Critique of Ethiopia's Debt Assessment

By Karin Strohecker

LONDON (Reuters) – Some World Bank staff have criticized an assessment of Ethiopia's finances conducted with the International Monetary Fund (IMF), questioning whether the analysis behind the country's debt restructuring may be "faulty".

In an internal paper seen by Reuters, World Bank consultant Brian Pinto and chief economist Indermit Gill assess the Debt Sustainability Analysis (DSA), dated July, prepared by the IMF and staff of the International Development Association (IDA). This is the World Bank's fund for the poorest nations.

The authors suggest that, based on the DSA, Ethiopia is facing a short-term liquidity crunch rather than a long-term solvency issue. This is a point of contention between the government and holders of its $1 billion international bond that is currently in default.

"We found that the bondholders have interpreted the DSA correctly, but the DSA itself may be faulty," Pinto and Gill wrote in the paper from earlier this month. "The disagreements about Ethiopia's debt sustainability will be repeated as other countries become debt distressed."

When asked about the paper, a World Bank spokesperson stated, "We generally don’t comment on internal deliberations between the World Bank and the IMF or any of our partner institutions."

Ethiopian State Finance Minister Eyob Tekalign informed Reuters that IMF and World Bank teams had recently revisited the DSA during the latest review of the Fund's loan program, indicating there was no major change to the position.

An IMF spokesperson confirmed that its staff visited Ethiopia in November for the second review of the Fund's loan program, adding that each review includes an update to the DSA, though they did not elaborate on its contents. The spokesperson did not comment on the memo.

Pinto and Gill did not respond to requests for comments.

Tension Between Bondholders and Ethiopian Officials

Bondholders and Ethiopian officials have experienced a tense standoff. At the heart of the debate is whether Ethiopia, as bondholders argue, faces a liquidity crunch that could be addressed by rescheduling debt, or if it has longer-term solvency problems requiring debt writedowns known as haircuts.

The DSA indicated that some export-related indicators showed both liquidity and solvency pressures.

In October, Eyob conveyed to Reuters that writedowns were unavoidable and that the DSA displayed a solvency issue. Investors, however, rejected this assessment and criticized a government proposal for an 18% haircut.

The comments in the paper suggest that some World Bank staff sympathize with the bondholders' views.

"Based on the July 2024 DSA, Ethiopia should be trying to find ways to lengthen debt maturity and increase exports to address its liquidity problem, not asking bondholders to take a haircut," Pinto and Gill wrote.

Financial Context

The report supports longstanding complaints from the private sector about the DSAs and what levels of debt countries can manage, as well as the amounts lenders must write off when a country defaults.

Ethiopia became the third African country to default on its international bonds in as many years in December 2023. Despite the relatively small size of its bond debt—compared to Zambia's $3 billion and Ghana's $13 billion—progress on restructuring has been slow and mired in controversy.

IMF funding often serves as the sole financial lifeline available to countries in a debt crunch, critical for unlocking other financing sources, including World Bank backing. Delays in debt restructuring add further pressure on government finances, businesses, and populations.

Pinto and Gill have long advocated for a change to the Debt Sustainability Framework for low-income nations, which is meant to inform borrowing decisions of poor countries.

This framework necessitates regular joint World Bank and Fund DSAs that analyze a country's debt burden and vulnerabilities over the next decade.

"It is hard not to conclude that Bank-Fund DSAs for Ethiopia have not provided accurate information to markets, nor perhaps to the Ethiopian government," the authors stated.