What to Know About Ethiopia’s Debt Breakthrough

Welcome to FP Free Week. To celebrate America’s 250th birthday, our entire site is completely unlocked this week only. Enjoy the article. Welcome to Foreign Policy’s Africa Brief. The highlights this week: Ethiopia reaches a milestone in its debt relief process, the United States sanctions a major Rwandan gold refinery, and Cape Verde makes history at the FIFA World Cup. Welcome to Foreign Policy’s Africa Brief. The highlights this week: Ethiopia reaches a milestone in its debt relief process, the United States sanctions a major Rwandan gold refinery, and Cape Verde makes history at the FIFA World Cup. After a tumultuous five-year struggle, there are signs that Ethiopia’s debt relief process may finally be nearing its end. On Monday, Addis Ababa announced that it had reached a preliminary deal to restructure its defaulted $1 billion international bond after private creditors threatened to sue the Ethiopian government in U.K. courts. The restructuring has become a test case for the Group of 20’s Common Framework, which is designed to help developing nations unify debt negotiations among traditional Western creditors, non-Paris Club ones such as China, and private lenders. Although Ethiopia’s debt relief process may be settled, it has highlighted divisions between sovereign creditors and private lenders as the two have argued over how to split financial losses—tensions that threatened to derail the steady growth that Ethiopia has seen in recent years. In 2021, Ethiopia became one of four African nations to request a debt restructuring under the G-20 Common Framework amid a two-year civil war in the country’s Tigray region. It sought to restructure at least $13 billion in external loans. No agreements had been made by December 2023, when the economic impact of the civil war led to a $33 million missed payment and Addis Ababa’s subsequent default on the $1 billion bond one year before it was due to be paid back in full. After four years, Ethiopia reached a final agreement with foreign governments last July on restructuring $8.4 billion of bilateral loans, with $3.5 billion in debt relief. But a deal on the $1 billion bond held by private lenders has proved to be more elusive. Ethiopia reached a preliminary agreement with the private holders of the Eurobond in January, but it was blocked by official bilateral lenders, led by China and France, who argued that the terms were too favorable to the private investors and insisted that they take similar losses to those accepted by sovereign governments. In April, Private bondholders threatened to sue Ethiopia, and they rejected a new proposal by the country the following month. The new deal still gives bondholders considerably more money than government creditors—and more than what was on the table in May, said Tim Jones, the policy director of Debt Justice, a U.K.-based organization. Private creditors have “threatened to sue or said they’re actually suing Ethiopia in U.K. courts four times,” he said. Jones argues that legislation is needed to deter creditors from using lawsuits during the debt relief process to achieve more favorable outcomes. “These debts are governed by English law, so the U.K.,” which holds the G-20 presidency next year, “has the power to do that,” he said. Critics argue the nominal debt relief achieved through the convoluted process has stopped more African nations from signing up for the G-20 Common Framework. Most countries on the continent are spending more on servicing foreign debt than on healthcare. “The Common Framework has largely failed; it’s been too slow, private creditors have been able to hold up the process in all cases and demand higher payments, and countries are being left with too high a debt at the end of it,” said Jones. There are still divisions between bilateral and private lenders. But for now, Ethiopia’s process can move forward. Under the new deal, bondholders have agreed to reduce the $1 billion debt by 12 percent to $880 million, repaid in installments by 2029 with an interest rate of 6.15 percent, down from the original 6.25 percent. Private investors will also have the right to buy new Eurobonds issued by Ethiopia of up to $1 billion—and if Addis Ababa does not go through with the bond issue, then it will have to pay investors up to $90 million. Still, finalizing the debt restructuring is a boon to Prime Minister Abiy Ahmed’s overall economic agenda. Since he took office in 2018, Abiy has sought to liberalize the Ethiopian economy, a process that relies heavily on more international cash. Abiy’s government has floated the birr, Ethiopia’s currency, and opened up key industries to foreign competition. Recent economic growth in the country has been driven by surging gold exports and diversification of its coffee exports, which have targeted Asian and Gulf markets—particularly China. Washington appears to support Abiy’s economic program. The United States’ relationship with Ethiopia soured during the

What to Know About Ethiopia’s Debt Breakthrough

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What to Know About Ethiopia’s Debt Breakthrough

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