Addis Ababa University

College of Business and Economics

School of Commerce

Department of Corporate Finance (Specialty in Investment Management)

Post graduate MSc. Students

Assignment of: Advanced Public Finance and Fiscal Policy

An Assessment of Public Debt: The Case of the Ethiopian Federal

Government

Submission date: 13/06/2025

Contents
Chapter One .................................................................................................................................... 1
1. Introduction ................................................................................................................................. 1
1.1. Background: Ethiopia's Public Debt Landscape .................................................................. 1
1.2. Key Institutions in Debt Management ................................................................................. 3
Chapter Two .................................................................................................................................... 8
2. Analysis of Findings ................................................................................................................... 8
2.1. Data Sources and Collection ................................................................................................ 8
2.2. Analysis of Ethiopia's Public Debt Portfolio ....................................................................... 9
2.2.1. Debt Stock Evolution and Projections .......................................................................... 9
2.2.2. Debt Composition ....................................................................................................... 10
2.2.3. Portfolio Risks: Maturity and Interest Rates ............................................................... 13
2.2.4. Debt Servicing Burden ................................................................................................ 15
2.3. Fiscal Context and Debt Accumulation Drivers ................................................................ 16
2.4. Debt Sustainability Assessment (DSA) ............................................................................. 19
2.5. Economic Implications of Public Debt .............................................................................. 22
Chapter Three................................................................................................................................ 24
3. Conclusions and Recommendations ......................................................................................... 24
3.1. Major Conclusions ............................................................................................................. 24
3.2. Policy Recommendations................................................................................................... 25
Reference ...................................................................................................................................... 29

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Chapter One
1. Introduction

1.1. Background: Ethiopia's Public Debt Landscape

Public debt can play an important role for economic expansion if managed appropriately. It helps
governments to finance essential public projects like infrastructure, human capital, and essential
services. Additionally, governments can use debt to smooth public spending over economic cycles,
which lessens the impact of short-term shocks (Yimer & Geda, 2024). Left unchecked excessive,
or poorly managed public debt accumulation can lead to serious concerns. As an example, high
debt levels may have a "debt overhang" effect, whereby the possibility of future tax increases or
unstable economies deterring private investment. And the allocation of finances toward principal
and interest payment which is kwon as debt servicing may also "crowd out" essential public
spending on development priorities. It’s been shown unmanageable debt loads can, in severe cases,
cause countries to default, face economic collapse, and limited their access to international capital
markets. Separating debt used for productive investments that boost long-term growth potential
from debt used for consumption or wasteful purposes is necessary to assess its overall economic
impact.

looking at Ethiopia’s historical debt accumulation can help us better understand the countries
current public debt states. Starting in early 1990, at the time the national debt reached a peak of
nearly 150 percent of GDP, leaving the Transitional Government heavily indebted after the military
regime ended in 1991. A significant portion of this debt was incurred primarily for defense
spending during the civil war years and contributed little to the country's economic potential. This
burden was too much for the economy to bear without impairing efforts to combat poverty
(Woldeyes, 2021). Recognizing this unsustainable situation, Ethiopia became eligible for
significant debt relief program under the Heavily Indebted Poor Countries (HIPC) initiative, which
reached decision point in 2001 and the completion point in 2004. Which was followed by further
relief under the Multilateral Debt Initiative (MDRI) in 2006. After which Public and publicly
guaranteed (PPG) external debt had dropped to roughly 18 percent of GDP by the middle of 2012
(World Bank, 2018). But in the years following debt relief, public debt rapidly increased again.
Which was largely attributed to the government's adoption of a state-led development paradigm,
particularly under the Growth and Transformation Plans (GTP I, 2010/11-2014/15, and GTP II,

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

2015/16-2019/20). Ten-year plans mostly prioritized large-scale public investments in energy (e.g.,
the Grand Ethiopian Renaissance Dam), transportation (roads, railroads), industrial parks, and the
expansion of state-owned enterprises (SOEs) (Woldeyes, 2021). These projects produced
impressive headline in GDP growth and improvements in some development metrics, such as
access to water and power. these projects were also heavily reliant on borrowing, both domestically
and internationally. To finance these massive projects, there was also a noticeable trend during this
time toward more non-concessional borrowing (NCB), especially by SOEs, frequently with
government guarantees (Mof, 2019). As a result, by 2018, the total public debt has increased from
about 42% of GDP in 2010 to 60%.

Ethiopia’s small export base and strong reliance on agricultural commodities, made it vulnerable
to price fluctuations. The country becomes unable to generate enough foreign exchange to pay for
rising import expenses and debt service payments (World Bank, 2018). The currency rate, which
was widely considered to be overpriced, further hindered export competitiveness (World Bank,
2020). These persistent structural problems together with low domestic revenue mobilization lead
for long term fiscal deficits to be primarily financed by borrowing.

International financial organizations such as the World Bank and the International Monetary Fund
(IMF) began to express worries about Ethiopia's debt sustainability as a result, of these
vulnerabilities. This saw the country's risk rating for external debt distress deteriorating from 'low'
prior to 2015 to 'moderate' between 2015 and 2017 and further escalated to 'high' from 2018
onwards (World Bank, 2018). The transition from post-HIPC sustainability to the current state of
distress was therefore not an abrupt event but rather a gradual erosion of fiscal and external buffers.
The war in Ukraine raised global inflation, particularly for fuel and food imports; internal conflict,
particularly in the Tigray region, diverted resources and undermined international support; severe
droughts affected agriculture and livelihoods; and the COVID-19 pandemic disrupted both
domestic and international trade. These crises burdened public finances, increased the current
account deficit, and depleted already limited foreign exchange reserves.

Due to low reserves and slight drops in institutional assessment scores, Ethiopia's Debt Carrying
Capacity (DCC), a metric used in the IMF/World Bank Debt Sustainability Framework to establish
appropriate debt thresholds, was downgraded from "medium" to "weak" in October 2022 in
response to these growing pressures (IMF, 2025).

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Ethiopia's debt levels were evaluated using lower benchmark thresholds as a result of this
downgrade, which further weakened the sustainability picture.

In late 2023, the debt sustainability failing point. When due to severe foreign cash shortages and
bundled debt service obligations, Ethiopia missed a $33 million coupon payment on its $1 billion
Eurobond, resulting in a formal default in December 2023 (IMF, 2025). The World Bank and IMF
consequently officially declared Ethiopia to be in "debt distress" and its public debt to be
"unsustainable" primarily looking the persistent violations of export-related external debt
indicators, which show serious liquidity and solvency issues (World Bank, 2025). In response,
Ethiopia initiated discussions with its official bilateral creditors, requested debt treatment under
the G20 Common Framework, and negotiated debt restructuring with bondholders and other
private creditors (Debt Justice, 2025). Ethiopia's public debt journey can show us the critical
interplay between development strategy, debt financing, structural economic characteristics, and
external shocks.

