Debt Repayment Is Eating Ethiopia's Budget, And It's Getting Worse

542.1 billion birr has been set aside to service domestic and foreign debt in the coming fiscal year. That is 43.3 percent of all recurrent expenditure, and 17 percent more than what was allocated for the same purpose in the previous year. Education ranks third. Health does not crack the top two. Debt does. This is not new. But it keeps getting harder to look past.

Ethiopia's debt story goes back further than most people realize. Before 2018, the government was borrowing aggressively to build infrastructure primarily through non-concessional loans from China and commercial lenders. External debt hit around $25 billion by 2017, driven by high interest rates and short repayment windows on projects that often failed to generate the expected returns.

The 2023/24 federal budget showed the same shift that has now become a trend: increased allocation for debt servicing, with simultaneous declines in the federal budgets for education, health, roads, and agriculture. The following year was no different. By 2025/26, debt repayment had already consumed 29 percent of the total budget and was the largest expenditure item, ahead of education, regional subsidies, and social spending combined.

Now in the 2026/27 draft, the share has climbed further. According to Finance Minister Ahmed Shide, who presented the budget to Parliament, debt repayment was one of the key considerations in drafting the budget precisely because debt obligations are expected to rise sharply in the coming year.

Ethiopia's total public debt stood at $51.8 billion as of March 2026, including $33.5 billion in external debt. The debt-to-GDP ratio, measured by the IMF, is projected at around 41 percent for 2026. Several things pushed the country into this corner.

The infrastructure borrowing binge of the 2010s was the first wave. Loans taken to build railways and power infrastructure came with repayment schedules that are now maturing. Many of those projects failed to generate the export earnings or growth that would have made servicing them easier.

Then came the crisis. The Tigray conflict (2020–2022) drained fiscal resources and pushed the government deeper into domestic borrowing. Drought, food insecurity affecting over 16 million people, and currency depreciation all forced more spending with less revenue to show for it. The birr's collapse — from around 57 to the dollar in mid-2024 to over 137 by June 2025- meant that foreign debt obligations ballooned in local currency terms overnight.

The restructuring process has brought some relief. Ethiopia reached an agreement in principle with official creditors in March 2025, covering about $8.4 billion of the $12.4 billion in external debt under the G20 Common Framework, securing $2.5 billion in debt service relief through 2028. But even the Finance Minister acknowledged that despite restructuring, actual payments will increase as Ethiopia resumes servicing external debt it deferred during negotiations. The restructuring bought time. It did not remove the weight.

The numbers in the draft budget tell the story plainly. Education gets 158.2 billion birr. That sounds like a lot until you put it next to 542.1 billion for debt. Ethiopia has roughly 30 million school-age children.

In the health sector, the picture is similar. A 2025 ActionAid survey found that 90 percent of Ethiopian health professionals reported significant disruptions to maternity services due to budget constraints, while all surveyed public health experts reported sharp increases in drug prices. Some 97 percent of health workers said their salaries no longer cover basic living costs.

In education, 95 percent of Ethiopian teachers reported insufficient funds for essential school materials, with the majority purchasing supplies out of pocket. Student-teacher ratios in rural areas have risen by 80 percent since 2020. Teachers are working more for less in classrooms with less. These are not abstract fiscal trade-offs. They are the lived reality of a government that spends more than twice as much on past loans as it does on its next generation.

The government is not unaware of the bind it is in. The broader reform program, including foreign exchange liberalization, domestic revenue mobilization, and efforts to widen the tax base, is meant to gradually improve the fiscal situation. The IMF's Extended Credit Facility of $3.4 billion and continued engagement with the G20 Common Framework reflect a bet that the country can grow its way out of the worst of it.

The draft 2026/27 budget targets 1.5 trillion birr in tax revenue, a jump that requires substantial growth in collection efficiency. Whether that materializes is a separate question.

What is harder to argue away is the structural reality: Ethiopia is committing nearly half of its regular government spending to paying for the past, while the present needs of its 129 million people go underfunded. Debt repayment at this scale is not just a budget line. It is a choice about whose needs come first, and right now, it is not the people waiting in public hospitals or sitting in understaffed classrooms.