IMF Says Ethiopia’s Debt Is Unsustainable: What Happens Next











Ethiopia’s debt sustainability assessment (DSA) is blunt: the country is in debt distress, with debt assessed as unsustainable after repeated breaches of export-linked thresholds and a missed Eurobond coupon in December 2023. Recovery hinges on timely reforms and relief from external creditors to bring the risk of debt distress back to “moderate” by the end of the IMF-supported program.

A pathway is emerging. An Official Creditor Committee (OCC) under the G20 Common Framework first granted a standstill on 2023–24 official debt service in November 2023 (retroactive to January 1, 2023). On March 21, 2025, the authorities and the OCC reached an agreement in principle (AIP) on key terms; a memorandum of understanding is expected next. Staff’s illustrative treatment, combined with the authorities’ proposal to other commercial creditors, is designed to close the external financing gap and restore a moderate risk of external debt distress by FY2027/28—the end of the IMF program.

Where the Debt Stands—and Why It Fell (on Paper)

Despite distress, the public and publicly guaranteed (PPG) debt ratio has fallen markedly, helped by low external disbursements and rapid nominal GDP growth. PPG debt declined to 34.8% of GDP at end-June 2024, from 40.2% a year earlier and 48.9% at end-FY2021/22. External PPG debt, 44.5% of the total, stood at 15.0% of GDP (down from 18.1% a year earlier). The federal government and central bank account for 78% and 6% of total PPG debt respectively, with the rest owed by SOEs. Disbursement halts by several official bilateral and market creditors during the Common Framework process also compressed the external stock.

Domestic debt is sizable but being re-profiled. The domestic debt-to-GDP ratio fell to 19.3% by end-June 2024, reflecting transfers of SOE liabilities to the federal government (via LAMC) and the conversion of legacy central bank advances into a long-dated bond. Treasury-bill auctions (relaunched in late 2019) have deepened price discovery: the weighted average T-bill yield rose to 16.4% in February 2025 (from 9–11% in 2023/24 and 1–2% on past non-market instruments). The authorities also signaled the phasing-out of financial repression—mandated bond purchases by banks—during the IMF program.

Notably, staff confirm no collateralized debt and highlight continued debt-data transparency efforts.

The 2024–2028 Financing Math: Mind the Gap

Even with consolidation, the program period still features a US$10.8 billion residual external financing gap. The plan: about US$3.4 billion from the IMF; US$3.8 billion in World Bank budget support (US$1.5 billion disbursed in August 2024 and US$1.0 billion expected between July 2025–June 2026, split US$650 million grants and US$350 million loans); and US$3.6 billion of debt relief from bilateral and private creditors (with private creditors proxied by an NPV-neutral bond). Reserve adequacy would rise to 3.5 months of imports by program end.

Restructuring: The Official and Market Tracks

On the official side, the November 2023 standstill cleaned up arrears and created space for reform; the January 2025 OCC meeting maintained financing assurances, culminating in the March 2025 AIP. On the market side, Ethiopia defaulted on its Eurobond, missing three coupons and the principal due on December 11, 2024—US$1.099 billion in total—while continuing talks with bondholders.

Macro Turning Points: Growth, Prices, FX, and Reserves

Growth has cooled from the go-go 2010s but remains robust. Average growth in 2019/20–2023/24 was 6.8%, with 8.1% recorded in 2023/24. For 2024/25, staff project 7.2% growth; trend growth rises to 7.5–8% in the medium term on the back of FX reforms, more market-based finance, and productivity gains.

Inflation is easing faster than expected. Headline inflation fell to 13.6% in March 2025, with the year-end (June 2025) projection revised down to 16% on tighter policies and softer food prices; single-digit inflation is targeted for 2028.