Notwithstanding its aspirations, the state-led investment program ultimately failed to be

maintained in the absence of appropriate reforms meant to boost export competitiveness,
productivity, local resource mobilization, and promotion of a greater role for the private sector in
the economy (World Bank, 2025). Due to the lack of these complementary reforms, the debt
accumulated to fund public projects eventually surpassed the nation's capacity to service its debt,
particularly its capacity to attract foreign investment (IMF, 2025). The resulting debt crisis and a
move toward comprehensive macroeconomic reforms under the government's Homegrown
Economic Reform Agenda (HGER), which was supported by the IMF and World Bank and attempt
to address these underlying imbalances (AfDB, 2025).

1.2. Key Institutions in Debt Management

In Ethiopia, managing public debt is not handled by a single agency; it is a collaborative effort
amongst multiple agencies, each with a specific responsibility defined by law. This system is built
around a few key legal tools: the Financial Administration Proclamation No. 648/2009 (later
updated by Proclamation No. 970/2016), the Financial Administration Regulations that go with it,
and a lesser-known but crucial document the Public Debt Management and Guarantee Issuance
Directive No. 46/017, issued by the Ministry of Finance.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

These regulations shape how the country borrows, manages, and guarantees debt. Some of the key
institution and their responsibilities are as follows:

Ministry of Finance (MoF) - Debt Management Directorate (DMD)

Through its Debt Management Directorate (DMD), the MoF is the primary government
organization responsible for managing the total amount of public sector debt. The DMD's mandate
encompasses a wide range of responsibilities meant to ensure responsible debt management
practices consistent with macroeconomic stability.

Core Responsibilities:

• Strategic Planning: to achieve a desired public debt portfolio composition that balance

• Strategic planning is the process of organizing the development and implementation of the
country's Medium-Term Debt Management Strategy (MTDS). The MTDS aims to
establish a desired public debt portfolio composition that balances cost and risk objectives
by directing borrowing decisions over a number of years.

• Sustainability and Risk Analysis: To evaluate the long-term viability of present and
projected debt levels in relation to the nation's repayment capabilities, yearly Debt
Sustainability Analyses (DSAs) are conducted. In order to comprehend the current debt
structure and the possible effects of additional borrowings, the DMD also regularly
evaluates the portfolio and conducts risk analysis, covering market, operational, and
liquidity issues.

• Borrowing Operations: providing input on the terms of potential new loans and
participating in loan negotiations with creditors. It also initiates and participates in debt
reduction and rescheduling negotiations when necessary.

• Debt Servicing: Ensuring timely and accurate principal and interest payments for the
federal government's domestic and foreign debt.

• Loan Administration: Monitoring the execution and distribution of loan agreements for
both foreign and domestic debt. It also supervises the management of on-lending
agreements, whereby the government disburses borrowed funds to other entities (often
state-owned businesses) and keeps track of these entities' repayments.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

• Data Management and Reporting: Maintaining a current, complete, and accurate

database of all public sector debt, including debt from the central government, non-
guaranteed SOEs, and government-guaranteed debt. The Directorate is responsible for
producing and disseminating significant reports to policymakers and stakeholders, such as
the Quarterly Public Sector Debt Statistical Bulletin and the Annual Debt Portfolio
Analysis (DPA). It also provides data and analytical studies to international partners like
the World Bank, the IMF, and credit rating agencies.

• Coordination: Speaking with relevant government organizations, especially the National

Bank of Ethiopia, as well as external stakeholders.

A 2013 World Bank Debt Management Performance Assessment (DeMPA) noted strengths in
Ethiopia's debt management framework at the time, including good coordination between
fiscal and monetary authorities, documented borrowing procedures, and complete debt records
for central government debt and guarantees. However, it also highlighted weaknesses, such as
the lack of a formally documented debt management strategy and inefficiencies in cash
management.

National Bank of Ethiopia (NBE): As the central bank, the NBE plays a critical, albeit distinct,
role relevant to public debt management (National Bank of Ethiopia, 2025). Its key mandates
include:

Monetary Policy: Formulating and implementing monetary policy with the primary
objective of ensuring price stability (National Bank of Ethiopia, 2025). This directly
impacts the domestic borrowing environment through interest rates and liquidity
conditions. Recent reforms have seen the NBE shift towards an interest-rate-based
monetary policy framework, introducing a policy rate (the National Bank Rate - NBR),
Open Market Operations (OMOs), standing facilities for banks, and enhancing the
interbank money market (National Bank of Ethiopia, 2025). A key goal is the elimination
of direct monetary financing of the budget deficit (National Bank of Ethiopia, 2025).

Exchange Rate Management: Formulating exchange rate policy and managing the
country's international reserves (National Bank of Ethiopia, 2025). This is crucial given the
significant share of external debt and the vulnerability to exchange rate fluctuations

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

(National Bank of Ethiopia, 2025). Recent policy shifts aim for a more flexible, market-
determined exchange rate (National Bank of Ethiopia, 2025).

Financial Sector Regulation: Licensing, supervising, and regulating banks and other
financial institutions (National Bank of Ethiopia, 2025). This includes enforcing
regulations like Net Open Position (NOP) limits for banks dealing with foreign exchange
(National Bank of Ethiopia, 2025). The health of the banking sector is vital for the domestic
debt market (National Bank of Ethiopia, 2025).

Fiscal Agent: Acting as the banker and fiscal agent for the government (National Bank of
Ethiopia, 2025). This involves facilitating government transactions, including those related
to debt issuance and servicing, particularly for domestic debt instruments like Treasury
Bills (National Bank of Ethiopia, 2025).

Liability and Asset Management Corporation (LAMC): Established more recently

(around 2021), LAMC was created specifically to address the large stock of domestic debt
accumulated by SOEs (LAMC, 2025). Its primary function is to take over specified SOE
domestic debts from lenders (mainly the Commercial Bank of Ethiopia - CBE), thereby
cleaning the balance sheets of both the SOEs and the lending banks (LAMC, 2025).
Significant amounts of SOE domestic debt (e.g., nearly ETB 400 billion in August 2021)
were transferred to LAMC (LAMC, 2025). LAMC makes repayments on this debt,
utilizing funds such as proceeds from asset sales (e.g., the first telecom license auction)
(LAMC, 2025). Importantly, the debt transferred to LAMC is classified as central
government debt in official statistics and debt sustainability analyses (LAMC, 2025).

