Ethiopia has been rebuked by the financial world for missing payments of interest totaling US$99 million and redemption of its debut US$1 billion Eurobond in December 2024, ten years after issue. Leading credit-rating agencies like Fitch and S&P, taking deep offence, have downgraded the government’s external credit rating to “default,” although the latter is very much in the eye of the beholder. But the IMF, too, has dubbed the country’s debt “unsustainable and in distress.” The authorities’ response includes limiting the accumulation of national debt and committing themselves to bringing Ethiopia’s debt distress rating to “moderate” under the watchful eyes of the IMF. Yet it turns out that Ethiopia has not often lacked the basic ability to shoulder its debt burden and our government should not be distracted from focusing on how to harness public debt for development purposes.
First things first: Why has Ethiopia failed to pay its first and only Eurobond obligations on time? It is not as if the government has accumulated unmanageable debt, or as if it has been unwilling to pay. Rather, the delayed payment is best regarded as an “excused default,” with some powerful mitigating circumstances. No sooner had the government led by Prime Minister Abiy Ahmed run into the Covid-19 shock than it was dragged in a major, two-year long armed conflict in Tigray. I mean, if pandemic and war do not constitute force majeure, what would? The emergencies severely strained public finances, and surely settling debts is not a priority when you find yourself in a life-threatening exigency. This, however, does not mean to free the EPRDF government officials who were too eager to advertise a high-yielding international bond once Ethiopia was assigned its first credit ratings, only to botch the management of the promised projects, leaving their successors to pick up the pieces.
But the default assumption that Ethiopian governments have been borrowing “too much,” or that Ethiopia has failed to keep its debt levels within reasonable bounds, does not fit the data. The federal government’s financing needs, for a start, have usually been limited by conventional measures. IMF and Ministry-of-Finance data indicate that overall fiscal balance averaged merely -2.4% of GDP, the primary balance -1.9%, between fiscal years 2006/07 and 2023/24 (just before that Eurobond matured and before the value of our foreign currency-denominated debt shot up due to a spectacular currency depreciation originally meant to achieve competitive exchange rate). Yes, federal outstanding debt rose from US$7.5 billion to US$44.7 billion over that period. However, relative to national income or GDP, it averaged a modest 28.4% per year, with no clear-cut trend and 13.9% of GDP accounted for by domestic debt, 14.5% by external debt. Even if we include government-guaranteed liabilities, public sector debt averages 45.6% of GDP, which is still moderate by international standards and obeys generally accepted debt limits.
Nor has the central government issued debt for the most part on imprudent terms. Domestically, the government almost always has borrowed very cheaply, actually at sub-zero real interest rates (admittedly helped by financial repression). And of the total external debt contracted by the government over 2006/07-2023/24, more than 90% was on a concessional basis (factoring in bilateral official development assistances or ODAs), with mostly fixed nominal interest rates averaging barely above 1%. True, commercial loans accounted for a significant 24.4% of the total external public debt annually, but that largely reflects the effect of public-enterprise borrowing backed by the government.
Even more informatively, and contrary to what might be expected from the Eurobond saga, interest payments have not been a major burden on government budget either. During 2006/07-2023/24, for example, interest payments averaged 0.5% of GDP, thrice lower than they did in the first half of the 2000s. Meanwhile, the government spent on average just 4.2% of its annual revenue on interest payments (even though with an overall upward trend), and 8.5% on servicing total public sector debt against the average of 18.1% for low-income countries in 2024. It spent 12.1% of export earnings annually for servicing external debt that includes publicly guaranteed liabilities; in 2024 low-income economies on average spent a record 24.2%.
What about the risk of a self-reinforcing debt spiral – a case in which rising debt level leads to higher interest payments, piling up even more debt, setting in motion a snowball effect? The authorities need not have worried about it. So long as the nominal interest rate on our sovereign debt is lower than the long-term nominal GDP growth rate, debt will actually shrink relative to the size of the economy over time, becoming less of a burden. And over the past 25 years, the rate of growth in real GDP plus inflation has on average, and in all but two cases, far exceeded yields on Ethiopia’s public debt. Even if government borrowing costs are expected to rise domestically as financial repression wanes and the debt market develops, our long-run growth outlook is also generally strong, at the very least in nominal terms. And this debt dynamics has two implications: (1) Ethiopia can realistically aim to grow its way out of debt (mind: growth lacks quality when it is not inclusive, not because it is debt financed), and (2) it is also able to rollover debt or stabilize debt ratio without having to reduce its primary fiscal deficits.
