KEY POINTS
- World Bank staff suggest Ethiopia’s debt analysis may be flawed.
- Ethiopia faces liquidity issues, not long-term solvency problems.
- IMF-backed restructuring stalls amid tensions with bondholders.
A recently surfaced internal memo from World Bank staff has questioned the accuracy of Ethiopia’s Debt Sustainability Analysis (DSA), which underpins the nation’s debt restructuring efforts.
The DSA, conducted jointly by the International Monetary Fund (IMF) and the World Bank’s International Development Association (IDA), was flagged for potentially faulty conclusions.
The memo, authored by World Bank consultant Brian Pinto and Chief Economist Indermit Gill, argues that Ethiopia is primarily dealing with short-term liquidity issues rather than the long-term solvency crisis suggested by the DSA.
This assessment contrasts with the Ethiopian government’s stance and has fueled an ongoing standoff with bondholders.
“We found that the bondholders have interpreted the DSA correctly, but the DSA itself may be faulty,” the memo stated.
Bondholders and Government disagree over debt solutions
Ethiopian officials and bondholders remain locked in tense negotiations. Bondholders argue that Ethiopia’s liquidity crunch could be addressed through rescheduling debt maturities, while the government insists on debt writedowns, including a controversial proposal for an 18 percent haircut.
The World Bank memo aligns with bondholders’ concerns, suggesting that Ethiopia should focus on lengthening debt maturity and boosting exports to resolve its liquidity challenges.
“Ethiopia should be trying to find ways to lengthen debt maturity, not asking bondholders to take a haircut,” Pinto and Gill wrote.
According to Reuters, State Finance Minister Eyob Tekalign, however, reaffirmed the government’s position, noting that recent IMF and World Bank reviews of the DSA have not resulted in significant changes.
Broader implications for debt sustainability frameworks
Ethiopia’s debt crisis highlights broader issues with the Debt Sustainability Framework (DSF) used by low-income countries. The DSF requires regular joint assessments by the IMF and World Bank to evaluate a country’s debt vulnerabilities, but critics argue that these analyses often fail to provide accurate information.
The memo adds weight to calls for reforming the DSF to better inform markets and borrowing nations. Ethiopia, which defaulted on its international bonds in December 2023, has struggled to navigate its debt restructuring, despite the relatively small size of its bond debt compared to countries like Zambia or Ghana.
IMF funding remains critical for Ethiopia, as it unlocks additional financial resources and supports government efforts to stabilize the economy. However, delays in restructuring agreements continue to strain the country’s finances and deepen tensions with creditors.
As the standoff persists, Ethiopia’s debt woes serve as a cautionary tale for other nations grappling with similar challenges.