While these institutions provide a formal structure for debt management, the escalation of
Ethiopia's public debt to unsustainable levels suggests that, prior to the recent HGER reforms,
there may have been challenges in the practical application of strategic debt management
principles or in ensuring effective coordination across all relevant entities (World Bank, 2025).
The significant accumulation of debt by SOEs, some initially contracted without explicit
government guarantees but posing clear quasi-fiscal risks, points to potential weaknesses in
oversight and risk assessment beyond the central government's direct liabilities (World Bank,
2025). Furthermore, historical reliance on monetary financing from the NBE (National Bank of
Ethiopia, 2025) and the maintenance of an overvalued exchange rate (National Bank of Ethiopia,

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

2025) indicate past policy choices that contributed to macroeconomic imbalances and exacerbated
debt vulnerabilities (National Bank of Ethiopia, 2025).

The establishment of LAMC itself is a corrective measure acknowledging the scale of the SOE
debt problem and the inadequacy of previous mechanisms to contain it (LAMC, 2025). The recent
reforms under the HGER explicitly aim to strengthen institutional capacity, improve policy
coordination, enhance SOE governance, and establish more market-based mechanisms for
monetary and exchange rate policy, reflecting an effort to address these past shortcomings
(Government of Ethiopia, 2025).

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Chapter Two
2. Analysis of Findings

2.1. Data Sources and Collection

This assessment cites a range of publicly available data and research from reliable domestic and
international sources. Primary quantitative data on Ethiopia's public debt stock, composition,
servicing, and portfolio characteristics were primarily obtained from the Debt Management
Directorate's Annual Debt Portfolio Analysis (DPA) reports and Public Sector Debt Statistical
Bulletins. To provide macroeconomic data, fiscal indicators, debt sustainability assessments
(DSAs), and information on recent reforms and program conditionality, the International Monetary
Fund (IMF) released several reports, including Staff Country Reports, Article IV Consultations,
Extended Credit Facility (ECF) review documents, World Economic Outlook (WEO), Fiscal
Monitor databases, and specific DSA reports. The World Bank provided supplementary data and
analysis in the form of historical debt reports, country overview pages, economic updates, joint
IMF-World Bank DSAs, and the Debt Management Performance Assessment (DeMPA) report.
The National Bank of Ethiopia (NBE) released reports that included details on the banking
industry, financial stability, and monetary policy. Insights were also gleaned from reports from
other organizations, such as the African Development Bank (AfDB) and policy think tanks, as well
as scholarly research papers that addressed Ethiopia's debt position and its effects on the economy.

The information gathered includes both qualitative and quantitative data. Time series and cross-
sectional data on debt stocks (in USD and local currency, Ethiopian Birr-ETB), debt as a
percentage of GDP, breakdowns by domestic and external sources, creditor type, currency
composition, maturity profiles (average time to maturity, debt maturing within a year), interest rate
structures, debt service payments, fiscal indicators (revenue, expenditure, balance as a percentage
of GDP), and important macroeconomic variables (GDP growth, inflation, reserves, exchange
rates) are examples of quantitative data.

Official policy statements, explanations of institutional mandates and reforms (such as HGER and
the modernization of the monetary policy framework), IMF/World Bank evaluations of debt
sustainability, scholarly research findings on the relationship between debt and growth, and
analyses of debt restructuring procedures are examples of qualitative data.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

The primary techniques employed in this study's analysis are theme synthesis of the gathered
qualitative data and descriptive statistical analysis of the quantitative data. This process includes
identifying patterns, calculating significant ratios and averages, and comparing indications with
relevant benchmarks, such as DSA thresholds. Assessing debt sustainability requires using the
well-established IMF/World Bank LIC-DSF methodology and applying it to Ethiopia as described
in official DSA reports.

2.2. Analysis of Ethiopia's Public Debt Portfolio

2.2.1. Debt Stock Evolution and Projections

Ethiopia's entire Public and Publicly Guaranteed (PPG) debt stock has seen significant volatility
over the past decade. The government's aggressive public investment program led to a gradual
increase in debt levels following the HIPC/MDRI relief. The total PPG debt peaked in relation to
the size of the economy around FY18–FY19, surpassing 60% of GDP (Woldeyes, 2021).
In recent years, the headline debt-to-GDP ratio has dropped dramatically. According to MoF and
IMF data, total PPG debt dropped from 48.9 percent of GDP at the end of FY22 (June 2022) to
40.2 percent at the end of FY23 (June 2023). Preliminary estimates suggested a further fall to
around 34.4 percent by the end of FY24 (June 2024), with the absolute stock reaching
approximately $68.9 billion.

Table 2.1: Historical and Projected Public Debt Stock (FY20 - FY29)

Fiscal Year Total PPG Debt (USD Million) Total PPG Debt (% GDP)
2019/20 55,096.53 57.2
2020/21 56,385.74 50.5
2021/22 57,381.19 48.9
2022/23 63,329.33 40.2
2023/24 68,860.24 34.4
2024/25 (f) - 45.6
2025/26 (f) - 39.8
2026/27 (f) - 36.9
2027/28 (f) - 34.4
2028/29 (f) - 32.2

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Sources: MoF DPA No. 25, MoF DPA No. 24, IMF ECF 2nd Review Note: Absolute USD figures
for forecast years (f) are not readily available in snippets. FY21 %GDP from. (p) =
preliminary/projected.

Although the debt-to-GDP ratio seems to be declining, this must be interpreted carefully. This
decline happened at the same time that Ethiopia was experiencing serious economic difficulties,
which included a much lower ability to obtain outside funding (low disbursements) and ultimately
led to the debt default and distress classification in 2023. Rather than just reflecting strong
economic expansion or proactive debt reduction, the ratio's decline was greatly impacted by high
nominal GDP growth, which may have been partially caused by high inflation. Consequently, the
decreasing ratio prior to the recent reforms did not always indicate a shift toward sustainability or
an improvement in fundamental repayment capacity.

IMF projections indicate that under the ECF-supported program, the debt-to-GDP ratio will
momentarily improve, rising to 45.6 percent in FY25 before gradually declining to 32.2 percent
by FY29. The impact of the significant exchange rate depreciation in mid-2024 (which raises the
Birr value of current external debt when calculating the ratio to GDP) and new financing inflows
related to the program are likely to be among the factors contributing to this expected short-term
increase.
The expected decline that follows depends on the completion of the HGER reforms, ongoing fiscal
restraint, and the advantages of the ongoing debt restructuring process.

