Ethiopia defaulted on a loan payment recently. The country in the Horn of Africa joins Ghana and Zambia on the list of African countries unable to pay their Chinese loans.
Fitch Ratings downgraded the country’s debt to junk status. It says Ethiopia’s plan to restructure its debt in the first quarter of 2024 “may still be optimistic.”
Chinese loans make up about half of Ethiopia’s $28 billion in foreign debt over the past 25 years. Since 2000, Ethiopia has borrowed $13.7 billion from China to build roads, railroads, water systems and telecommunication infrastructure.
Chinese loans to Ethiopia mostly came from the Export-Import Bank of China or the China Development Bank and carry higher interest rates than loans from lenders such as the World Bank or International Monetary Fund. The terms also are confidential, making it difficult for financial experts and international lenders to know the status of loans or default conditions.
Financial analysts say Ethiopia owes about $7.7 billion to foreign governments, most of that to China. It also owes $5.2 billion to private creditors, including $3.2 billion to commercial banks.
Ethiopia has asked the G-20, which includes China, to restructure some of its debt under the G-20’s Common Framework, which coordinates debt relief with public and private lenders. Ghana and Zambia have used it to get some debt relief.
Following that framework, Ethiopia announced in August 2023 that China would let it suspend debt payments that were coming due over the next 12 months. Because Ethiopia’s Chinese loans are shrouded in secrecy, it’s not clear how big those payments were or what happens after the suspension ends in July 2024.
Ethiopia’s two-year war in Tigray coming after the COVID-19 pandemic helped the country to burn through its foreign currency reserves. The war also led to a spike in inflation as the economy weakened.
Despite the end of the Tigray conflict, Ethiopia still faces conflicts in Amhara and Oromia regions that drain its financial capacity.
Ethiopian Finance Minister Ahmed Shide has said that the country avoided taking out commercial loans — the type used by the Export-Import Bank of China and China Development Bank — for the past five years. Such loans typically come with no option for forgiveness and can require lengthy renegotiation to extend the repayment period.
Instead, according to Shide, Ethiopia has focused on concessional loans, which come with lower interest rates than commercial loans, and offer grace periods during which the borrower can stop making payments.
Kenyan economist Aly Khan Satchu said the default on Ethiopia’s $33 million Eurobond payment will stop further borrowing for now.
“Essentially it means no new money is going to be available to them until some resolution is reached,” Satchu said, adding that the Eurobond default is a way for Ethiopia to press its creditors for relief.
“They’re trying to corral everybody to the negotiating table,” Satchu said.
Developing countries owe Chinese lenders at least $1.1 trillion, according to a new data analysis from AidData, more than half of the thousands of loans China has doled out over two decades are due as many borrowers struggle financially.
