Why Ethiopia’s Government Must Reduce Local Borrowing

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Ethiopia is facing economic challenges due to heavy domestic borrowing, which is impacting businesses and financial stability.

Key points:

  • Crowding Out Private Sector: Government borrowing competes with small and medium enterprises (SMEs) for credit, limiting their access to funds.
  • Rising Interest Rates: Increased borrowing pushes interest rates higher, making loans more expensive for businesses and individuals.
  • Debt Servicing Burden: In the 2025/26 fiscal year, Ethiopia allocated 463 billion Birr—39% of recurrent expenditures—just for debt repayment.
  • Inflation Risks: Excessive borrowing can inflate the money supply, pressuring monetary stability.

Proposed Solutions:

  • Seek international loans and grants with concessional terms.
  • Develop domestic capital markets to mobilize resources via bonds.
  • Improve tax collection to reduce reliance on borrowing.
  • Foster public-private partnerships for shared investment risks.

Reducing local borrowing would free up capital for entrepreneurs, lower interest rates, and strengthen fiscal responsibility, paving the way for sustainable economic growth.

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