2.2.2. Debt Composition

Understanding the composition of public debt is critical for assessing associated risks. Key
dimensions include the split between external and domestic sources, the types of creditors, and the
currency denomination.

External vs. Domestic Debt: Over the past five years, the composition of Ethiopia's PPG debt has
shifted noticeably towards a greater reliance on domestic sources. While external debt constituted
52.3 percent of the total in FY20, its share fell to 42.3 percent by FY24. Correspondingly, the share
of domestic debt rose from 47.7 percent to 57.7 percent over the same period. As of end-June 2023,
external debt stood at 18 percent of GDP, while domestic debt was 22 percent of GDP.

Table 2.2: External vs. Domestic Public Debt Breakdown (FY20 - FY24)

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Fiscal Year External Debt External Debt Domestic Debt Domestic Debt
(USD Million) (% Total) (USD Million) (% Total)
2019/20 28,827.35 52.3 26,269.18 47.7
2020/21 29,470.83 52.3 26,914.91 47.7
2021/22 27,953.10 48.7 29,428.09 51.3
2022/23 28,249.15 44.6 35,080.18 55.4
2023/24 28,890.38 42.3 39,939.86 57.7
Source: MoF DPA No. 25

This increasing share of domestic debt reduces direct exposure to exchange rate risk but transfers
pressure onto the domestic financial system. Large government borrowing needs can absorb
domestic savings, potentially increasing borrowing costs for the private sector and complicating
the NBE's task of managing liquidity and implementing its new interest-rate focused monetary
policy framework, especially as direct financing from the central bank is phased out (National
Bank of Ethiopia, 2025).

External Creditor Composition: Ethiopia's external debt is predominantly owed to official

creditors. As of end-June 2023, multilateral institutions held the largest share, approximately 54.1
percent, with the World Bank's IDA accounting for about 41.7 percent of total PPG external debt,
followed by bilateral creditors at 27.6 percent. Non-Paris Club bilateral creditors, particularly
China, are significant within this category. Private creditors held a smaller share, around 8.3
percent, combining non-official creditors at 4.1 percent and commercial banks/suppliers from 2020
data, including the $1 billion Eurobond issued in 2014 and other commercial loans, often to SOEs.

Table 2.3: External Debt Creditor Composition (End-June 2023 Estimate)

Creditor Category Share (%) Key Creditors/Components

Multilateral ~54.1 World Bank (IDA: ~41.7%), AfDB, IMF, EU, others
Bilateral ~27.6 Non-Paris Club (China, Saudi Arabia, India), Paris Club
Private/Commercial ~8.3 Eurobond (~4.1% non-official), Commercial Banks, Suppliers
Sources: Calculated/Synthesized from MoF DPA No. 24, IMF Staff Report, AfDB Note Note:
Shares are approximate based on available data points.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

The majority of Ethiopia's external debt has always been concessional. However, during the GTP
eras, borrowing from non-concessional sources increased significantly, primarily to finance SOE
projects. Recent funding, particularly from IDA and under the IMF ECF structure, aims to restore
a higher level of concessionally. The variety of creditors, particularly the Eurobond and other
private lenders in addition to official bilateral creditors (like China, which is not a member of the
Paris Club), significantly complicates the current debt restructuring process. Ethiopia is requesting
treatment under the G20 Common Framework, which primarily arranges for official bilateral
creditors and requires private creditors to receive the same treatment, leading to complex parallel
negotiations. The bondholders' rejection of an initial restructuring proposal serves as an example
of these challenges.

Currency Composition: The currency composition of the debt portfolio is a key determinant of
exchange rate risk. As of June 2024, Ethiopia's total public debt portfolio (combining external and
domestic converted to USD) showed significant exposure to foreign currencies (Ministry of
Finance, 2025). The Ethiopian Birr (ETB) naturally accounted for the domestic portion (around
57.7 percent). For the external portion (42.3 percent), the dominant currencies were the US Dollar
(USD) and the IMF's Special Drawing Rights (SDR), followed by the Euro (EUR) and smaller
shares of others like the Chinese Yuan (CNY) (IMF, 2025). Specifically, within the external debt
portfolio as of June 2023, USD accounted for 46.1 percent, SDR for 44.0 percent, and EUR for
6.1 percent.

Table 2.4: Public Debt Currency Composition (End-June 2024 Estimate)

Currency Share of Total Public Debt (%) Notes

ETB ~57.7 Domestic Debt
USD ~19.4 Approx. 45.8% of External Debt
SDR ~18.5 Approx. 43.8% of External Debt
EUR ~2.8 Approx. 6.6% of External Debt
Others ~1.6 Approx. 3.8% of External Debt
Source: Calculated based on Domestic/External split and External Currency Composition from
MoF DPA No. 25 Shares are approximate.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Source: MoF DPA No. 25.

While significant exposure to foreign currency exists, the MoF assesses that the currency
composition of the external debt aligns reasonably well with the currency composition of the
country's foreign exchange reserves and earnings, potentially mitigating some mismatch risk.15
However, given the volatility of the Birr and low levels of reserves, exchange rate fluctuations
remain a major source of vulnerability.

2.2.3. Portfolio Risks: Maturity and Interest Rates

The structure of the debt portfolio in terms of maturity and interest rates reveals further risks.

Maturity Profile: Ethiopia's external debt generally has a long maturity profile, particularly for
the central government. As of June 2024, the Average Time to Maturity (ATM) for total public
external debt was 13.5 years, with central government external debt having an ATM of 14.05 years.

However, external debt contracted by SOEs has a significantly shorter maturity, with an ATM of
around 5.9 years. Domestic debt also has a shorter maturity profile, with an overall ATM of 7.4
years.

The volume of short-term maturing debt, which represents refinancing risk, is a major worry.
Relatively few shares in the external portfolio matured within a year (5.3 percent in FY23, 8.8
percent for CG external debt in FY24). Nonetheless, the share of the domestic portfolio that
matured in a year was extremely high (53.7 percent in FY23), primarily due to the short-term
Treasury bill stock. Including T-bills that are anticipated to be rolled over, the total amount of
principal payments owed on the public debt in FY25 is $8.2 billion, or 13% of the total stock. The
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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

principal payment that is due, excluding T-bills, is less, at $1.98 billion (3 percent of total stock).
However, a major contributing cause to the recent liquidity problems has been noted as the bunc
hing of debt service obligations, particularly the Eurobond expiring in December 2024 (albeit cur
rently under restructuring).

