The International Monetary Fund (IMF) and World Bank have warned that Ethiopia’s debt levels are unsustainable, citing falling foreign exchange reserves and weak export performance. The warning comes in a joint Debt Sustainability Analysis (DSA) published this week, local media reported.

“Ethiopia’s debt is assessed to be unsustainable, mainly due to protracted breaches of exports-related external debt indicators and is based on a weak Debt Carrying Capacity,” said the joint World Bank-IMF report.

According to the DSA, Ethiopia’s ability to service external debt has weakened significantly. The IMF and World Bank noted that the Horn of Afrcia country has been in debt distress since failing to make a Eurobond interest payment in December 2023 and missing several additional obligations by the end of 2024.

Ethiopia’s repayment risks are aggravated by “bunching of debt service in the near to medium term” and by the sharp decline in external financing during and after the Tigray war, the DSA says, calling for “timely implementation of the authorities’ reform agenda and debt relief from external creditors” to alleviate liquidity pressures and “restore debt sustainability.”

The DSA projects that Ethiopia’s economy could expand by an average of 7.4% annually over the next decade under its baseline scenario, but cautions that the outlook is highly vulnerable to currency volatility, import shortages and export gaps.

The report estimates a financing gap of $10.8bn through 2028. According to the institutions, this would be met by about $3.4bn from the IMF, $3.8bn from the World Bank, and roughly $3.6bn in debt relief from private creditors.

Ethiopia has also agreed, under IMF programme conditions, not to take on new non-concessional external borrowing except in limited cases such as the Koysha Hydroelectric Dam, The Reporter (Ethiopia) noted. The IMF and World Bank emphasised in their DSA that debt restructuring, fiscal reforms and export diversification are essential to restore sustainability.