Yonas Biru, PhD
The World Bank and IMF issued a joint statement on September 19, 2025, reaffirming that “Ethiopia faces political, economic, and humanitarian challenges.” The joint statement stressed: “Ethiopia’s debt is assessed to be unsustainable, mainly due to protracted breaches of exports-related external debt indicators. Following a missed Eurobond interest payment in December 2023, the country is in debt distress.” This assessment, part of the Low-Income Country Debt Sustainability Framework (LIC-DSF), highlights Ethiopia’s weak Debt Carrying Capacity (DCC) and classifies it in debt distress after the $33 million Eurobond coupon default.
At first glance, this seems like a clear-eyed assessment. But a closer look shows the problem: the IMF and World Bank are whispering about the smoke while ignoring the fire—and the arsonist who lit it.
How the IMF and World Bank Measure Debt
To understand the joint statement, we need to unpack what they mean by “protracted breaches of exports-related external debt indicators” and “debt distress.”
The IMF uses key indicators to assess a country’s capability to repay its international debts. Since international debts are settled in dollars or other foreign currencies, the two primary debt sustainability indicators are: (1) the Debt-to-exports ratio (total external debt compared to annual export revenues); and (2) the Debt service-to-exports ratio (how much of export earnings are needed to service debt payments each year). Additional metrics, like the Debt service-to-revenue ratio, also factor in under stress tests.
The World Bank and IMF have established standard thresholds for these indicators based on a country’s ability to service its debt. For a country such as Ethiopia the thresholds include a present value (PV) of debt-to-exports threshold of 140% and a debt service-to-exports threshold of 10%. A breach occurs if ratios exceed these levels—e.g., Ethiopia’s PV of debt-to-exports is projected at 180-200%, and debt service-to-exports at 36.6% in the near term without relief. These figures put Ethiopia in breach. The problem is deemed protracted if it persists over several years, as in Ethiopia’s case.
The IMF and World Bank classify countries into four categories based on their debt standing, ranked from good to worst:
- Low risk: No indicators breached.
- Moderate risk: Some stress, but manageable.
- High risk: Indicators breached, debt problems likely.
- In debt distress: The country has already missed payments, is restructuring debt, or is in arrears (a default-like situation).
Because Ethiopia has breached these export-based thresholds for years and then defaulted on the Eurobond coupon in December 2023, the IMF and World Bank concluded the country is officially in debt distress. The report identifies a $10.8 billion financing gap.
The Policy Prescriptions
The joint report provided domestic and international policy recommendations to rectify the distress. On the domestic front, these include improving the functioning of the foreign exchange market (praising recent birr liberalization, which has eased parallel market pressures but contributed to 20% inflation in 2024), central bank reform to strengthen monetary policy, fiscal discipline and revenue mobilization, promoting private sector-led growth and trade diversification, and SOE restructuring to address governance-related risks (e.g., contingent liabilities shocked at 4.5% of GDP, above the standard 2%).
On the international front, it pushes for grants and highly concessional loans (e.g., via the G20 Common Framework, targeting $8.4 billion in relief out of $12.4 billion in external debt) to mitigate the distress, alongside the IMF’s $3.4 billion Extended Credit Facility (ECF) program, which disbursed $250 million in January 2025.
An Assessment that is 5% Right and 95% Mute
Ethiopia’s exports-to-GDP ratio is 5% for the fiscal year 2024/25. The IMF and World Bank joint report is focused on external repayment capacity (especially export earnings). This aligns with the IMF and World Bank’s mandates to promote global financial stability and prevent balance-of-payments crises, ensuring repayment to international creditors like Eurobond holders and bilateral lenders (e.g., China). As a result, the well-being of the debtor country is considered indirectly, rather than as the central criterion.
In the Ethiopian context, this means 95% of the nation’s economic challenges and opportunities—such as ongoing armed conflicts in regions like Amhara and Oromia, governance flaws leading to misallocated spending on SOE-driven “vanity projects”, and domestic hardships like a 27% poverty rate—are relegated to second-tier status.
The report does acknowledge some of these factors: It references the Tigray war (2020–2022) as a historical shock causing a “sharp decline in external financing” and worsening liquidity, while noting “reform fatigue” and governance risks as aggravators. However, these are framed diplomatically as contextual risks rather than central drivers, with limited forward-looking analysis on current instability or policy missteps like financial repression and off-budget borrowing.
This narrow lens, while methodologically rigorous under the LIC-DSF, is disconnected from Ethiopia’s realities, where ethnic tensions, protracted regional wars, widespread corruption, and spending inefficiencies undermine export growth and debt repayment.
The Hard Reality in Ethiopia: The Crisis Beneath the Crisis
Government spending on key sectors has been declining since the 2020 Tigray War. Four indicators highlight this:
- Education: 3.7% of GDP in 2022, projected at ~3-4% for 2025—below UNESCO’s 4-6% benchmark.
- Health: ~3% of GDP in 2021-2022, projected at ~2.5-3% for 2025—far below the Abuja Declaration’s 15% of budget target (Ethiopia’s ~7-8%).
- Gross Fixed Capital Formation(including buildings, machinery, transport, and agricultural assets): ~31% of GDP in 2020, down to 20.5% in 2024, with a similar trend projected for 2025—below the 25-30% aspirational for developing countries.
- Social Protection(pro-poor programs): ~1.6% of GDP in 2020-2022, rising to ~2.8% projected for 2025—still below the 3-5% consensus minimum (excluding health).