The high proportion of domestic debt that matures in less than a year is a significant barrier to
refinancing. Despite the fact that T-bills are typically rolled over, the constant need for refinancing
makes the government susceptible to shifts in market sentiment and liquidity conditions. As the
NBE moves away from direct financing and toward market-determined interest rates, any
disruption could make rollovers difficult or unaffordable, which would impact government cash
flow. Interest rate structure: The risk of interest rate fluctuations is determined by the proportion
of debt that is committed at variable rates. This risk appears to be manageable given that a sizable
amount of Ethiopia's central government's external debt is concessional and most likely fixed-rate.
However, a large proportion (around 75 percent in FY23) of SOEs' external debt carries variable
interest rates. This makes SOEs particularly vulnerable to increases in global interest rates, which
could unexpectedly raise their debt servicing costs.

The Average Time to Re-fixing (ATR), which measures sensitivity to interest rate changes, reflects
this: ATR for CG external debt was high (12.9 years in FY24), while for SOE external debt it was
very low (1.5 years).

Given the historical financial difficulties of some SOEs that necessitated debt transfers to LAMC
(Ministry of Finance, 2025), this interest rate exposure represents a potential contingent liability
for the government. For domestic debt, around 30 percent was estimated to be floating rate in
FY23.

Table 2.5: Key Debt Portfolio Risk Indicators (End-June 2024)

Indicator Total Public Central Gov. SOE External Central Gov.

Sector Debt External Debt Debt Domestic Debt
ATM (Years) 11.47 13.68 5.97 7.4
Debt Maturing in 10.30 (incl. T- 8.8 14.0 High (see text)
1 Year (%) bills)

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

ATR (Years) 9.30 12.85 1.55 7.4

Debt Refixing in 39.0 0.5 20.5 38.0
1 Year (%)
Share Variable - Low High (~75% ~30% FY23
Rate Debt (%) FY23)
Sources: MoF DPA No. 25, MoF DPA No. 24 Note: Some figures adapted or inferred from
text/tables.

2.2.4. Debt Servicing Burden

The sustainability of public debt ultimately depends on the government's capacity to service it
without compromising essential functions or future growth. Key indicators compare debt service
payments (principal and interest) to measures of repayment capacity, such as exports (for foreign
exchange generation) and government revenue (for fiscal capacity).

Total public debt service payments have been substantial. In FY23, total service amounted to $2.68
billion, with $1.79 billion for external debt and $0.89 billion for domestic debt. In FY24, total
service was $2.21 billion, comprising $1.27 billion external and $0.94 billion domestic.

Crucially, Ethiopia has persistently breached key external debt service thresholds associated with
its 'weak' debt carrying capacity classification under the IMF/World Bank LIC-DSF:

• External Debt Service-to-Exports Ratio: The threshold for weak DCC is 10 percent. Ethiopia's
ratio was approximately 22 percent in FY23 and 11.3 percent in FY24, both exceeding the
threshold. Historical DSAs also show breaches or near-breaches even under baseline scenarios in
previous years.

• External Debt Service-to-Revenue Ratio: The threshold for weak DCC is 14 percent. DSAs
indicate that this ratio has also been breached, particularly under stress tests, signaling severe fiscal
pressure from external debt payments.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Table 2.6: Debt Service Payments and Ratios (FY23 - FY24)

Fiscal Year Total Debt External Debt Domestic Ext. Debt Ext. Debt
Service Service (USD Mn) Debt Service Service/Exports Service/Revenue
(USD Mn) (USD Mn) (%) (%)
2022/23 2,684.7 1,790.1 894.6 ~22.0 Breached
(Specific % N/A)
2023/24 2,208.3 1,265.3 943.0 11.3 Breached
(Specific % N/A)
Sources: MoF DPA No. 24, MoF DPA No. 25, IMF/WB DSA info.Note: Revenue ratio status based
on DSA findings; specific percentage values not consistently available in snippets.

The simultaneous and persistent breach of both export-related and revenue-related external debt
service thresholds points to a profound crisis. It signifies not only a shortage of foreign exchange
earnings to meet external obligations (an external liquidity problem) but also an inability of the
government budget to accommodate these payments without severely squeezing other
expenditures (a fiscal liquidity problem). This dual constraint underscores the depth of the financial
distress leading up to the 2023 default.

Furthermore, academic studies focusing on Ethiopia confirm the detrimental economic impact of
high debt servicing burdens. Research consistently finds that higher debt service payments
negatively affect economic growth in both the short and long term, primarily by diverting resources
that could otherwise be channeled into productive public and private investment.

2.3. Fiscal Context and Debt Accumulation Drivers

Ethiopia's public debt situation cannot be understood in isolation from its broader fiscal context.
Trends in government revenue, expenditure, and the resulting fiscal balance are fundamental
drivers of debt dynamics.

Government Revenue

A defining characteristic of Ethiopia's fiscal landscape has been chronically low domestic revenue
mobilization. General government revenue (including grants) as a percentage of GDP has
consistently remained low, often falling below 10 percent in recent years.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

For instance, it stood at 8.1 percent in FY22 and 7.9 percent in FY23, with a preliminary figure of
7.3 percent for FY24. World Bank data on tax revenue specifically shows a figure as low as 3.9
percent of GDP in 2023. This low level of revenue generation is insufficient to finance the
government's expenditure needs and development aspirations.

Recognizing this critical constraint, the HGER program, supported by the IMF ECF arrangement,
places strong emphasis on boosting domestic revenue through measures like implementing VAT
and excise tax reforms and improving tax administration. Projections under the program target a
gradual increase in the revenue-to-GDP ratio, reaching 11.4 percent by FY29.

Government Expenditure

On the expenditure side, Ethiopia pursued an expansionary fiscal policy for much of the past two
decades, driven by the public investment-led growth strategy under the GTPs (Ministry of Finance,
2025). Government expenditure as a share of GDP averaged 15.4 percent over the decade leading
up to FY23.

However, facing mounting fiscal pressures and debt concerns, expenditure has seen significant
compression in recent years, falling from 12.7 percent of GDP in FY22 to 10.8 percent in FY23,
and a projected 9.5 percent in FY24.

While necessary for fiscal consolidation, this compression can impact the delivery of essential
public services and investments. A key challenge moving forward is to create fiscal space for
critical social spending, particularly scaling up the Productive Safety Net Program (PSNP) to
protect vulnerable populations during the reform period, and for development-oriented capital
spending, while maintaining overall fiscal prudence. IMF program projections show expenditure
rising again moderately to around 13.4 percent of GDP by FY29, reflecting anticipated increases
in revenue allowing for higher spending within a sustainable framework.

