A country unable to pay its debt isn’t forced into liquidation by the court, but suffers detrimental economic and political consequences.
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Ethiopia's public debt has been steadily increasing, and in 2024, it amounted to 32.9% of the nominal GDP. This is sourced from internal and external creditors; the former being 59%($40 billion) and the latter 41%($28.9 billion) of the total debt. State projects have gradually become highly dependent on domestic funds, and this heavy dependence came as a needs-based solution. Let’s delve into how we are lending the government billions while the majority struggles to make ends meet.
The shift came out of necessity as Ethiopia was falling into debt distress, a scenario in which a country needs loan restructuring, as it can’t follow through with repayment. In December 2023, it defaulted on a $33 million Eurobond investment, and a year later, it failed to pay the $1.1 billion principal amount. Understand that, unlike a company, a country in such a position isn’t forced into liquidation by the court, but suffers detrimental economic and political consequences. Basically, it loses credibility as a borrower, resulting in ripple effects in loans becoming barely affordable, currency devaluation, and the economy drifting into slumps.
That’s when tapping into local resources was deemed imperative. Ethiopia has, for a while, strategised towards exhausting internal financial resources as its international credit rating plummeted. Even amidst restructuring programs, the remaining deficit is stated to be $10.8 billion till 2028. It has also agreed not to take any other non-concessional external debt, with a single project spared. There was nowhere to look but within itself.
The persistent shortage of foreign currency, which is more due to the subpar FDI rather than an underperforming export sector, has impaired the country's ability to repay its debt. The consequential debt distress and constraints on obtaining new foreign funds have left the government with no choice but to turn towards its own assets. It came as a provisional ease to the debtor but not so favourable to local creditors, since its sustainability is disputable and could turn out to be a liability to the creditors.
When Lending is the Only Way Out
Unable to revive from the debt crisis and the situation being undesirable to the domestic financiers, the government devised a policy to make lending compulsory to commercial banks. Government bonds, treasury bills(T-bills), direct loans, and special securities serve as the primary instruments to accessing these funds. Bonds are long-term security options that repay debt through periodic interest, while T-bills are short-term reliefs. Direct loans mainly engage central banks, which inject emergency liquidity into the government’s financial deficit. Other securities include project-specific certificates, saving bonds, and some non-marketable securities.
The strained government employed financial repression practices, borrowing from local resources at interest rates below market, resulting in banks losing on those investments. Until mid-2025, a 20% mandatory T-bill purchase was pushed upon commercial banks. Moreover, the government becoming the chief borrower muscled out private investors and obstructed the creditors from diversifying their portfolios. The IMF and World Bank refuted it for hindering a market-based economy. It was most challenged for pressuring domestic players into being compulsory creditors, creating an ineffective economic system.
A civil way to get the loan
A new price-based framework is being phased in. It has established policy interest rates(15%), which the National Bank closely manages through Open Market Operations. It also facilitates inter-bank money markets supported by digital tools and a system that helps regulate commercial banks' liquidity shortage through borrowing and the surplus by depositing at the National Bank. Hopes are for a more transparent, regulated, conducive, and robust economic environment that alleviates the national debt crisis while empowering private investments. May we have the money we owe repaid too, the chaos is unimaginable.
