The International Monetary Fund (IMF) has approved a $3.4 billion loan for Ethiopia over the next four years as part of an economic reform initiative, marking a significant step toward negotiating the restructuring of the country's debt.
This decision enables an immediate release of approximately $1 billion, according to an IMF statement on Monday. The funds are part of the $10.7 billion that Ethiopia, the largest economy in eastern Africa, anticipates receiving from creditors through loans, grants, and debt reprofiling. The IMF emphasized that this program will attract additional external financing from development partners and support the completion of ongoing debt restructuring efforts.
Ethiopia has around $28.4 billion in external debt and has been attempting to restructure its loans since 2021. Progress was hindered by a two-year civil war in the northern Tigray region, which ended in November 2022. The country defaulted on a eurobond payment in December.
“This is a landmark moment for Ethiopia,” said IMF Managing Director Kristalina Georgieva. The approval of this funding program demonstrates Ethiopia’s strong commitment to transformative reforms, she added.
In preparation for the IMF deal, Ethiopia’s central bank announced on Monday that it would allow the birr, the national currency, to trade freely. This step is similar to Egypt’s decision in March to devalue its currency by almost 40%, which facilitated an $8 billion IMF bailout. Following the announcement, the birr dropped 23%, according to rates published by the Commercial Bank of Ethiopia. Additionally, Ethiopia’s 2024 eurobond increased by 0.4 cents to 75.72 cents on the dollar, reaching its highest value in over two years, as reported by Bloomberg.
Earlier this month, Ethiopia’s official creditors committee provided financing assurances to expedite the approval of the new IMF loan. Ethiopia is the fourth country to renegotiate its debt under the Group of 20's Common Framework, which aims to coordinate debt discussions between official, commercial, and private creditors.
Under Prime Minister Abiy Ahmed’s administration, Ethiopia has moved to open up its economy to secure the IMF program, including allowing foreign investment in domestic banks and creating a capital market. This is Ethiopia’s ninth arrangement with the IMF, according to the fund’s website.
The IMF stated that the new program will address economic imbalances, restore external debt sustainability, and lay the foundation for higher, inclusive, and private sector-led growth. The country will gradually phase out fuel and fertilizer subsidies, which are common in emerging economies, as part of its fiscal program.
The IMF projects that Ethiopia’s real gross domestic product will grow by 6.5% in the current fiscal year, which began in July, and accelerate to 8% by 2027-28. Inflation is expected to decrease from 30% to about 10% over the same period, while the external debt-to-GDP ratio will fall from 28% to approximately 23%.
Overall, this new IMF loan program is poised to significantly aid Ethiopia in overcoming its economic challenges and paving the way for sustained growth and stability.
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