Ethiopia Debt Restructuring: Bondholders Reject Proposal, Seeking Higher Profits
HARARE, Zimbabwe — Ethiopia’s debt restructuring process has hit a snag as bondholders rejected a proposal from the Ethiopian government, demanding higher profits at the expense of the Ethiopian people and bilateral creditors, writes Winston Mwale.
The rejection has raised concerns about the fairness of the current debt restructuring frameworks and their impact on the country's ability to meet its social and economic needs.
Abdurahman Hussien from HESPI stated, "Mounting debt servicing has taken a toll on important social and economic sectors by crowding out limited resources. Public debt accounts for a larger share of the budget allocation than that of education, health, waste water, and energy combined in 2022/23 & 2023/24. Substantial debt relief is required to free up resources to finance health, education and social safety nets."
The Proposed Restructuring
In October 2024, the Ethiopian government proposed a restructuring plan to bondholders that included an 18% haircut on the original principal, repayment of the remaining principal between 2027 and 2031, and a 5% interest rate.
The proposal also included the repayment of missed interest payments from December 2023 and 2024 once the restructuring was agreed.
Despite these terms, which would still result in significant profits for bondholders, they were rejected.
Bondholders' Profit
According to the report, even with the proposed restructuring, bondholders would still make a considerable profit compared to investing in US government debt.
For instance, those who bought bonds at the average price between the start of 2022 and November 2024 (67 cents) would make 38% more profit than if they had invested in US government bonds.
Catherine Mithia of AFRODAD argued that the existing framework overwhelmingly favours creditor interests, effectively marginalising the socioeconomic rights of debtor nations: “The Common Framework is creditor-centric, favouring creditor interests while forcing countries like Ethiopia to make decisions to divert their resources from social protection and public services without real consideration of their human and socio-economic rights. The Common Framework must be replaced with a fair and effective sovereign debt restructuring mechanism that ensures participating countries are not compromising development obligations to their citizens and effectively denying them their socio-economic rights.”
IMF Targets and Debt Sustainability
Ethiopia is currently restructuring its external debt through the G20 Common Framework for Debt Treatments, which uses the IMF to determine the level to which debt should be reduced.
The IMF has set targets for debt indicators, including:
•External government debt service at 14% of government revenue and 10% of exports
•Present value of external debt at 140% of exports
In 2023, the present value of Ethiopia's external government debt was 204% of exports, and it was estimated to rise to 220% by 2025.
Without restructuring, external debt service in 2025 would be 26.3% of revenue and 24.7% of exports.
The IMF also projects that the present value of the debt as a percentage of exports would only drop below the 140% threshold by 2029.
However, this projection relies on high debt payments, which are not currently being made.
Tim Jones, Policy Director at Debt Justice, was particularly pointed in his assessment: “Bondholders rejected an extremely generous deal. It allowed them to still make a profit and required bilateral creditors to be repaid significantly less for debt sustainability targets to be met. Creditor governments need to do far more to make private lenders participate in debt relief, including passing laws in the UK and New York so that hedge funds, banks, and asset managers cannot hold out from fair levels of debt relief.
The Impact of the Restructuring on Ethiopia
The report indicates that if the IMF's debt indicators were met after the restructuring, Ethiopia would be on the threshold between being at a moderate or high risk of debt distress.
This is despite an IMF guidance note that suggests the risk rating should be reduced to at least a moderate risk of external debt distress with space to absorb shocks.
The IMF is breaking its policy by only aiming to reduce debt to the thresholds without leaving any space to absorb shocks.
One shock could increase the present value of the external debt to exports ratio by 40%, the external debt service to exports ratio by 33%, and the external debt service to revenue ratio by 160%.
Comparability of Treatment
One of the key issues in debt restructuring is the comparability of treatment between different creditor groups.
The report argues that if the proposal to bondholders were accepted, the net present value of payments to bondholders from the end of 2022 would be $865 million.