Fiscal Balance

The persistent gap between expenditure and low domestic revenue has resulted in chronic fiscal
deficits. The overall fiscal balance (including grants) registered a deficit of 4.2 percent of GDP in
FY22, narrowing to 2.6 percent in FY23 and a projected 2.0 percent in FY24. These deficits have
been a primary driver of public debt accumulation over the years.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

The IMF program targets continued fiscal consolidation, aiming to keep the overall deficit
contained, projected at around 1.5-2.0 percent of GDP in the medium term.

Table 2.7: Key Fiscal Indicators (% GDP) (FY22 - FY29)

Fiscal Year Total Revenue & Total Fiscal Balance

Grants Expenditure (incl. grants)
2021/22 8.1 12.7 -4.2
2022/23 7.9 10.8 -2.6
2023/24 (p) 7.3 9.5 -2.0
2024/25 (f) 8.5 11.6 -1.7
2025/26 (f) 9.8 12.3 -2.0
2026/27 (f) 10.8 13.2 -1.9
2027/28 (f) 11.2 13.4 -1.7
2028/29 (f) 11.4 13.4 -1.5
Sources: IMF ECF 2nd Review, World Bank MPO. (p) = preliminary/projected, (f) = forecast.

Drivers of Debt Accumulation: Synthesizing the analysis, the key drivers behind Ethiopia's
public debt accumulation and subsequent crisis include:

1. Structural Fiscal Imbalance: Ambitious development plans necessitating high public

expenditure consistently outstripped the government's capacity to raise domestic revenue,
creating persistent fiscal deficits financed by borrowing (World Bank, 2025). This
fundamental gap between spending needs and revenue generation represents the core
structural vulnerability

2. Public Investment Drive: Large-scale infrastructure projects under the GTPs, while
contributing to growth, were often financed with debt and sometimes suffered from cost
and time overruns, reducing their efficiency and return on investment (Ministry of Finance,
2025).

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

3. SOE Borrowing: State-owned enterprises borrowed heavily, including on non-

concessional terms, to implement major projects. This borrowing, whether explicitly
guaranteed by the government or not, added significantly to the public sector's overall debt
burden and associated risks.

The significant role of SOEs, particularly their non-guaranteed debt initially, represented a
substantial quasi-fiscal risk that wasn't fully transparent in central government accounts until later
consolidation efforts (like the creation of LAMC), effectively masking the true extent of public
sector liabilities for a period (Ministry of Finance, 2025).

4. External Shocks: The economy's vulnerability was amplified by multiple external and
internal shocks (COVID-19, conflict, drought, global inflation) that suppressed revenues,
increased spending needs, and strained foreign exchange reserves (IMF, 2025).

5. Exchange Rate Dynamics: The depreciation of the Ethiopian Birr, particularly the
significant adjustment in mid-2024, increases the local currency value of the existing stock
of external debt, contributing to fluctuations in the Debt/GDP ratio.

2.4. Debt Sustainability Assessment (DSA)

The formal assessment of Ethiopia's debt situation is conducted using the Joint World Bank-IMF
Debt Sustainability Framework for Low-Income Countries (LIC-DSF) This framework compares
various debt burden indicators against indicative thresholds that vary based on a country's assessed
Debt Carrying Capacity (DCC).

Current Assessment and Historical Context

As of late 2023 and into 2025, the official IMF/World Bank assessment classifies Ethiopia's public
debt as 'unsustainable' and the country as being 'in debt distress' (IMF, 2025). This represents the
culmination of a deteriorating trend over the past decade, moving from 'low risk' (pre-2015) to
'moderate risk' (2015-17) and then 'high risk' (2018-23) before entering distress.

Debt Carrying Capacity (DCC)

The LIC-DSF categorizes countries into three DCC levels (strong, medium, weak) based on a
Composite Indicator (CI) score (IMF, 2025). The CI incorporates factors like the World Bank's
Country Policy and Institutional Assessment (CPIA) score, real GDP growth, remittances, import

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

coverage of reserves, and world growth. Ethiopia's CI score has declined, leading to a downgrade
from 'medium' DCC (CI score 2.8 in 2019) to 'weak' DCC (CI score 2.31 currently) in October
2022.

This downgrade is critically important because it lowers the indicative thresholds against which
Ethiopia's debt burden indicators are measured, making it harder to achieve a sustainable rating.

The downgrade reflected factors such as low foreign exchange reserves and recent modest declines
in the CPIA score, highlighting how broader macroeconomic health and institutional quality
directly impact debt sustainability assessments

Indicators vs. Thresholds

Under the 'weak' DCC classification, Ethiopia's debt indicators show protracted breaches of several
key thresholds, indicating both liquidity and solvency pressures:

• Present Value (PV) of Debt-to-Exports Ratio: The threshold is 140 percent. Ethiopia's ratio
has persistently exceeded this level.
• Debt Service-to-Exports Ratio: The threshold is 10 percent Ethiopia's ratio has consistently
breached this, indicating severe difficulty in generating sufficient export earnings to cover
external debt payments.
• Debt Service-to-Revenue Ratio: The threshold is 14 percent. This indicator has also been
breached, highlighting the strain external debt service places on the government's budget.
• PV of Debt-to-GDP Ratio: The threshold is 30 percent. This indicator has generally
remained below the threshold, suggesting that the overall debt level relative to the size of
the economy is less critical than the external financing constraints.

Table 2.8: IMF/WB DSA Key Indicators vs. Thresholds (Weak DCC)

Indicator Threshold Recent/Projected Status

(Weak DCC) (Baseline/Post-Reform)
PV of Debt-to-GDP Ratio 30% Below Threshold
PV of Debt-to-Exports Ratio 140% Protracted Breach
Debt Service-to-Exports Ratio 10% Protracted Breach

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Debt Service-to-Revenue 14% Protracted Breach

Ratio
Source: IMF/WB DSA findings

Vulnerability to Shocks

Stress tests conducted as part of the DSA consistently reveal Ethiopia's extreme vulnerability to
adverse shocks. The most significant vulnerabilities are to export shocks (a sharp decline in export
earnings) and exchange rate depreciation shocks. Under such scenarios, all external debt risk
indicators breach their thresholds by significant margins and for protracted periods. For instance,
one analysis indicated that a single shock could increase the PV of external debt-to-exports ratio
by 40 percent, the external debt service-to-exports ratio by 33 percent, and the external debt
service-to-revenue ratio by a staggering 160 percent. This high sensitivity underscores the fragility
of Ethiopia's external position.

