Ethiopia Defaults Amid Financial Strains from War, Debt to China

ADF STAFF

Weighed down by the costs of war, the COVID-19 pandemic and billions of dollars in Chinese loans, Ethiopia defaulted on a loan payment recently, joining Ghana and Zambia on the list of African countries unable to pay their debts.

Chinese loans constitute about half of Ethiopia’s $28 billion in foreign debt over the past 25 years. Since 2000, Ethiopia has borrowed $13.7 billion from China to build roads, railroads, water systems and telecommunication infrastructure, among other things.

Most of those Chinese loans came from the Export-Import Bank of China or the China Development Bank and carry higher interest rates than loans from lenders such as the World Bank or International Monetary Fund. The terms also are confidential, making it difficult for financial experts and international lenders to know the status of loans or default conditions.

According to analysts, Ethiopia owes about $7.7 billion to foreign governments, most of that to China. It also owes $5.2 billion to private creditors, including $3.2 billion to commercial banks.

Ethiopia has asked the G-20, which includes China, to restructure some of its debt under the G-20’s Common Framework, which co-ordinates debt relief with public and private lenders. Ghana and Zambia have used it to relieve their own debt pressures with mixed results.

Under that framework, Ethiopia reported in August 2023 that China would let it suspend payments on debt that was coming due over the next 12 months. Because Ethiopia’s Chinese loans lack transparency, it’s unclear how big those payment were or what happens after the suspension ends in July 2024.

Ethiopia’s two-year war in Tigray, coming on the heels of the COVID-19 pandemic, caused the country to burn through its foreign currency reserves, analysts say. The war also drove up inflation as the economy weakened.

Despite the end of the Tigray conflict, Ethiopia still faces conflicts in Amhara and Oromia regions that sap its financial capacity, experts say.

Ethiopian Finance Minister Ahmed Shide has said that the country avoided taking out commercial loans — the type used by the Export-Import Bank of China and China Development Bank — for the past five years. Such loans typically come with no option for forgiveness and can require lengthy renegotiation to extend the repayment period.

Instead, according to Shide, Ethiopia has focused on concessional loans, which come with lower interest rates than commercial loans, and offer grace periods during which the borrower can stop making payments.

The default on Ethiopia’s $33 million Eurobond payment will halt further borrowing for the time being, Kenyan economist Aly Khan Satchu told Channels TV.

“Essentially it means no new money is going to be available to them until some resolution is reached,” Satchu said, adding that the Eurobond default is a way for Ethiopia to press its creditors for relief.

“They’re trying to corral everybody to the negotiating table,” Satchu said.

Fitch Ratings downgraded Ethiopia’s debt to junk status. It says the country’s plans to restructure its debt in the first quarter of 2024 “may still be optimistic.”