Ethiopia’s Bond Rallies with IMF’s $3.4 Billion Economic Reform Support

Ethiopia’s defaulted international bond saw a significant surge following the announcement of a $3.4 billion loan agreement with the International Monetary Fund (IMF).

The IMF’s decision announced on Monday is an opportunity for Ethiopia to restructure its debt and stimulate economic growth.

The immediate impact of this agreement was evident in the financial markets with Ethiopia’s 2024 eurobond climbing 2.23 cents to 77.48 cents on the dollar by Tuesday morning in London.

This increase represents the bond’s highest value since November 2021 and underscores the market’s positive reception to the IMF’s intervention.

The IMF’s $3.4 billion loan is part of a larger financial strategy aimed at securing about $10.7 billion for Ethiopia through a combination of loans, grants, and debt re-profiling.

The IMF highlighted that this program would “catalyze additional external financing from development partners and provide a framework for the successful completion of the ongoing debt restructuring.”

Ethiopia has been grappling with significant economic challenges, including a civil war in the northern Tigray region that only concluded in November 2022.

This conflict severely disrupted the nation’s economic activities and delayed debt restructuring efforts.

Consequently, Ethiopia defaulted on a eurobond payment in December 2022, exacerbating its financial woes.

The IMF’s Managing Director, Kristalina Georgieva, hailed the loan agreement as a “landmark moment for Ethiopia,” commending the country’s strong commitment to transformative economic reforms.

These reforms include the liberalization of the Ethiopian birr, which saw a 23% devaluation on Monday as part of efforts to secure the IMF bailout.

Ethiopia’s central bank announced the liberalization of the birr to allow the currency to trade more freely, echoing similar measures taken by other nations, such as Egypt, to secure IMF support.

The Commercial Bank of Ethiopia reported the birr’s significant drop, reflecting the market’s adjustment to the new policy.

Despite these positive developments, the path to economic stability remains complex. Ethiopia’s total external debt stands at approximately $28.4 billion, and while the IMF program provides a crucial lifeline, the country must navigate the intricate process of debt restructuring with various creditors, including bondholders and commercial lenders.

Samir Gadio, head of Africa strategy at Standard Chartered Plc in London, noted that the restructuring process for countries like Ethiopia often involves a memorandum of understanding with official creditors, followed by agreements with bondholders and other commercial loans.

This multi-step approach has proven to be time-consuming, as seen in other nations like Zambia and Ghana.

Ethiopia’s official creditors committee recently granted the nation financing assurances, facilitating the IMF loan approval.

Ethiopia is now the fourth country to renegotiate its debt under the Group of 20-backed common framework mechanism, which aims to coordinate restructuring talks between various creditors.

In addition to debt management, Ethiopia’s economic reform agenda under Prime Minister Abiy Ahmed includes opening up the economy to foreign investment, particularly in the banking sector, and establishing a capital market.

These initiatives are crucial for fostering a more dynamic and inclusive economic environment.

The IMF’s program also emphasizes addressing macroeconomic imbalances, restoring external debt sustainability, and laying the foundation for higher, inclusive, and private sector-led growth.

Part of this strategy involves gradually unwinding popular but costly subsidies on fuel and fertilizer.

Looking ahead, the IMF projects that Ethiopia’s real gross domestic product (GDP) will grow by 6.5% in the current fiscal year, accelerating to 8% by the 2027-28 fiscal year.

Inflation is expected to decrease from the current 30% to about 10%, while the external debt-to-GDP ratio is projected to decline from 28% to approximately 23%.