A recent visit by the International Monetary Fund (IMF) to Ethiopia concluded without a deal, as Addis Ababa seeks financial assistance to address its significant external debt restructuring needs.
Last December, Ethiopia faced a setback when it couldn’t pay a $33 million bond coupon, marking its entry into Africa’s list of debt defaulters. Earlier in 2023, China, the country’s largest creditor, allowed Ethiopia to defer debt repayments on bonds maturing in the 2023-4 fiscal year.
In November 2023, the Paris Club of international creditors announced a suspension of debt repayments until the end of 2024, contingent upon Ethiopia reaching a preliminary bailout agreement with the IMF by the end of March.
However, the inability to reach an agreement by the deadline raised concerns about Ethiopia resuming debt repayments, potentially leading to a second default. Nonetheless, the Paris Club has extended the deadline for an IMF deal to the end of June.
The IMF reported “substantial progress” during the visit towards determining how it could assist Ethiopia’s economic program, with further discussions scheduled later this month in Washington DC.
Hailemelekot Berhan, a capital markets analyst in Addis Ababa, suggests that the ongoing negotiations reflect Ethiopian policymakers’ reluctance to agree to an IMF deal involving currency reform measures.
Such deals typically entail the introduction of free-floating currency regimes, often leading to significant currency devaluations. This trend, observed in countries like Egypt, can exacerbate inflation by raising the cost of imported goods.
Berhan highlights potential resistance from the government regarding currency liberalization, despite statements from the central bank governor expressing a commitment to market-driven currency valuation and efforts to stabilize interest rates.
Nevertheless, Berhan underscores the importance of an IMF deal for Ethiopia’s economy, citing the country’s dwindling foreign currency reserves and the need for macroeconomic stability.
While acknowledging the short-term challenges associated with financial liberalization, Berhan emphasizes the necessity of implementing economic reforms effectively to foster long-term growth.
