Ethiopia Risks Creditor Lawsuit as Talks Imperil IMF Reform Drive

Jun 7 , 2026. By BEZAWIT HULUAGER ( FORTUNE STAFF WRITER )

Negotiations over Ethiopia’s one-billion-dollar Eurobond have broken down, prompting private creditors to prepare a formal lawsuit in a UK court following a default that began in late 2023. The escalation uncovered a tension between private bondholders demanding viable financial returns and international frameworks requiring strict fiscal boundaries. The Ministry of Finance faces a severe legal standoff that directly threatens the country's macroeconomic outlook amidst heightened global commodity volatility.

Ethiopia’s debt talks have reached a precarious juncture, where a stalled billion-dollar Eurobond restructuring threatens to collide with the country’s IMF-backed reform programme.

The International Monetary Fund (IMF) has identified the restoration of durable debt sustainability as a critical threshold for Ethiopia’s economic programme. A representative of creditors told Bloomberg that a plan to sue the government in a UK Court is on the table after negotiations recently collapsed.

An ad hoc committee of Ethiopia's bondholders issued a statement on Monday, June 1, quoted by Bloomberg for stating that "given the lack of tangible results from the recent restricted discussions, those members intend to press forward with legal claims in the English court to protect and enforce their rights."

The legal escalation comes as the IMF proposes front-loading approximately 200 million dollars in disbursements this year to help the country absorb external shocks from the war in the Middle East.

The rephasing follows a Staff-Level Agreement reached on June 3, 2026, for the fifth review of the four-year, 3.4 billion-dollar Extended Credit Facility, unlocking 468 million dollars upon Executive Board approval. The Creditors’ Committee, representing holders of Ethiopia’s billion-dollar Eurobond, rejected a revised restructuring proposal last week, claiming it failed to offer a viable solution. The group said it would proceed with litigation to enforce rights, acting on a pre-action warning issued in April.

The dispute traces back to Ethiopia’s default in late 2023, when the government failed to make a coupon payment, triggering a protracted negotiation period that is likely to move from the bargaining table to the courtroom.

The Ministry of Finance expressed disappointment, but maintained that any settlement must align with the IMF programme and the principle of "comparability of treatment." The Official Creditor Committee, co-chaired by France and China, rejected a preliminary January agreement because its "Value Recovery Instrument," which would have allowed additional payments based on future growth, was deemed to violate parity between bilateral and private lenders.

According to Julie Kozack, director of the IMF’s Communications Department, the Fund is encouraging all parties to work toward a resolution that "restores long-term debt sustainability." While progress has been made with official creditors, she warned that bondholder litigation poses a serious threat to Ethiopia’s outlook amid heightened commodity price volatility and mounting global uncertainty.

Experts, such as B. Fikereyohannes, investment advisor and CEO of Pragma Capital, warn that aggressive taxation on fixed-income earners, the planned removal of fuel subsidies, and efforts to formalise the informal sector risk weakening household savings and pushing people out of business rather than into compliance.

"It would shrink the tax base, leaving a gap where corporate income taxes account for 200 billion Br while federal-level collections remain significantly lower," he said. "The government should impose more taxes on corporate businesses, as 66pc of them are not paying their fair share.'

At home, policymakers face persistent inflationary pressures and a forex parallel-market premium at around 20pc. People familiar with these negotiations warn that the success of the Extended Credit Facility and the wider objective of restoring macroeconomic stability depend on securing a market-based debt settlement that meets legal obligations while remaining within strict IMF and bilateral-creditor fiscal parameters.

The IMF tied the removal of fuel subsidies to the expansion of social safety nets, seeking to shield vulnerable households from higher prices. According to Kozack, the IMF’s global advisory on subsidy reform is "consistent and clear," arguing that protections "should be in place to soften the burden on the poor." The IMF-supported programme includes a dedicated target for government contributions to the Productive Safety Net Program, which the Administration of Prime Minister Abiy Ahmed (PhD) plans to scale across all regional states, including rural areas, to prevent an escalation of poverty after fuel subsidies are eliminated.

"The IMF’s primary objective is to restore macroeconomic and financial stability," Kozack told Fortune at a virtual press briefing on Thursday, February 4, 2026. "It's the foundation for strong and sustained growth."

Mered characterised the IMF-supported plan to reallocate roughly 200 billion Br from fuel subsidies to the Productive Safety Net Program as a government tactic to manage high global energy costs. He argued that the transition should be matched by a full shift to market-based monetary policy, including an end to direct Central Bank financing of government spending.

"Direct advances to the Ministry of Finance should be replaced by Treasury bills and bonds issued at market-determined rates," he said, "helping establish a positive yield curve and allowing the Ministry to borrow sustainably while reducing inflationary pressure."

Ethiopians continue to face the weight of a high cost of living, but the authorities say they have taken steps to "modernise the monetary and exchange rate framework to narrow the parallel market premium."

These reforms include the launch of a Foreign Exchange trading platform, the elimination of surrender requirements for services exports, and the easing of retail transaction limits. The fifth review is expected to address institutional benchmarks, including requirements for the National Bank of Ethiopia (NBE) to cease non-auctioned foreign currency allocations by specific dates. The Fund has also recommended that Ethiopian Investment Holding (EIH), under the managment of Brook Taye (PhD), provide consolidated audit reports and that the Central Bank’s foreign currency interventions outside auctions be stopped.

According to Kozack, the Middle East energy shocks have renewed pressure on headline inflation worldwide. In the United States, the IMF now projects that a return to the two percent inflation target will be delayed until late 2027.

"The test for Ethiopia’s reforms is whether fiscal consolidation and the removal of 'distortionary' subsidies can improve living standards without compromising the welfare of the most vulnerable," said Kozack.

Mered sees a broader challenge, identifying five foundational pillars required to stabilise the economy, beginning with a comprehensive overhaul of the foreign exchange architecture. He argued that current bank commission rates and bonuses continue to feed the parallel and fractured markets, making a modernised system necessary.

"Dollar transactions on the official market should be simplified through platforms such as mobile money," he said, "to pull informal transactions into official channels."

Mered estimated close to 37pc of foreign exchange transactions in remittance remain outside official channels.

Mered urged the government to stop rolling over short-term Treasury bills and issue long-term bonds, potentially with 10-year maturities, at market-driven rates. The current 29-day or six-month bills force the government into constant re-issuance, effectively “spinning” funds from entities such as pension funds at around 16pc interest.

"By issuing instruments of up to 10 years at market rates, potentially 17pc to 19pc, the government would end frequent rollovers, gain time to manage finances, and signal progress toward economic modernisation," he told Fortune.

Mered's sharpest criticism was directed at the tax regime. Mered described the income tax rate on salaried employees as "extortionist because it fails to reflect economic reality and basic living standards." He contrasted regional thresholds, arguing that while a 35pc rate might apply to someone earning 6,200 dollars a month in Kenya, in Ethiopia the same rate applies to those earning roughly 95 dollars a month, which he called "disproportionate and excessive" without accounting for Ethiopia’s GDP, which is similar to Kenya's.

He also pointed to the need to increase foreign currency reserves, raise the purchasing power of citizens in the fixed-income bracket, and ensure access to necessities.

"Peace and security of the country and the looming geopolitical tension are worrisome, and the government should create a fiscal buffer," Mered told Fortune.

PUBLISHED ON Jun 07,2026 [ VOL 27 , NO 1362]