Ethiopia is intensifying efforts to restructure its $1 billion international bond as part of a broader debt overhaul, facing resistance from investors over potential write-downs, government officials and financial analysts report.
The East African nation, home to 120 million people, initiated its debt restructuring process in early 2021 under the G20 Common Framework initiative. The move came in response to acute foreign currency shortages and sluggish government revenues, exacerbated by a civil war in the northern Tigray region that ended in late 2022.
Ethiopia’s external debt stood at $28.9 billion in March, according to government figures. The International Monetary Fund (IMF) has identified a $3.5 billion financing gap during its recent lending program to the country.
Ethiopian officials have indicated they will seek a 20% write-down on the principal of the $1 billion bond to achieve comparability of treatment with official creditors. This proposal has met with strong opposition from bondholders, who argue it doesn’t reflect Ethiopia’s economic fundamentals.
Kevin Daly, portfolio manager at abrdn, which holds the bond, suggested a potential solution might lie between the government’s proposed haircut and extending the repayment period.
The restructuring process was delayed by the Tigray conflict and slow progress in meeting IMF requirements, including abandoning the currency peg and introducing an interest rate-based monetary policy framework.
On July 29, Ethiopia floated its birr currency, helping secure a $3.4 billion four-year IMF loan program. The birr has since nearly halved in value this year, trading at 103.97 per dollar according to data from Commercial Bank of Ethiopia, the country’s largest lender.
The currency devaluation has led to price hikes on basic commodities. In response, authorities have closed thousands of businesses deemed to have raised prices unjustifiably and increased imports of essential goods.
The IMF has scheduled an unusually rapid series of reviews to monitor the impact of reforms. The first review, focusing on foreign exchange reserves and external debt, is already underway. Subsequent reviews are set for the end of September and December, by which time both the IMF and the Ethiopian government expect to have sealed a restructuring deal.
Ethiopia hopes the restructuring will achieve $4.9 billion in debt relief, citing official creditor proposals, though without specifying a timeframe.
The dispute between Ethiopia and its bondholders centers on whether the country faces a short-term liquidity problem or a longer-term solvency crisis. The IMF’s debt sustainability analysis shows Ethiopia has experienced protracted breaches of several indicators typically used to identify a solvency crunch.
As negotiations continue, the bondholder group has warned that “unduly conservative assumptions, coupled with unambitious fiscal efforts, may lead to protracted restructuring negotiations.”
Ethiopia’s debt restructuring process is being closely watched by international investors and financial institutions, as it could set precedents for other developing nations seeking debt relief under the G20 Common Framework.
Reuters
