Ethiopia’s Debt Restructuring to Accelerate Following IMF Approval, Fitch Ratings Reports
Fitch Ratings has forecast a rapid acceleration in Ethiopia’s debt restructuring process following the approval of a new program by the International Monetary Fund (IMF). This development is attributed to the Ethiopian government’s recent macroeconomic reforms, including exchange rate liberalization and the adoption of a new interest-rate based monetary policy framework.
In its latest report, Fitch noted that the new IMF program, which includes a USD 3.4 billion funding package, is expected to expedite the restructuring of Ethiopia’s debt. The ratings agency emphasized that these reforms should streamline discussions and potentially lead to a quicker resolution compared to other recent restructurings under the G20’s Common Framework.
Ethiopia has faced structural current-account deficits and worsening external imbalances over the past four years, exacerbated by a series of internal and external shocks. Fitch highlighted that these challenges contributed to the Ethiopian government’s decision to suspend coupon payments on its USD 1 billion Eurobond, leading to a downgrade of its Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) to ‘RD’ (Restricted Default) in December 2023.
The IMF’s approval of Ethiopia’s Extended Credit Facility on July 29, 2024, allowed for an immediate disbursement of USD 1 billion from the program’s total funding. This program aims to address a projected financing gap of USD 10.7 billion, with additional support expected from the World Bank and debt restructuring efforts.
Fitch observed that Ethiopia’s exchange rate had depreciated less than 3% by late July 2024, with a more significant drop of 24% following the reform, which has helped align the official and unofficial exchange rates. While this liberalization may lead to a short-term inflationary shock due to rising import prices, the IMF has proposed a fiscal package equivalent to 1.5% of GDP to mitigate these effects.
The new monetary policy regime introduced aims to reduce financial repression and enhance the effectiveness of monetary policy. Previous measures to control private credit growth and address domestic financing needs through administrative means have now been replaced by more market-driven approaches.
Fitch projected that the debt restructuring, valued at USD 3.5 billion, would reduce Ethiopia’s debt-to-exports ratio to 154% by the end of the program period, still above the 140% threshold for moderate risk of debt distress. The IMF has indicated that additional debt relief beyond the program period will be necessary to further reduce Ethiopia’s external debt burden.
The ratings agency expects that Ethiopia will quickly reach an agreement on the treatment of its official debt, as preliminary discussions with the Official Creditor Committee (OCC) have likely set the stage for a more efficient restructuring process. With over 90% of Ethiopia’s external debt held in the form of a USD 1 billion Eurobond and private creditors holding only about 5% of the total, the complexity of the restructuring discussions is expected to be relatively manageable.
Fitch anticipates that once Ethiopia completes its restructuring process and normalizes relations with the majority of its foreign-currency creditors, it will receive a new LTFC IDR based on a forward-looking assessment of the country’s capacity and willingness to meet its debt obligations.
This positive outlook highlights the significant progress Ethiopia is making in addressing its debt challenges and aligning its economic policies with international standards, potentially paving the way for enhanced economic stability and growth.
