The World Bank has announced the approval of $1.5 billion in financing for Ethiopia, marking its first-ever budget support lending to the East African nation. This decision comes as Ethiopia continues its efforts to restructure its long-standing debt and implement significant economic reforms.
Ethiopia, Africa’s second-most populous country, recently secured a four-year, $3.4 billion program from the International Monetary Fund (IMF). This development followed the central bank’s decision to float the birr currency, a critical step in advancing the country’s debt restructuring plans.
The World Bank’s financing package consists of a $1 billion grant and an additional $500 million low-interest credit line. This direct budgetary support aims to facilitate home-grown reforms and help Ethiopia transition to a more inclusive economy, allowing the private sector to play a more substantial role in driving growth.
The World Bank plans to commit around $6 billion in new funding over the next three fiscal years. This support will be focused on backing economic reforms through fast-disbursing budgetary assistance. The financial support is part of a broader $10.7 billion financing package from the IMF, the World Bank, and other creditors, according to Ethiopian officials.
However, this financial aid is contingent upon the Ethiopian government implementing significant economic reforms. One key reform is the liberalization of the foreign currency market. The decision to float the birr has already shown immediate effects, with the currency experiencing a 3% drop against the dollar, trading at 77.13. The birr had remained relatively stable on Tuesday after a sharp 30% decline on the day it was floated.
Ethiopia’s journey to restructure its sovereign debt began in 2021 under the G20 Common Framework initiative. This initiative aims to provide relief to developing nations facing debt crises. However, progress was significantly hindered by a civil war in the northern region of Tigray, which only ended the following year.
The debt restructuring process Ethiopia is undergoing mirrors the experiences of Chad and Zambia, which have successfully completed their debt overhauls under the Common Framework. Ghana, another African country grappling with high debt levels, is also nearing the completion of its restructuring under the same initiative.
Ethiopia’s move towards a market-based foreign exchange rate has been welcomed by its development partners. However, some analysts warn that this shift could lead to increased inflation and higher living costs, particularly affecting the country’s poorest residents.
Beyond its economic challenges, Ethiopia, with a population of 126.5 million, faces other significant issues. The impact of climate change poses a severe threat to the nation, and the post-war reconstruction of Tigray presents additional hurdles that need to be addressed.
The World Bank’s support aims to help Ethiopia navigate these challenges by providing the necessary financial resources to implement critical economic reforms. By fostering a more inclusive economy and encouraging private sector involvement, the hope is that Ethiopia can achieve sustainable growth and improve living standards for its citizens.
