A visit to Ethiopia from the International Monetary Fund (IMF) ended without a deal last week, as Addis Ababa seeks a bailout to support the restructuring of billions of dollars’ worth of external debt.
In December last year, Ethiopia failed to pay a $33m bond coupon and became Africa’s latest debt defaulters. Earlier in 2023, Ethiopia’s largest single creditor, China, allowed the country to suspend debt repayments on bonds maturing in the 2023-4 fiscal year.
In November 2023, the Paris Club of international creditors also announced that it would be suspending debt repayments until the end of 2024. The Paris Club said that this was dependent, however, on Ethiopia reaching a preliminary bailout deal with the IMF by the end of March.
The failure to reach a deal therefore raised fears that Ethiopia would be expected to make debt repayments again, potentially risking a second default, although the Paris Club has now clarified that they are extending their deadline for an IMF deal to the end of June.
The IMF said its team had made “substantial progress” during the visit towards establishing how the IMF could support the authorities’ economic program, and said discussions will continue later this month in Washington DC.
Hailemelekot Berhan, a capital markets analysed based in Addis Ababa, believes that the ongoing talks reflect the fact that Ethiopia’s politicians are reluctant to sign up to an IMF deal that includes currency reform measures.
As has been seen recently in Egypt, for example, IMF deals normally involve the introduction of free-floating currency regimes that usually lead in turn to steep currency devaluations. For countries such as Egypt and Ethiopia, which run sizeable trade deficits, a devalued currency can fuel higher inflation by making imported goods more expensive in local terms.
“An IMF deal is likely to include the need for currency liberalisation and a free-floating Ethiopian birr,” Berhan says. “I think there may be resistance to this from the government side. The governor of the central bank has stated that they are working towards currency liberalisation, has said that the market should determine the value of the birr, and they are currently arranging things such as stabilising the interest rates.”
“However, I think they are fearful about the effects of an IMF deal because we are currently in an inflationary environment and the currency could be slaughtered,” he adds.
Despite these potential effects, Berhan notes that an IMF deal is “critical” for the Ethiopian economy.
“I think the central bank probably has only about three weeks’ worth of foreign currency reserves left. From a macro perspective, an IMF deal is crucial,” Berhan tells African Business. “The Ethiopian government needs money in foreign currency for macro stability, but Ethiopia also cannot afford commercial loans with high interest rates.”
“There’s a delicate balance to play – managing the potential downsides of financial liberalisation in the short-term, but implementing the economic reforms properly so the economy can grow in the long-term.”