethiopia's economy staggered into the Gregorian New Year. In December 2023, the country had the dubious honour of becoming the third African nation, after Zambia and Ghana, to default on its sovereign debt in the last three years. After several years of economic downturn, a USD 33 million interest coupon payment on a USD 1 billion 10-year Eurobond proved to be the final straw. Ethiopia's failure to pay has already had major repercussions for the country's economic forecast and standing, with several international credit agencies downgrading Ethiopia in recent weeks.

This current economic frailty largely stems from severe costs of the COVID-19 pandemic and recent armed conflicts, particularly the Tigray War. Between November 2020 and December 2021, USD 22.7 billion worth of damage was done to infrastructure across Amhara, Afar, and Tigray, while another USD 6 billion was lost in productivity. Ethiopia's Gross Domestic Product (GDP) dropped from 5.9% in 2019 to 4.3% in 2022. The full scale of the infrastructure and livelihood damage from ongoing insurgencies in Amhara and Oromia is unknown but has been estimated to currently number several USD billion.

While the Pretoria agreement ended armed conflict in Tigray in November 2022, the Ethiopian economy has remained underwater. Persistently high inflation and unemployment levels barely shifted throughout 2023. In September, Ethiopia's Central Bank signalled that inflation had fallen while remaining painfully steep at 27%, with many staple food items, including teff, continuing to surge in cost. Meanwhile, unemployment has remained dogged, driven by the millions displaced across the country.

Ethiopia's external debt had climbed to USD 28.2 billion by April 2023, of which the International Monetary Fund (IMF), World Bank, and Paris Club hold roughly 75%. The sovereign debt default thus came as little surprise despite federal government attempts to secure delays in debt repayments with its external creditors. It did have some success, including securing an agreement in principle with China and other creditors to restructure its USD 1 billion bond. Negotiations with the IMF for the G20's Common Framework for Debt Treatment have been ongoing since early 2021 but have been repeatedly stalled by armed conflict. The sovereign debt default may accelerate the debt restructuring process, but in the meantime, there will be high financial costs to the country.

IMF and Ethiopian officials are set to meet in the coming weeks amid speculation that Addis will be forced to devalue the Ethiopian birr to secure a bailout. The approval of the USD 3.5 billion sought from the IMF by Addis will be contingent on currency reform, with the birr currently trading at a government-managed rate of 56 ETB to the dollar, far lower than the black market rate. Limits on accessing international capital markets may also be put in place during the debt restructuring negotiations.

Last year, growing debt repayments, and costly armed conflicts, slashed Ethiopia's foreign exchange reserves and capacity to import fuel and fertilisers, whose costs have soared since the Russian invasion of Ukraine in 2022. In the last fiscal year alone, Ethiopia's import costs ballooned to USD 17 billion but still proved insufficient. The lack of fertilisers and fuel in 2023 contributed to myriad problems, not least instability in the Amhara region. Impoverished Amhara farmers, unable to grow crops due to drought and fertiliser shortages, have swelled the ranks of Fano in recent months. These shortages and the punishing drought in northern Ethiopia have further propelled the massive humanitarian crisis consuming Tigray and parts of Amhara and Afar. Any currency depreciation will spike the cost of Ethiopia's imports further.

In a bid to insulate the Ethiopian economy from a likely drop in imports in 2024, the federal government is seeking to ramp up internal production of food and textiles. But much of the country's manufacturing sector lies in disarray, again hampered by instability and the lack of forex. Numerous businesses have been forced to shut in the last year, including the only foreign-owned financier, Ethio Lease. And key imports, including fuel and fertiliser, will still need to be imported, even if domestic manufacturing can be ramped up.

There can be little doubt that the general instability in much of Ethiopia is compounding a poor economic forecast. Massive infrastructure damage and loss of livelihood in three of the country's most economically significant regions means any economic reform will be hampered. The non-physical impacts of armed conflict also exact a high financial toll. A recent report into economic losses from internet shutdowns revealed that in 2023 Ethiopia lost an estimated USD 1.9 billion, the second highest globally after Russia.

Ethiopia's economic downtown can also partially explain the rationale behind the federal government's recent pursuit of sea access, and the subsequent New Year's Memorandum of Understanding (MoU) with Somaliland. The overwhelming majority of the country's import-export business currently runs through the Port of Djibouti, to the frustration of many Ethiopian politicians. Though likely many years in the making, an Ethiopian-owned commercial port on the Red Sea could offer significant financial benefits if it can be effectively developed and utilised.