This is only slightly below the 87.7 cents bilateral creditors were due to be repaid on their original, pre-restructured lending.
According to the report, a key principle of debt restructuring should be that creditors are repaid fairly based on the net present value of the debt they are owed, not just the nominal amount.
The proposal to bondholders requires very little net present value reduction from bilateral creditors, who would only need a reduction of $146 million (1.3%) in net present value terms to be comparable with the bondholder terms.
However, if this approach is taken, the report states that restructuring would only account for 5% of the effort to get Ethiopia’s debt down to the IMF threshold.
The rest would come from austerity and export growth.
The report states that the Paris Club and G20 do not define how they assess the comparability of treatment and they do not publish their assessments.
Academic research has found that in practice, official bilateral debt is often "junior" to private sovereign debt, with private creditors typically being paid first and losing less than bilateral official creditors.
Challenges and Options
The report highlights several challenges with the current restructuring approach. It says that the IMF's targets for debt levels and payments do not leave enough space to absorb shocks.
Additionally, the report states that bondholders are demanding even greater profits at the expense of the Ethiopian people and bilateral creditors.
The report suggests that for the restructuring to be compatible with the IMF thresholds and ensure fair treatment for all creditors, several measures are needed:
•Bilateral creditors must accept being repaid significantly less than bondholders
•Bilateral creditors must move most of their payments after 2030, allowing bondholders to be repaid first
•A significant amount of debt reduction must come from austerity in Ethiopia rather than debt relief from creditors
The report also notes that recent restructurings in Ghana and Zambia show that bondholders are often repaid significantly more than bilateral creditors.
For example, in Zambia, bondholders are being repaid 23% more than bilateral creditors.
If this average difference were replicated in Ethiopia, it would mean bilateral creditors would be repaid 78.6 cents for every dollar lent, compared to the 86.5 cents in the proposal to bondholders.
This would increase total debt relief to Ethiopia to $1.332 billion, a 6% reduction in the net present value of the total external debt, but would still leave 80% of the effort in reducing the debt to the IMF threshold to domestic austerity and export growth.
The Social Impact
The debt crisis has significantly impacted Ethiopia's social spending. In 2022/23, debt servicing accounted for 22.3% of the government's budget, while water and energy, education, and health combined accounted for only 19.3%.
In 2023/24, the budget for debt servicing increased to 27.8%, which is 11 percentage points higher than that of water energy and education combined.
This has led to a crowding out of resources for essential social sectors.
The IMF program in Ethiopia includes a focus on reducing the public deficit through tax increases and spending cuts, which could exacerbate the social challenges.
However, the program also includes provisions to create space for priority public spending and strengthening social safety nets.
The Ethiopian government is implementing measures to mitigate the adverse social impact of these reforms, including expanding social safety nets and providing temporary subsidies on food, medicine, and fuel.
Legal and Ethical Considerations
The report raises crucial questions about the legal and ethical aspects of debt restructuring.
It highlights that the current system prioritises creditors’ rights to payment, regardless of the seriousness of the debt crisis or its impact on a country's social and economic rights.
This creditor-priority norm lacks an international legal basis and raises the question of whether it is right to prioritise creditors over a debtor's socioeconomic rights.
The report argues that debtor countries should be allowed to suspend debt servicing commitments to create space for implementing the socio-economic rights of their citizens.
It suggests that under international law, a debtor state can invoke the principle of necessity using socio-economic rights as a debtor's essential interest.
The Way Forward
The report emphasises the need for a more equitable approach to debt restructuring, including debt write-offs and outright cancellation, especially for countries facing persistent debt distress.
It also stresses the need to use up-to-date sustainability indicators that account for climate shocks and sustainable development.
The rejection of the Ethiopian government's proposal by bondholders underscores the challenges of the current debt restructuring framework, highlighting the potential conflict between creditor profits and the welfare of debtor nations.