In the meantime, the Prime Minister is building a palace with an opulent environ at the cost of $15.3 billion, glamoured up with a waterfall, three artificial lakes, a zoo, and luxury villas. Le Monde has described similar grandiose projects as “pharaonic taken by delusions of grandeur.” To top it off, the President of the Oromo region is spending $1 billion on his expansive mansion, with artificial lakes, dancing fountains, underground parking, and meeting halls.
Furthermore, the PM “bypassed” the Parliament, stating: “I did not come to Parliament with the intention of asking you for money to build it.” He is supposedly mobilizing resources from both local and international sources, with terms and conditions known only to him. This stands in gross breach of one of the most important pillars of the Constitution encapsulated in Article 50, Section 3: “Supreme power of the Federal Government shall reside in the Council of Peoples’ Representatives which shall be accountable to the Ethiopian people.” This includes “Approving general economic, social development policies and strategies” (Article 55, Section 10).
On September 6, 2025, Ethiopia’s Chief of General Staff, Field Marshal Berhanu Jula, inaugurated several key Naval defense facilities, marking a major milestone in the navy’s reestablishment. These include naval headquarters in Addis Ababa, a navy training center in Debre Zeyit, and special operations command HQ southeast of Addis Ababa. Such lavish expenditures are for a landlocked country.
As the IMF report notes, “Aid, being fungible, may ultimately help support wasteful and nefarious expenditures.” The World Bank’s research findings concur. What good is the IMF and World Bank’s advocacy for international grants and highly concessional loans if there is no financial accountability in the country? How can the nation grow its export revenue if the nation’s resources are diverted to the Prime Minister’s vanity projects? Even if exports grow, what assurance do the IMF and World Bank have that export revenues will not end up feeding the Prime Minister’s vanity appetite?
Why the IMF and World Bank Framework Falls Short
Focusing on 5% while ignoring 95% of Ethiopia’s economy is not simply a matter of oversight. The debt sustainability framework is designed to prioritize international financial stability. Its mandate is to ensure countries can service external debt, not to diagnose the political or institutional rot that produces economic collapse.
As a result, the wellbeing of debtor nations enters the analysis only indirectly. When the IMF prescribes fiscal tightening, it is not because it wishes to shrink education budgets—it is because international debt repayment obligations requires it. When the World Bank calls for foreign exchange liberalization, it is not because it resolves conflict—it is because it facilitates external balance.
In Ethiopia’s case, this technocratic focus on repayment capacity means that 95 percent of the crisis—conflict, governance failure, vanity spending—is effectively treated as noise outside the IMF and World Bank debt sustainability model.
The focus on external metrics reflects a creditor bias, prioritizing global stability over tailored solutions for Ethiopia’s unique challenges—conflict, equity, and survival. Without integrating these more explicitly, through rigorous qualitative assessments, the IMF and World Bank risk assessment ends up being a technocratic exercise that whispers about the symptoms while ignoring the root causes.
Where the IMF and World Bank Lack Transparency and Integrity
On July 1, 2025, the World Bank downgraded Ethiopia to an “unclassified” income status, effectively removing it from the Bank’s global income tables. The reason: Ethiopia’s economic statistics are too unreliable to be used for international comparisons. This unprecedented step signals a profound lack of trust in the government’s reported GNI per capita (about $1,020 in 2023) and other foundational data. Out of more than 190 countries, the only other nation in this “unclassified” category is Venezuela.
Just weeks later, on July 19, The Economist published a scathing article, “A Fragile Overhaul,” reinforcing this skepticism. It argued that Ethiopia’s reported GDP growth of 6–7 percent annually is inflated by 2–3 percentage points due to weak methodology, political interference in the Central Statistical Agency, and conflict-related data gaps. Independent estimates put real growth closer to 3–4 percent.
Despite this, the IMF and World Bank’s joint report projects 7.2 percent growth for FY2024/25 and 7.5–8 percent in the medium term—essentially reproducing the government’s questionable numbers. This is not a trivial oversight. It reflects the institutions’ unwillingness to confront deeper governance failures, from the Prime Minister’s $15.3 billion palace project to the Oromo region’s $1 billion mansion. Just as fungible aid has financed wasteful vanity projects, fabricated statistics are now being used to dress up Ethiopia’s policy narrative—with the IMF and World Bank looking the other way.
This is less about error than about institutional incentives. Ethiopia is Africa’s second-largest borrower from the World Bank, after Nigeria. For the Bretton Woods institutions, keeping a major client afloat—and the lending pipeline intact—often outweighs the harder task of demanding transparency and accountability. In doing so, they compromise their own credibility, endorsing doctored statistics while claiming to enforce global standards.
Conclusion
The IMF and World Bank would argue that debt sustainability is a prerequisite for development, and that defaults harm citizens more than temporary austerity. They would point to their advocacy for grants and concessional loans as proof of concern for Ethiopia’s welfare. These claims carry weight. But they miss the bigger truth: a framework that tracks dollar flows while ignoring political firestorms is bound to misdiagnose.
What Ethiopia needs is not only a recalibration of its foreign exchange market or central bank statutes, but a reckoning with the political economy of debt. That means connecting debt relief to governance reform, curbing wasteful vanity projects, and linking fiscal policy to peacebuilding and social investment.
Ethiopia’s crisis cannot be solved by debt metrics alone. A more meaningful approach would integrate economic indicators with political realities and institutional reforms. Until then, the IMF and World Bank will continue to sound alarms about smoke while the fire—and the arsonist—remain untouched.