BRICS Inductee Ethiopia Becomes Third African Country in Three Years to Default on Sovereign Debt

Ethiopia on Tuesday became the third African nation in three years to default on its sovereign debt, following in the unfortunate footsteps of Zambia and Ghana.

Ethiopia’s default was unsurprising, as it has pursued debt relief since 2021. As with many other developing nations, the Wuhan coronavirus pandemic slammed Ethiopia’s finances, followed by the enormous expense and disruption of the brutal civil war against Tigrayan rebels in 2020 and 2021.

Ethiopia has only one international government bond worth about one billion dollars. In early December, S&P Global Ratings downgraded its status to “default” following a missed $33 million payment.

“We view the nonpayment of interest and the statement that the government would not honor its debt service obligations within the stipulated grace period as a default on its external commercial debt,” S&P Global Ratings said at the time.

Ethiopian officials said they could have cobbled together enough funds to make the payment, but they would not do so because they had already requested debt service suspension from other lenders, including China.

The grace period in question elapsed on Tuesday, and as promised, Ethiopia did not make its coupon payment. Due to the Christmas holiday, Friday was technically the last day when payment could have been made, so the default officially occurred at the close of business on that day.

Ethiopia said it wanted to treat all its creditors equally, no doubt mindful of the crisis that engulfed Zambia when it defaulted in November 2020. Zambia played favorites with some bondholders, which annoyed others into rejecting a crucial debt restructuring deal. Zambia was unable to restructure more than $6 billion in loans until June 2023.

Ethiopia is one of several developing nations caught between servicing Western creditors and massive Chinese loans. Ethiopia is a regional focus of China’s Belt and Road Initiative (BRI), which loans huge sums from Chinese banks to finance infrastructure improvements, many of which struggle to generate enough income to repay the loans.

Ethiopia joined the China-dominated BRICS economic bloc in August 2023. China has suspended debt payments from Ethiopia until July 2024, putting pressure on other creditors to follow suit.

Ghana defaulted on most of its $29 billion in external debt in 2022 and restructured much of its debt the following year, although it still struggles to meet its financial obligations. Ghana looked like a major African economic success story until its economy was exposed as a debt-fueled illusion, its currency crashed, and civic order disintegrated in the face of 40 percent inflation.

Ethiopia is the second most heavily populated country in Africa, trailing Nigeria. Its debt default is troubling because of its size and because it could expose deep liquidity problems that will not be easily resolved, even with the pandemic and civil war in its rear-view mirror. 

Ethiopia is one of many developing nations that racked up sovereign debt far beyond its ability to generate tax revenue and make payments. The pandemic hit the shaky financial foundations of these countries hard, and ongoing disruptions like Russia’s war in Ukraine are making it difficult for them to recover.

Developing nations have also been hit hard by the inflation crisis in advanced economies like the United States, as Western inflation pushes up interest rates and makes it hard for Third World countries to finance their debt. 

Ethiopia, like Ghana, accumulated a mountain of debt while trying to make itself look prosperous — and under the Tigrayan-dominated government that ended with the election of current Prime Minister Abiy Ahmed in 2018, a great deal of that borrowed money was lost to embezzlers. 

Abiy’s government might be a bit less kleptocratic, but it has become much more unstable, marked by constant tribal battles in addition to the massive civil war with Tigray. This instability means the Ethiopian central government will have difficulty implementing the reforms demanded by creditors and the International Monetary Fund (IMF) in restructuring proposals.