(Bloomberg) -- Ethiopia’s defaulted international bond jumped after the International Monetary Fund agreed to lend the country $3.4 billion over four years as part of an economic reform program, a key step that’s also expected to ease negotiations with creditors on restructuring its debt.
The decision will allow the immediate disbursement of about $1 billion, the fund said in a statement on Monday announcing the loan.
The IMF funds are part of about $10.7 billion that eastern Africa’s biggest economy expects from creditors through loans, grants and debt re-profiling. The IMF said the program will “catalyze additional external financing from development partners and provide a framework for the successful completion of the ongoing debt restructuring.”
Ethiopia’s 2024 eurobond jumped 2.23 cents to 77.48 cents on the dollar by 10 a.m. on Tuesday in London — the most since December, according to data compiled by Bloomberg. That’s the highest since November 2021.
Ethiopia has about $28.4 billion of external debt and has been seeking to restructure its loans since 2021. Progress was delayed by a two-year civil war in the nation’s northern Tigray region that ended in November 2022. The country defaulted on a eurobond payment in December of last year.
“This is a landmark moment for Ethiopia,” IMF Managing Director Kristalina Georgieva said in a statement. The approval of the program is “a testament to Ethiopia’s strong commitment to transformative reforms,” she said.
Ethiopia’s central bank paved the way for the deal when it announced on Monday that it would allow the nation’s currency — the birr — to trade freely. The step echoed a similar measure by Egypt in March, when it allowed its currency to weaken almost 40%, enabling an $8 billion IMF bailout.
The birr slumped 23% on Monday, according to rates published on the website of the state-owned Commercial Bank of Ethiopia, the country’s biggest lender.
It remains unclear how quickly the government will move toward a debt rework with bondholders, said Samir Gadio, head of Africa strategy at Standard Chartered Plc in London.
“In countries that went through the common framework, the sequencing has been a memorandum of understanding with official creditors followed by an agreement with bondholders and then the restructuring of other commercial loans. And that process has taken a long time for Zambia and Ghana,” he said.
Earlier this month, Ethiopia’s official creditors committee granted the nation financing assurances to help fast-track approval for the new IMF loan.
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Ethiopia is the fourth country to renegotiate its debt under the Group of 20-backed common framework mechanism, which seeks to coordinate talks between official, commercial and private creditors.
As part of its efforts to secure an IMF program, Ethiopia moved to open up the economy under Prime Minister Abiy Ahmed’s administration, including allowing foreign investment into domestic banks and establishing a capital market. Ethiopia has had eight earlier IMF arrangements, according to the lender’s website.
The IMF said the new program will “address macroeconomic imbalances, restore external debt sustainability and lay the foundations for higher, inclusive and private sector-led growth.” As part of its current fiscal program, the country’s fuel and fertilizer subsidies, which are common and popular measures in emerging economies, “will need to be unwound gradually over time,” the fund said.
The IMF estimates real gross domestic product will grow 6.5% in the current fiscal year, which began in July, accelerating to 8% by 2027-28. Meanwhile, the rate of inflation will drop from 30% to about 10% over the same period, while external debt-to-GDP will decline from 28% to about 23%.
--With assistance from Eric Martin, Christopher Condon and Paul Richardson.
(Updates with bond moves from top; analyst comment in eigth paragraph.)
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