Path to Sustainability

Restoring debt sustainability is a central objective of the HGER and the IMF ECF program. The
goal is to bring Ethiopia's risk of debt distress back to 'moderate' by the end of the program period
(around 2028). Achieving this requires a combination of factors:

1. Successful Debt Treatment: Obtaining significant debt relief through the G20 Common
Framework and comparable treatment from private creditors is essential. The IMF
estimates that debt relief required during the program period (FY25-FY28) amounts to
approximately $3.5 billion to close balance of payments financing gaps. The restructuring
must be deep enough to bring the three currently breached external debt indicators
(PV/Exports, Service/Exports, Service/Revenue) below their respective weak DCC
thresholds by the program's end.

2. Sustained Reform Implementation: Diligent implementation of the comprehensive reform

agenda under HGER is critical. This includes fiscal consolidation (revenue mobilization,
expenditure control), moving to and maintaining a market-clearing exchange rate,
modernizing monetary policy to control inflation, strengthening SOE governance and
financial discipline, and implementing structural reforms to boost exports and private
investment.
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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

However, even if these conditions are met, the path to sustainability may be precarious. Some
analysts suggest that merely bringing the debt indicators back to the threshold levels for 'moderate'
risk might not provide sufficient buffers or "space to absorb shocks," potentially leaving Ethiopia
vulnerable to falling back into high risk or distress if further adverse events occur. This implies
that the required adjustment and debt relief might need to be even more substantial than currently
targeted to ensure a truly resilient recovery.

2.5. Economic Implications of Public Debt

Beyond the immediate fiscal and external financing pressures, Ethiopia's high level of public debt
and the associated servicing burden have significant implications for its broader economic
performance and development prospects.

Academic Findings on Debt-Growth Nexus

Empirical research specific to Ethiopia generally points towards a complex, often detrimental,
relationship between public debt and economic growth (Academic Research, 2025):

• Short-Term vs. Long-Term Effects: Several studies using Autoregressive Distributed Lag
(ARDL) modeling find that while public debt accumulation might provide a short-term
boost to investment and growth, it tends to hinder economic growth in the long run. The
quality and efficiency of the investments financed by debt appear critical in determining
the net long-term outcome.

• Negative Impact of Debt Servicing: A consistent finding across studies is the negative
impact of debt servicing on economic growth, in both the short and long term. Higher debt
service payments divert resources away from potentially more productive uses, such as
public investment in education, health, and infrastructure, or private investment.

• Threshold Effects: Some research attempts to identify threshold levels beyond which
public debt becomes detrimental to growth in Ethiopia (Academic Research, 2025). One
study suggests potential thresholds around 66.75 percent of GDP or 36.27 percent of Gross
National Income (GNI) (Academic Research, 2025). However, methodologies and findings
vary and should be interpreted cautiously.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

• External vs. Domestic Debt: Some analyses differentiate between external and domestic
debt, with findings suggesting potentially different impacts (Academic Research, 2025).

Transmission Channels

The mechanisms through which high public debt can impede Ethiopia's economic growth include:

• Debt Overhang: As public debt accumulates to high levels, economic agents (investors,
businesses) may anticipate future tax increases, macroeconomic instability, or reduced
government capacity to support growth.

• Crowding Out: High debt service obligations absorb a significant portion of government
revenue, reducing the fiscal space available for crucial public investments in physical
infrastructure and human capital.

• Macroeconomic Instability: High debt levels can contribute to broader macroeconomic

instability. In the past, reliance on monetary financing to cover deficits fueled inflation.

• Reduced Policy Flexibility: A heavy debt burden constrains the government's ability to
implement counter-cyclical fiscal policies or respond effectively to new economic shocks.

Impact on Development Goals

The debt crisis and the necessary austerity measures pose challenges to Ethiopia's long-term
development aspirations, including poverty reduction and the goal of reaching lower-middle-
income status by 2025. High inflation and economic disruptions have eroded real incomes, and
poverty rates are estimated to have increased in recent years. While the HGER aims to foster
inclusive and sustainable growth driven by the private sector, the near-term adjustment period
involves difficult trade-offs and requires careful management, including strengthening social
safety nets to mitigate the impact on vulnerable populations.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Chapter Three
3. Conclusions and Recommendations

3.1. Major Conclusions

This assessment of the Ethiopian Federal Government's public debt situation leads to several major
conclusions:

1. Unsustainable Trajectory and Distress: Ethiopia's public debt escalated significantly

over the past decade, driven primarily by a state-led development model reliant on large-
scale, debt-financed public investments. This occurred against a backdrop of structural
weaknesses, including a narrow export base, chronically low domestic revenue
mobilization, and an overvalued exchange rate. Compounded by severe external and
internal shocks, this trajectory proved unsustainable, culminating in the country entering
debt distress in late 2023 following a default on its Eurobond obligations. The official
IMF/World Bank assessment confirms the debt is unsustainable.

2. Significant Portfolio Risks: The current public debt portfolio embodies substantial risks.
Key external debt sustainability indicators related to export earnings and government
revenue remain in protracted breach of thresholds applicable to Ethiopia's 'weak' debt
carrying capacity, signaling severe external and fiscal liquidity constraints. The portfolio is
highly vulnerable to export and exchange rate shocks. Furthermore, the domestic debt
component carries significant refinancing risk due to its short maturity structure, while
SOE external debt exhibits considerable interest rate risk due to a high share of variable-
rate loans.

3. Reform and Restructuring Imperative: The government's Homegrown Economic

Reform Agenda (HGER), supported by an IMF Extended Credit Facility (ECF)
arrangement, represents a necessary and comprehensive effort to address the root causes
of the crisis. Key elements include fiscal consolidation, revenue enhancement, monetary
policy modernization, exchange rate liberalization, SOE reform, and measures to boost
private sector activity. Concurrently, securing substantial debt relief through the G20
Common Framework and parallel negotiations with private creditors is indispensable for
restoring sustainability.

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

4. Challenging Path to Sustainability: While corrective measures are underway, the path
back to a 'moderate' risk of debt distress is narrow and challenging. Success hinges on the
diligent and sustained implementation of ambitious reforms and the timely conclusion of
debt restructuring negotiations that provide sufficient relief. Even if program targets are
met, Ethiopia may remain vulnerable to future shocks, suggesting that achieving a truly
resilient debt position requires building significant fiscal and external buffers beyond
merely meeting minimum thresholds.

5. Institutional Capacity and Coordination: Formal institutions for debt management exist
within the Ministry of Finance (DMD) and the National Bank of Ethiopia. However, the
emergence of the debt crisis indicates historical challenges in strategic foresight, risk
management implementation, particularly concerning SOE borrowing, and overall fiscal-
monetary policy coordination. Recent reforms aim to strengthen these areas, which will be
crucial for preventing future crises.

