ADDIS ABABA, Aug 3 – Ethiopia’s external debt burden increased sharply after the depreciation of the birr following the country’s foreign exchange reform, with the external debt-to-gross domestic product (GDP) ratio rising from 23.8 percent in 2024 to 33.9 percent in 2025.
The increase reflects the impact of exchange rate movements on foreign currency-denominated liabilities. As the birr weakened against major currencies, the value of Ethiopia’s external debt increased when measured in local currency terms, raising the debt ratio despite no equivalent increase in the underlying foreign debt stock, the African Development Bank Group said in its East Africa Economic Outlook 2026.
Ethiopia introduced a market-based foreign exchange regime in July 2024 as part of wider economic reforms aimed at addressing persistent foreign currency shortages, improving export competitiveness and attracting investment. The move resulted in a significant depreciation of the birr against the US dollar.
For countries with large foreign currency obligations, exchange rate depreciation can increase the cost of servicing external debt because governments need more local currency to repay the same amount of foreign currency debt.
The AfDB said the rise in the country’s debt ratio highlights the challenges associated with exchange rate adjustments, particularly for economies that rely heavily on external financing for infrastructure, development programmes and imports.
Despite the pressure on debt indicators, Ethiopia remained East Africa’s largest destination for foreign direct investment in 2024, contributing to regional foreign investment inflows that reached 12.6 billion US dollars, according to the report.
The bank also identified the country’s financing needs as a major challenge. It estimates the country requires annual financing equivalent to between 11 percent and 15 percent of GDP through 2030 to support structural transformation, including infrastructure development and economic expansion.
The report places Ethiopia’s debt challenge within a wider regional context. East African economies recorded real GDP growth of 6.6 percent in 2025, the fastest pace among Africa’s regions, but the AfDB warned that rising debt service costs, fiscal pressures and external vulnerabilities could weigh on future growth.
Beyond exchange rate pressures, the bank highlighted Ethiopia’s exposure to trade disruptions due to its dependence on the Djibouti port and Red Sea shipping route. More than 90 percent of the country’s international trade relies on the corridor, leaving import and export flows vulnerable to geopolitical disruptions and higher freight costs.
The AfDB said strengthening domestic revenue mobilisation, expanding local capital markets and improving access to private financing would be critical for Ethiopia and other East African economies seeking to reduce dependence on external borrowing.
