15th March 2024

Three years after Ethiopia officially requested relief under the G20-backed Common Framework for debt treatments beyond the Debt Service Suspension Initiative (DSSI), Prime Minister Abiy Ahmed's administration is still moving slowly towards agreement with its creditors. Ethiopia announced an agreement with China on the temporary suspension of its debt servicing last August, and with Paris Club official creditors in November, but talks with bondholders remain fraught in the aftermath of December's default on Ethiopia's US$1 billion Eurobond (AC Vol 65 No 1, Reality catches up with gambler Abiy & Dispatches 2/1/24, Abiy races for funds after debt default).

As with other Common Framework participants, including Ghana and Zambia, negotiations with the IMF – from which Ethiopia now seeks up to $3.5bn in concessional financing over four years – remain critical to securing finance from other sources such as the World Bank, and relations with its official creditors.

According to finance ministry numbers, the Paris Club accounts for a mere 3% of Ethiopia's external debts, albeit a significantly greater share of debt service. Ethiopia's November agreement to suspend (in a net present value-neutral manner) its 2023-24 debt service payments until 2027-29, remains critical for a country with less than $1bn in foreign exchange reserves and severe liquidity constraints. Its debt service costs for 2024/25 are estimated by the UN Development Programme to exceed – in the absence of debt service suspension – $4bn. Under the terms of the November agreement, Paris Club official creditors retained the right to end the suspension should Ethiopia not reach staff-level agreement with the IMF by the end of March.

A 7 March press briefing stating that another IMF mission is 'expected to take place in the coming weeks', does not mean that the March deadline will be met. Tellimer Senior Economist Patrick Curran, who sees the current debt suspension as providing the 'financing assurances' the IMF requires for the staff-level agreement, believes that Ethiopia's Paris Club creditors are likely to extend the deadline if they receive assurances that 'good progress' towards an agreement is being made.

What may constitute sufficient progress is unclear. Yet the 10-strong group of participating Paris Club creditors – including France, which co-chairs Ethiopia's Official Creditor Committee (OCC) with non-Paris Club China – has little interest in seeing its Common Framework negotiations derailed.

China, which last September accounted for roughly a quarter of Ethiopia's $27.8bn in external debt via the China Development Bank (CDB), the Export-Import Bank of China (China Exim), and the Industrial and Commercial Bank of China (ICBC), has not conditioned its debt service suspension on an IMF deal (AC Vol 64 No 16, Abiy ploughs on as economy staggers).

More than other non-Paris Club creditors (including India and Saudi Arabia), who have minimal exposure to Ethiopia, China remains loathe to continue playing ball in African debt restructurings unless the international financial institutions play their part.

Just before it missed its 11 December Eurobond coupon payment, the Ministry of Finance claimed that although Ethiopia had the funds to pay the $33 million in interest, it would not do so to avoid treating Eurobond holders more favourably.

The ministry has also referred to external liquidity concerns to justify the default.  Creditors saw this as showing a lack of consistency in decision-making, and raised concerns about how Ethiopia may act in upcoming negotiations.

Disagreement

That the market price of Ethiopia's $1bn Eurobond has risen since early December, and prior to the missed payment, in part reflects the extent to which its fiscal and liquidity woes were largely priced-in, and growing expectations that an IMF deal is on its way. The ministry has since sought to reassure bondholders, including via a mid-December investor call. Yet the government appeared far from an agreement with a large group that includes several US-based funds, a minority of which are represented by a bondholder committee that publicly criticised the government's decision to default.

Bondholders have rejected the initial proposals from the ministry and appear sceptical of subsequent suggestions that a Eurobond maturing this December could be replaced by eight payments between 2028 and 2032, based on a lower coupon rate than the current 6.625%, albeit without a haircut to the principal. Key bondholders have even pushed for a provision that would compensate them for a future debt default, to the extent of restoring them to their initial position. Ethiopia officials dismiss this idea as far-fetched.

What the government and bondholders might agree on, is the former's request that whatever deal is reached satisfies 'comparability of treatment' between different sets of creditors. That would avoid the need to renegotiate terms once there is a deal with official creditors.

A substantial 'net present value' loss, from the perspective of bondholders not buying in after the value of Ethiopia's Eurobond had already plummeted, is inevitable.

More will become apparent when the IMF and World Bank issue an updated Ethiopia debt sustainability analysis, to replace that issued back in December 2019 in conjunction with Ethiopia's request for a three-year Extended Credit Facility (ECF) and accompanying Extended Fund Facility (EFF). The 2019 analysis concluded that Ethiopia was – prior to the costly fallout of the Tigray conflict – at high risk of external and overall debt distress and drew particular attention to Ethiopia's hefty debt service needs 'relative to exports'.

Debt service is also high as a proportion of revenues that have significantly declined as a percentage of GDP in recent years. Ethiopia's Eurobond default unsurprisingly prompted ratings agencies Fitch Ratings and S&P Global Ratings to slash their  foreign currency sovereign rating to 'restricted default' and 'selective default' respectively. This follows previous downgrades in 2023 as Ethiopia's deteriorating liquidity and – according to Fitch – 'external financing gaps' caused rising concern.

So did the slow pace of Common Framework negotiations and the government's increasing reliance on domestic financing from Ethiopia's banking sector and direct advances from the National Bank of Ethiopia. That Ethiopia has not made a habit of issuing Eurobonds – only partially softens the blow.

Concerns over sources of domestic financing echo broader concerns, among the IMF and others, of increased reliance on central bank financing in African economies such as Ghana and Nigeria.

Regardless of whether the Paris Club March deadline is missed, the government's fiscal plans will be closely scrutinised ahead of the June presentation of the 2024/25 fiscal year's budget. The recent increases in debt service and domestic security spending, and resulting pressure on social and capital spending, will make it harder to make the cuts required under an IMF programme – if and when approved by its Executive Board.

Little clarity prevails over what the IMF will demand, although economists expect any deal to require devaluation of an increasingly over-valued Ethiopian birr, at a time when domestic inflation is well into double digits.