6. Economic Growth Implications: High public debt levels and, more consistently, the
burden of debt servicing have acted as a drag on Ethiopia's long-term economic growth
potential through channels such as crowding out investment and creating macroeconomic
uncertainty. While past debt-financed investments may have provided short-term boosts,
the long-term costs associated with the debt burden appear significant, hindering progress
towards national development goals like poverty reduction and achieving middle-income
status.

In essence, Ethiopia faces a critical juncture. Corrective actions are being taken, but sustained
commitment to deep structural reforms, successful navigation of complex debt restructuring, and
a fundamental shift towards a more diversified, private-sector-driven, and export-oriented growth
model are required to exit the current crisis and establish a foundation for durable macroeconomic
stability and sustainable development.

3.2. Policy Recommendations

Based on the analysis of Ethiopia's public debt situation, the following policy recommendations
are proposed, targeting key areas of debt management, fiscal policy, structural reforms, and
macroeconomic coordination:

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

Debt Management Strategy:

• Enhance and Implement the MTDS: Regularly update Ethiopia's Medium-Term Debt
Management Strategy (MTDS), ensuring it is based on rigorous cost-risk analysis
reflecting current market conditions and lessons from the crisis. Focus strategically on
lengthening the maturity profile of domestic debt to mitigate refinancing risk and carefully
manage the composition of new external borrowing.15 Ensure effective implementation and
monitoring of the strategy.

• Strengthen Debt Management Capacity: Continue building technical capacity within the
MoF's Debt Management Directorate (DMD) for sophisticated portfolio risk analysis
(refinancing, interest rate, currency risks), debt sustainability modeling, and negotiation
skills (Ministry of Finance, 2025). Develop and institutionalize robust frameworks for
managing contingent liabilities arising from SOEs and potential Public-Private
Partnerships (PPPs) (World Bank, 2025).
• Adhere to Prudent Borrowing Practices: Strictly adhere to the zero non-concessional
borrowing (NCB) ceiling under the current IMF program framework (IMF, 2025).
Prioritize maximizing concessional financing from multilateral and bilateral partners
(World Bank, 2025). Any future non-concessional borrowing should be subject to rigorous
scrutiny regarding its economic returns, alignment with the MTDS, and impact on debt
sustainability (IMF, 2025). Ensure borrowing plans are consistent with the country's
absorptive and implementation capacity to maximize the efficiency of debt-financed
projects (Academic Research, 2025).
• Maintain Debt Transparency: Continue efforts to enhance public debt transparency
through timely, comprehensive, and easily accessible publication of debt statistics,
portfolio analyses, and borrowing plans, covering all components of public and publicly
guaranteed debt, including SOEs (Ministry of Finance, 2025).
Fiscal Policy
• Sustain Fiscal Consolidation: Remain firmly committed to the fiscal consolidation path
agreed under the IMF program, targeting a reduction in the fiscal deficit and stabilization
of the debt-to-GDP ratio (IMF, 2025). This requires discipline on both the revenue and
expenditure sides (World Bank, 2025).

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

• Accelerate Domestic Revenue Mobilization: Vigorously implement planned tax policy

reforms (e.g., VAT rationalization, excise tax adjustments) and significantly strengthen tax
and customs administration to broaden the tax base and improve compliance (IMF, 2025).
Addressing the chronically low revenue-to-GDP ratio is fundamental to creating fiscal
space and reducing debt dependency (World Bank, 2025).
• Improve Expenditure Quality and Efficiency: Enhance public financial management
(PFM) systems and public investment management (PIM) processes to ensure that public
spending is efficient, effective, and yields high returns (Ministry of Finance, 2025).
Conduct rigorous appraisals of new investment projects (IMF, 2025). Reallocate spending
towards priority areas, including strengthening social safety nets like the PSNP to protect
the vulnerable during adjustment, and investing in human capital and critical infrastructure,
while phasing out inefficient or untargeted subsidies (e.g., fuel subsidies) (World Bank,
2025).
Structural Reforms
• Boost Export Performance: Implement a concerted strategy to increase the volume,
value, and diversification of exports beyond traditional agricultural commodities
(Academic Research, 2025). Address bottlenecks in trade logistics, improve product
quality and standards, enhance market access, and ensure a competitive real exchange rate
to tackle the core vulnerability of insufficient foreign exchange generation (IMF, 2025).
• Advance SOE Reforms: Continue strengthening the governance, transparency, and
financial discipline of State-Owned Enterprises (IMF, 2025). Implement the government's
privatization agenda where appropriate to reduce contingent fiscal risks, improve
efficiency, and create space for private sector participation (World Bank, 2025). Ensure
remaining SOEs operate on a commercial basis with hard budget constraints (IMF, 2025).
• Deepen FX Market Reforms: Sustain the transition towards a flexible, market-
determined exchange rate regime (IMF, 2025). Further improve the functioning,
transparency, and efficiency of the foreign exchange market, minimizing distortions and
gradually rebuilding foreign exchange reserves to bolster resilience against external shocks
(World Bank, 2025).

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 An Assessment of Public Debt: The Case of the Ethiopian Federal Government

• Enhance the Investment Climate: Implement reforms to improve the ease of doing
business, strengthen property rights, ensure predictable regulations, and reduce
bureaucratic hurdles to attract significantly more private domestic and foreign investment
(Academic Research, 2025). Fostering a dynamic private sector is crucial for shifting the
burden of growth generation away from sole reliance on public debt and investment (World
Bank, 2025).

Macroeconomic Coordination and Debt Restructuring

• Ensure Consistent Policy Mix: Maintain strong coordination between the Ministry of
Finance and the National Bank of Ethiopia to ensure that fiscal, monetary, and exchange
rate policies are mutually consistent and supportive of the program objectives of reducing
inflation, stabilizing the macroeconomy, and ensuring debt sustainability (World Bank,
2025). Strictly avoid any form of direct monetary financing of the fiscal deficit (IMF,
2025).
• Finalize Debt Restructuring: Expedite and conclude negotiations with all creditor groups
(official bilateral under the Common Framework, and private creditors including
bondholders and commercial lenders) to secure debt treatment consistent with restoring
sustainability and program parameters (IMF, 2025). Achieving timely agreements that
provide substantial debt service relief is critical for alleviating immediate liquidity
pressures and restoring market confidence (World Bank, 2025). Ensure adherence to the
principle of comparable treatment across creditor categories (IMF, 2025).

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