FX market reform is the program’s hinge. After early gains, spreads widened again: following a sub-5% parallel premium in September 2024, the gap hovered around 15% since March 2025. The central bank (NBE) has moved to publish bank FX fees, lift caps on advance payments to US$50,000, and tighten prudential NOP limits (with CBE brought into compliance by end-2025 and an NOP directive by end-September 2025). These measures aim to deepen the interbank market, curb rent-seeking, and normalize pricing.

The external accounts show a mixed but improving picture. Staff now see the current-account deficit narrowing to –3.2% of GDP in FY2024/25 as exports of goods and services reach ~12% of GDP, buoyed by coffee and a one-off surge in gold shipments. By end-April 2025, gross international reserves hit US$4 billion, above prior projections. That gold surge—US$2.4 billion expected in FY2024/25—is partly inventory-driven and unlikely to be sustained without new investment; a pullback is assumed in 2025/26. Meanwhile, NGO private transfers are US$1 billion lower per year than previously assumed from 2025/26 onward, reflecting shifts in donor priorities.

Domestic Financing Is Getting More Market-Based

The authorities are trying to anchor inflation expectations and end monetary financing. From FY2024/25, direct advances from the central bank are eliminated; July 2024 operations converted ETB 242 billion of advances into a 25-year bond at 3%, and 899 billion birr of 13-year securities were issued to clean up CBE’s exposures to SOEs and LAMC and recapitalize the bank. Mandated below-market bond purchases (DBE and 5-year government bonds) are slated for phase-out by mid-2025. Going forward, T-bills at market rates will cover government needs, while SOEs issue medium/long-term bonds—a step toward a functioning domestic yield curve.

What Could Still Go Wrong?

Execution risk on FX market deepening. Re-emergence of parallel-market premia signals lingering rationing and fee-based distortions; reforms (fee transparency, higher advance-payment caps, tighter NOP limits) must translate into higher interbank volumes and narrower spreads.

Aid shortfalls and shifts in donor priorities. Staff cut NGO private transfer assumptions by ~US$1 billion per year from 2025/26; essential imports (food, medicines) rely heavily on development assistance (≈70%), with about US$400 million expected from the private sector to fill near-term gaps.

Commodity and inventory risks. The gold export spike looks transitory; sustaining higher export receipts requires investment, not just inventory drawdown and price cycles. Coffee shows similar inventory effects.

Domestic financial conditions. T-bill yields at ~16% reflect tighter local liquidity and higher risk premia; if persistent, they raise interest costs and crowd out credit unless growth and inflation keep normalizing.

Market creditor negotiations. With US$1.099 billion in defaulted Eurobond obligations, the speed and modality of a market-friendly resolution (the DSA uses an NPV-neutral bond as a proxy) will shape investor sentiment and re-entry costs.

The Base Case—and What “Success” Looks Like

By FY2027/28, staff envisage all debt indicators back below DSA thresholds, contingent on: (i) Common Framework implementation per the March 21, 2025 AIP; (ii) steady FX market deepening and prudential reforms (NOP limits, transparency on fees, more interbank trades); (iii) continued fiscal discipline without central-bank financing; and (iv) concessional and program financing arriving broadly as programmed. If this holds, Ethiopia exits the program with moderate debt distress risk, reserves at ~3.5 months of imports, trend growth 7.5–8%, and inflation gliding toward single digits.

Five Markers to Watch (Next 6–12 Months)

OCC MoU and comparable treatment progress with private creditors;

FX market metrics—interbank turnover, bid-ask spreads, and the parallel-market premium;

T-bill curve—yields and tenor extension as repression unwinds;

Exports beyond the gold/cycle bump—coffee, horticulture, manufacturing volumes;

Budget support timing and NGO transfer flows relative to revised assumptions.

Bottom line

The DSA’s message is clear but conditional: distress today, a plausible path to moderation tomorrow. Ethiopia’s chances rest on executing FX and domestic-debt market reforms, locking in the Common Framework deal, and securing programmed concessional flows—while managing near-term shocks to exports and aid. If the authorities deliver, the macro narrative could turn from arrears and standstills to re-entry and resilience by 2028.