In a startling development that has sent shockwaves through Ethiopia’s economic landscape, public sector debt has surged to more than half of the country’s Gross Domestic Product (GDP) following a fresh influx of funding in the first quarter of the fiscal year. This alarming trend raises questions about the sustainability of Ethiopia’s financial health and the implications for its citizens as the government grapples with mounting fiscal pressures.

In the past three months, the government sold Treasury bonds totaling 15.8 billion birr to banks.

According to the Ministry of Finance’s (MoF) debt bulletin, approximately USD 1.6 billion was issued in the first quarter of the 2024/25 budget year, representing a 20% increase over the total amount disbursed in the entire 2023–2024 budget year.

A MoF study published a week ago revealed that, as of September 30, public sector debt—both external and domestic—accounted for over 50.3% of nominal GDP.

The external debt now represents 30.9% of the total, having increased from 13.9% of GDP as of June 30.

The MoF report indicates that both the external and total debt percentages exceed the debt sustainability criteria for low-income countries, which are set at 35% for total public sector debt in a weak debt-bearing nation and 30% for external debt.

The report noted, “Debt sustainability with export-related thresholds is still an issue.”

Since 2017, Ethiopia’s debt load has been classified as high risk, prompting the government to avoid commercial loans. The country’s low debt-to-GDP ratio has also been affected by minimal new disbursements from bilateral and international partners over the past four years.

It is worth noting that the last time the public debt exceeded half of GDP was on June 30, 2022, when the debt-to-GDP ratio stood at 50.3%. In recent years, the debt has significantly decreased due to negative inflows and high service costs.

At the end of the last budget year, total public sector debt was approximately 32.9% of nominal GDP, with external debt making up over 13.9%. Both figures were well below the debt sustainability thresholds for low-income countries.

Furthermore, the proportion of external debt has surpassed that of domestic loans, a change driven by the macroeconomic reforms implemented post-reform, substantial support from international partners such as the World Bank and the International Monetary Fund (IMF), and the nearly 100% decline in the birr’s value due to exchange rate floating.

The report states that as of September 30, 2024, total public sector debt by source comprised 39% domestic debt and 61% external debt, an increase from 42% external debt as of June 30, 2024.

The government’s stock of foreign debt rose significantly following the major reforms implemented on July 29, which enabled it to secure substantial assistance from international partners.

According to the Ministry of Finance (MoF) report, total external debt rose from USD 28.9 billion on June 30 of last year to USD 31 billion on September 30, 2024.

The report noted, “Disbursements during this quarter were significantly higher compared to principal payments, resulting in a 7.4% increase in debt between the two periods, which can be partially attributed to exchange rate fluctuations.”

The International Monetary Fund (IMF) and the International Development Association (IDA) of the World Bank accounted for the majority of the over USD 1.7 billion in foreign public sector debt disbursements during the reported three-month period. This amount represents a 120% increase compared to the funding distributed in the previous full budget year. From July 1, 2023, to June 30, 2024, external public sector debt disbursements totaled USD 1.4 billion.

Debt Relief

The administration has expressed its strong expectation that macroeconomic reforms will facilitate debt repayment rescheduling through the G20 communique on the Common Framework (CF) and with private creditors.

Debt restructuring negotiations under the CF have been ongoing for the past four years. The agreement is expected to be finalized by December; however, the New Year has begun without further developments.

The administration stated that a significant amount of debt re-profiling would accelerate macroeconomic transformation.

According to MoF documents, the government estimates that the residual financing gap of USD 10.7 billion for the 2024/25–2027/28 program will be addressed with “USD 3.4 billion from the IMF, and a budget of USD 3.75 billion from the World Bank, which has been approved in July.”

It also noted that financing related to debt treatment under the CF would cover the remaining USD 3.5 billion deficit.

The MoF bulletin reminded readers of the substantial short-term relief provided by the debt service standstill arrangement with the members of the Official Creditor Committee.

The projections include re-profiling USD 1.4 billion in debt payments owed to all official bilateral creditors in 2023 and 2024. However, the expected USD 3.5 billion in debt treatment under the Common Framework brings the total debt relief to USD 4.9 billion.

“The forecasts incorporate re-profiling of debt payments of USD 1.4 billion due to all official bilateral creditors in 2023 and 2024. However, the debt treatment under the Common Framework is estimated at USD 3.5 billion, resulting in a total of USD 4.9 billion in debt relief,” the report stated.

Domestic Debt

Following the reform of the foreign exchange market, which is now market-governed, the total domestic debt in USD has decreased from 40 billion to over 19.8 billion.

As of September 30, 2024, the total domestic and foreign public sector debt fell by 26.11 percent, reaching USD 50.8 billion, down from USD 68.8 billion on June 30, 2024, due to changes in the exchange market.

The use of a market-determined exchange rate for converting domestic debt from birr to USD has resulted in a 7.4% increase in public sector foreign debt, while domestic debt has decreased by 101.3% in USD terms, according to the Ministry of Finance (MoF) report.

To manage the repayment of domestic debt, the government has examined various debt profiles as part of the reform process.

Consequently, the central government now controls over 98% of the total domestic debt, which was previously held by state-owned enterprises.

To facilitate this transition, the government issued 845.3 billion birr in 10-year government securities to settle the 263.3 billion birr debt owed by Ethiopian Electric Power and the 582 billion birr claims from the Commercial Bank of Ethiopia (CBE) against the Liability Asset Management Corporation.

During the review period, the government restructured Treasury bills held by the Private Organization Employees’ Social Security Administration (POESSA) and the Public Servants Social Security Agency (PSSSA) into 10-year government bonds.

According to the statement, “this is due to the restructuring of PSSSA’s Treasury bills amounting to 176.8 billion birr and 89.5 billion birr of POESSA.”

As a result of this restructuring, the total outstanding Treasury bills decreased from 447.8 billion birr on June 30, 2024, to 125.6 billion birr on September 30, 2024.

Following the 2022 directive No. MFDA/TRBO/001/2022 from the National Bank of Ethiopia, which mandates all commercial banks to purchase a five-year treasury bond at 20% of their new loan disbursements, the stock of these bonds reached 109.6 billion birr by the end of September.

The stock of Treasury bonds increased from 93.8 billion birr at the end of the previous budget year to 109.6 billion birr.

The government announced that the bond established on November 1, 2022, will be phased out by the end of June 2025, while banks are required to purchase 50 billion birr worth of bonds. During the reported period, Treasury bonds increased by 15.8 billion birr.

As of September 30, 2024, there was no balance remaining because the MoF reported that the entire amount of Direct Advance, which stood at 242 billion birr as of June 30, 2024, was converted to government bonds.