Ethiopia’s debt talks collapse without a deal

Negotiations between Ethiopia’s government and investors holding its $1 billion defaulted bond have collapsed, with both sides agreeing to end talks without a deal, Bloomberg reported.

The Ethiopia Ad Hoc Bondholder Committee, which represents investors owning more than 40% of the country’s 2024 bond, said it had offered a proposal that included an upfront reduction in Ethiopia’s debt. In return, bondholders sought a mechanism that would allow higher repayments in the future if the country’s export revenues improved.

However, Ethiopia rejected the proposal, citing restrictions linked to its official creditor agreements. In July 2024, the government reached a deal to restructure $3.5 billion in debt owed to foreign governments and international institutions. That agreement prevents Ethiopia from offering private creditors better repayment terms than those granted to official lenders, limiting its flexibility to negotiate with bondholders.

Ethiopia’s debt profile has shifted dramatically over the past 50 years. After accumulating unsustainable debt levels, the country received major debt relief in the early 2000s, reducing its burden. However, this relief opened the door for renewed borrowing, and in recent years, total debt has climbed rapidly to several billions of dollars.

Ethiopia now owes money to a mix of lenders, including foreign governments, international financial institutions, and private investors. The cost of servicing this debt has surged, consuming a growing share of export revenues and putting pressure on the country’s finances.

Addis Ababa officially defaulted on its only international sovereign bond late 2023 after missing a $33 million interest payment, becoming Africa’s third sovereign default in three years, following Zambia and Ghana.

The default was triggered by a combination of factors, including the COVID-19 pandemic, a two-year civil war, depleted reserves, and high inflation. Ethiopia had sought debt relief under the G20 Common Framework since 2021, but progress was slowed by internal conflict and economic instability.

S&P Global subsequently downgraded Ethiopia’s bond to “Default” after the 14-day grace period expired without payment.

Economists view Ethiopia’s troubles primarily as a liquidity crisis, the country lacks cash flow to meet short-term obligations but is not believed to be permanently insolvent. Still, the failure to reach a deal with bondholders increases pressure on the government as it tries to rebuild investor confidence and balance competing demands from its various creditors.

Moreover, the debt negotiations collapse comes as Ethiopia faces a widening economic crisis marked by slowing growth and rising poverty, despite ongoing infrastructure development.

According to recent World Bank data, more than one-third of Ethiopians live in poverty, and the rate has risen from 33% in 2016 to 39% in 2021, with projections reaching 43% by 2025. Human capital indicators remain low, with most rural adults lacking primary education and nearly half of households reporting child stunting.