The Habesha News Desk
September 2025
The latest joint Debt Sustainability Analysis (DSA) conducted by the World Bank and IMF has delivered a stark assessment of Ethiopia’s economic future. It concludes that the country is already in debt distress and that its obligations are unsustainable without significant restructuring and reform. This finding is not simply a matter of accounting; it reflects the political instability, structural weaknesses, and humanitarian strains that have converged over the past five years.
Ethiopia’s debt crisis is inseparable from its political history. The two-year war in Tigray was devastating, not only in human terms but also in its effect on the state’s finances and credibility. During the conflict, donor confidence evaporated and international partners reduced support, while much of the government’s spending was redirected from development priorities to security needs. Even after the cessation of hostilities, insecurity in Amhara and Oromia has continued to hinder economic activity, weaken tax revenues, and deter foreign investors. Combined with recurring droughts and humanitarian emergencies, the political turbulence has created a cycle where borrowing substitutes for domestic resilience.
The DSA outlines how this has translated into financial strain. Ethiopia’s export earnings have stagnated, making it increasingly difficult to service external debts. Ratios measuring debt relative to exports have breached safe thresholds for years, signaling that the country simply does not generate enough foreign exchange to cover its obligations. Compounding this, the debt service schedule is concentrated in the near to medium term, meaning Ethiopia faces heavy repayment demands without the necessary reserves to manage them. The failure to pay interest on its Eurobond in December 2023 was a dramatic signal of this vulnerability and confirmed Ethiopia’s entry into debt distress.
In response, the government has pledged to pursue reforms under its Extended Credit Facility (ECF) program with the IMF. These reforms include restructuring state-owned enterprises, strengthening the independence of the central bank, and tightening fiscal discipline. Yet reforms alone are insufficient; external debt relief is essential. Here, the G20 Common Framework has become the central platform. Ethiopia’s Official Creditor Committee, formed in 2021, suspended debt service for 2023 and 2024, offering temporary relief. In March 2025, an Agreement in Principle was reached between Ethiopia and the creditors, marking a major step toward formal debt restructuring. A Memorandum of Understanding is expected soon, which will lay out the detailed terms of this arrangement.
If successfully implemented, this agreement could stabilize the situation by reducing debt obligations and closing Ethiopia’s external financing gap. The IMF projects that, under these conditions, Ethiopia’s debt ratios could return below critical thresholds by the fiscal year 2027/28, when the ECF program ends. By then, the country could shift from “in distress” to a more manageable “moderate risk of debt distress.” But this outcome is far from guaranteed.
The underlying causes of Ethiopia’s debt problem are structural. The economy depends heavily on a narrow base of commodities such as coffee, sesame, and gold. The push for industrialization and export diversification has lagged behind expectations, leaving the country vulnerable to global price swings. Meanwhile, the state’s infrastructure-led development model, while delivering dams, railways, and roads, also created a debt overhang that now constrains fiscal space. Weak institutions and limited transparency in monetary and fiscal policy exacerbate the problem, reducing the government’s credibility with investors and citizens alike.
The DSA also highlights risks that could derail even the most carefully designed restructuring plan. Political instability remains a constant threat, with localized conflicts undermining both growth and reform credibility. Climate shocks add another layer of unpredictability, as recurring droughts and floods weaken agriculture and intensify humanitarian costs. Globally, higher interest rates or falling commodity prices could also restrict Ethiopia’s access to credit and worsen its already fragile external position.
In sum, Ethiopia’s debt crisis is not simply about money owed—it is about the sustainability of its development model, the resilience of its institutions, and the confidence of its partners. The World Bank–IMF analysis makes clear that debt relief, while vital, will not by itself guarantee stability. The government must seize this moment to implement credible reforms, build resilience, and diversify its economy. Only then can Ethiopia turn a painful restructuring into an opportunity for renewal.
For the country’s 120 million citizens, the stakes are immense. Whether Ethiopia emerges from this crisis as a nation on the path to recovery or sinks deeper into instability will depend on the choices made in the coming three years.