Ethiopia will benefit from a $4.9 billion relief from debt repayments after completing a long-awaited restructuring, according to State Finance Minister Eyob Tekalign. This comes as the East African nation hopes to sign agreements with creditor nations in the coming months. Ethiopia, which defaulted on its debt at the end of 2023, aims to restore its financial stability after securing a new International Monetary Fund (IMF) financing program this week.
Eyob explained, “We will sign and finalize with each individual creditor country over the course of the next few months.” This restructuring is expected to provide significant financial relief for Ethiopia. The country’s total external debt was reported at $28.38 billion in March this year, according to finance ministry data.
Prime Minister Abiy Ahmed, during a televised speech on Thursday, outlined recent economic reforms and emphasized the importance of the estimated $200 million savings from restructuring the $1 billion Eurobond. Eyob added that this could be achieved through a “nominal reduction” in the bond’s value as part of the debt overhaul.
The Ethiopian government switched to a market-determined foreign exchange rate earlier this week. This change aimed to close the gap between official and black market rates, not to devalue the currency. The central bank allowed the birr to float freely on Monday, fulfilling a key condition for securing IMF support. The birr has since fallen at least 31.5% against the dollar, now trading at 83.94 per greenback, according to the Commercial Bank of Ethiopia. Some economic analysts have expressed concern that this could lead to a surge in inflation.
Prime Minister Abiy addressed these concerns, explaining that having two separate exchange rates—one at 100 and the other at 50—was dangerous. The goal was to unify these rates. He criticized banks for not unifying the rates quickly enough, stating that their approach was incorrect.
Following Abiy’s comments, banks posted new, weaker rates for the birr, with some quoting it at 90 per dollar, closer to the black market rate of 118 per dollar. This move, while helping Ethiopia secure the IMF deal and funding from other creditors, has raised concerns about its inflationary impact on low-income households.
In response to these concerns, the federal trade ministry has closed over 700 shops for “unjustified price hikes and hoarding” since the new exchange rate came into effect. Several local governments have also taken action against shops raising prices.
Despite these challenges, the government and its creditors believe that liberalizing the foreign exchange market will help the private sector contribute more significantly to the economy and boost long-term growth.
Abiy defended the decision, stating, “There were two markets. One is 100, and the other is 50. So when the gap between the two became wide, it brought many dangers. So what we said, the two should be unified.” He criticized banks for not promptly unifying the rates, asserting that their current approach was incorrect and did not ensure unification.
Following Abiy’s comments, banks adjusted the birr to new, weaker rates, with some quoting it at 90 per dollar, closer to the current black market rate of 118 per dollar. This adjustment was a crucial step in meeting IMF conditions and securing funding from other creditors, including the World Bank. However, concerns about the inflationary impact of this policy on low-income households have led to a crackdown by authorities.
The federal trade ministry announced the closure of more than 700 shops for “unjustified price hikes and hoarding” following the new exchange rate implementation. Additionally, at least two local governments have taken action against shops that raised prices unfairly.
Despite these challenges, the government and its creditors argue that liberalizing the foreign exchange market will help the private sector contribute more significantly to the economy, ultimately boosting long-term growth. The government remains committed to these economic reforms, aiming to stabilize the economy and promote sustainable development.
