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Ethiopia Enters Default: Causes of Economic Crisis and Challenges in Debt Restructuring

On Tuesday, December 26, Ethiopia officially entered into default, failing to honor the payment of €33 million on its sole international bond. This marks a critical moment for the second most populous country in Africa, now joining Zambia in 2020 and Ghana in 2022 as the third African state to face this challenging situation since the onset of the Covid-19 crisis.

Ethiopia: The Decision and Consequences of Default

In early December, Ethiopia announced its intention to formally declare default, attributing the decision to the economic consequences of the pandemic and the civil war that concluded in November 2022 after two years of conflict. This African state, once considered a “miracle” in the Horn of Africa, now faces significant economic challenges.

The default was anticipated, becoming official when Ethiopia failed to honor the €33 million coupon on its international bond of one billion dollars, issued in 2014 and due in December 2024. This marks the third default in Africa, with significant repercussions for Ethiopia.

Ethiopia: Causes of the Economic Crisis

The reasons behind this financial crisis include the Covid-19 pandemic and the civil war that has disrupted the country for two years. The combination of these factors has created fertile ground for the challenging economic situation that Ethiopia is currently grappling with.

Attempts at Debt Restructuring

To address the debt crisis, Ethiopia sought to renegotiate its obligations through the Common Framework for Debt Treatment, introduced by the G20 to make debt more sustainable for low-income countries. However, negotiations were delayed by the civil war. Only in November of this year did international creditors of Ethiopia, including China, agree to temporarily suspend debt payments.

Ethiopia: Debt Restructuring and Future Prospects

The request for debt restructuring was announced by Ethiopia earlier this month, emphasizing the financial difficulties caused by the combination of pandemic and conflict. However, on December 8, the government declared the failure of parallel negotiations with pension funds and other private sector creditors, while on December 15, S&P Global Ratings downgraded the bond to default, anticipating the inevitable non-payment of the coupon.

Post-Default Challenges and the Role of the International Community

Ethiopia now faces significant challenges as it seeks to recover from this economic crisis. Unfortunately, the default represents a severe blow to a country that was once considered an example of economic growth in Africa. The international community closely watches Ethiopia’s fate as the country seeks solutions to restore financial stability and address the consequences of default.

Conclusions: The Way Forward for Ethiopia

In conclusion, Ethiopia is entering a critical phase in its economic history. Debt restructuring and international community support will be crucial in determining the country’s financial future. As Ethiopia strives to overcome this crisis, the world watches closely, aware of the importance of finding sustainable solutions to ensure economic stability and the well-being of the Ethiopian population.

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