Western Creditors Left Ruing Ethiopia’s Default Must Learn From Proactive China

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The failure of Ethiopia to meet its debt obligations on a Eurobond coupon payment coming due in December 2024 has prompted Western creditors to scramble in response, as they find themselves lagging China’s proactive approach to debt-service relief. S&P Global Ratings has officially labeled the $33 million missed interest payment as a selective default, an instances whereby a country falls short of fulfilling specific obligations towards its debt, while concurrently meeting other commitments promptly.

Ethiopia’s recent selective debt default, marked by the non-payment of a coupon on a Eurobond first issued in 2014, underscores contrast with the approach of Chinese lender to debt relief. While Ethiopia faces challenges with Western creditors and is labeled with a “selective default” by S&P Global Ratings, China has demonstrated a proactive stance by pausing debt repayment, thus fostering a more cooperative relationship with Ethiopia.

China’s approach involves temporarily halting or restructuring debt payments, providing breathing room for countries facing financial difficulties. This contrasts with the more rigid response from Western creditors in the face of defaults across the developing world reeling from high interest rates following pandemic shocks. Overall inflexibility towards debt restructuring may lead to increased financial strain and even strained diplomatic relations in the long run.

Interview given by Finance Minister Ahmed Shide discussing debt restructuring plans on December 20, 2023

The proactive debt-service relief from China not only showcases a willingness to work collaboratively with debtor nations in Africa, but also contributes to strengthening diplomatic ties. This approach has been particularly beneficial for Ethiopia-China relations, as it reflects a commitment to understanding and addressing the economic challenges faced by Ethiopia, fostering a more constructive and supportive partnership. In his recent speech in Addis Ababa, American economist Jeffery Sachs praised the patient approach when financing development, stating, “repayment horizons should be thirty to fifty years, not ten or fifteen.”

China, itself a developing nation not too long ago is better able to understand challenging circumstances of investment in Africa, thus takes on a long-term and patient approach. This is one of several reasons why Chinese financed projects on the continent are increasingly preferred. Despite accusations predatory lending, China has pardoned a minimum of $3.4 billion in debt from 2000 to 2019, primarily consisting of interest-free loans to African nations, according to the China Africa Research Initiative (CARI) at Johns Hopkins University.

Moreover, as of 2022, China has granted debt forgiveness for 23 interest-free loans across 23 countries. On the contrary, the proclivity of European or in general Western lenders to be fixated on unrealistic repayment schedules is a determent to both creditors institutions, and debtor countries in Africa.

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