AfDB Warns: Ethiopia’s External Debt Nearly Doubles to 33.8% of GDP

Ethiopia among seven East African nations facing mounting external debt service pressure as the region’s financing gap widens

Ethiopia’s external debt burden rose sharply in a single year, according to the African Development Bank’s 2026 East Africa Economic Outlook report. The country’s external debt-to-GDP ratio climbed from 23.8 percent in 2024 to 33.8 percent in 2025, one of the fastest increases recorded in the region.

The report places Ethiopia among seven East African economies, alongside Somalia, Sudan, Kenya, Tanzania, Uganda, and Rwanda, that recorded sharp increases in external debt service obligations relative to government revenue between 2020 and 2023, compared with the pre-pandemic period of 2015 to 2019. The AfDB attributes the rise to tightening global financial conditions, higher borrowing costs, and a regional shift away from concessional lending toward market-based external financing.

Debt dynamics vary widely across the region. Kenya’s external debt-to-GDP ratio actually fell, from 69.7 percent to 64.9 percent, though it remains the second-highest burden after Djibouti, which stands at 68.9 percent of GDP. Burundi, Uganda, and Somalia recorded low and declining debt levels, while Eritrea and Djibouti posted comparatively low debt service ratios even as regional debt payment pressure stayed elevated overall.

For Ethiopia, the AfDB projects an annual financing gap of 11 to 15 percent of GDP through 2030, a shortfall the report ties to investment needs outpacing domestic savings capacity. Closing it, the Bank argues, will depend on stronger domestic resource mobilization, deeper private capital participation, and expanded access to long-term financing.

The report also flags illicit financial outflows as a drag on development financing. Ethiopia lost an estimated 24 billion dollars to trade misinvoicing between 2013 and 2022, the AfDB found, weakening both domestic revenue collection and foreign exchange availability.

On public financial management, Ethiopia and Rwanda posted the region’s strongest institutional scores, near 4 out of 6 on the World Bank’s Country Policy and Institutional Assessment framework, in both 2015 and 2024. Kenya and Uganda held steady around 3.5. Tanzania and Djibouti showed modest gains, while Eritrea’s score fell from 2 to 1, dragging down the regional average alongside weak scores in Burundi and Comoros. The AfDB says the broader lack of improvement over nearly a decade points to persistent structural weaknesses in budget preparation, financial reporting, and implementation across the region.

Rather than new taxes or higher rates, the report recommends governments prioritize administrative reforms to raise revenue in the near term: expanding digital tax administration, strengthening VAT collection and invoicing systems, improving customs valuation, scaling back tax exemptions, and tightening coordination between customs and domestic tax authorities.

For Ethiopia’s banking sector, the findings carry direct implications. Rising external debt service obligations compete with credit expansion and foreign exchange allocation, both already under pressure as the country continues its managed exchange rate liberalization under the IMF-backed Extended Credit Facility program. A widening financing gap also raises the stakes for domestic capital markets, including the nascent Ethiopian Securities Exchange, to help fill financing needs that external borrowing can no longer easily cover.

Source: African Development Bank, 2026 East Africa Economic Outlook.