So this gives another reason why our government does not have to embark on a substantial – in fact, any – fiscal correction in order to ensure debt sustainability. What is more, if this fiscal correction means lower public infrastructure investment (one immediate measure taken by the government to contain debt vulnerabilities is indeed curtailing the infrastructure investment of some big state-owned enterprises – SOEs), it is essentially borrowing from the future. For it can retard accumulation of productive physical capital and ultimately economic growth, which in turn lowers future public revenues, ironically undermining fiscal solvency.
Of greatest importance from the standpoint of Ethiopia, however, is making good use of the debt it contracts. It has to be said that, until very recently, several of our large-scale public investment projects have been wasteful – due to weak governance and corruption. It suffices to look at the ones that served as a sales pitch for the aforementioned Eurobond – namely, the Grand Ethiopian Renaissance Dam (GERD) hydropower, railway and sugar-industry projects. For all its multi-dimensional benefits, GERD alone was squandering billions of U.S. dollars in terms of incurred as well as opportunity costs before it was given a “kiss of life” by Premier Abiy. But all three projects turned out to have multifaceted problems, from inadequate feasibility studies to administration inefficiency to massive cost overruns and delays. And was it really surprising that the SOEs responsible for these projects were unable to service their debt, to the point of bringing the Commercial Bank of Ethiopia – their largest domestic lender, our “too big to fail” – to the brink of crisis?
That’s not all. According to a 2025 University of Massachusetts report, Ethiopia had been losing on average an astonishing US$1.6 billion per annum through capital flight over the period 1971-2022. This estimated amount is far greater than that needed to pay off our Eurobond debt. And twice the amount roughly matches the total loan disbursements set aside by the IMF for Ethiopia’s four-year stabilization program. Or, if you want, we could build 16 GERDs with the total capital flight (US$83 billion!) during the 52-year period. In fact, there is also an increase in the risk of capital flight that Ethiopia could face in the future: if central bank reserve loss occurs and this creates depreciation fears, continued relaxation of currency controls means that more willing residents will be able to take foreign currencies abroad. But for now the point is that Ethiopia might face no external debt problem if it were able to keep its own funds at home.
Given these, what more can be said of ongoing efforts by the government to ensure debt sustainability? On the domestic front, enhancing public debt management is definitely desirable. Measures to strengthen borrowing justification, governance and viability of SOEs are also welcome. So is the marked improvement observed under Abiynomics in terms of evaluating projects and completing them within designated time periods and costs. On the external front, if the aim is to improve our external debt servicing capacity, expanding and diversifying sources of foreign exchange earnings, especially exports, makes a lot more sense than trying to unduly reduce the external debt-GDP ratio by minifying the numerator. The debt restructuring negotiations with official bilateral creditors under the G20’s initiatives and with private bondholders to secure a comparable treatment, if successful, do alleviate temporary financial crunches, but they do not establish debt sustainability. The same applies to abstention from commercial loans.
In fact, while it is clearly desirable to avoid unadvisedly-contracted commercial external loans and what Léonce Ndikumana and James Boyce called in their 2011 book “odious debts,” when conditions are ripe, credit terms are not too far away from concessional ones – the American economist Jeffrey Sachs says loans with 2-3% real interest rate and 30 to 40-year maturity are no-brainers for Africa’s development projects – and the social and economic returns of an underlying project justify it, Ethiopia should not shy away from knocking on the doors of world credit markets again. If it faces difficulty in borrowing on financial markets, it will not be due to a one-time delay in Eurobond payments.
To recap, contrary to the cliché, the Ethiopian state has not had excessive indebtedness levels or a fundamental problem of fiscal sustainability in recent history. And at this point, the country probably has little to gain from a debt reduction of choice, but a lot to lose. So when societal needs call for it, the federal government can and should continue to use its unique ability to take on debt without having to worry about paying it off. Oh, and it should not overextend itself in terms of chasing the IMF’s “indicative” debt thresholds or Fitch/S&P’s favorable credit ratings, although the harsh realities of global finance and investment mean that these issues cannot be completely ignored. What matters most for Ethiopia today is not enhancing credit reputation, but that its sovereign debt promotes the ultimate goals of development policy.
