Why Ethiopia’s Government Must Reduce Local Borrowing

Dr Jibril Mohamed Ahmed, Founder of SLab Ethiopia, financial and capital market literacy intiatuce.

Ethiopia is at a crucial economic crossroads. In the 2025/26 fiscal year, the government’s budget reached a historic 1.93 trillion Birr, with 463 billion Birr—nearly 39% of recurrent expenditures—earmarked just for debt servicing. While managing these obligations is important, the government’s heavy borrowing from domestic banks is creating unintended challenges for the broader economy, especially for entrepreneurs and businesses.

Here’s why Ethiopia’s government must urgently reduce its reliance on local borrowing.

Crowding Out the Private Sector

When the government borrows heavily from commercial banks, it competes directly with private businesses—particularly small and medium enterprises (SMEs)—for limited credit resources.

Because lending to the government is viewed as low risk, banks often prioritize these loans over riskier SME loans. This means less money is available to entrepreneurs who need capital to launch and grow their businesses.

Put simply:

• Every Birr borrowed domestically by the government is one less Birr that could empower Ethiopian entrepreneurs.
• Rising Borrowing Costs and Inflation Risks

As government borrowing increases, demand for credit pushes interest rates higher. This makes loans more expensive not only for the government but also for the private sector.

High borrowing costs can stifle innovation, delay business expansion, and slow down job creation—the very engines Ethiopia needs to sustain economic growth.

Moreover, excessive local borrowing risks inflating the money supply indirectly and pressures monetary stability, which Ethiopia has been striving to maintain with support from international partners like the IMF.

The Fiscal Year 2025/26 Debt Servicing Reality

The 463 billion Birr debt servicing budget in 2025/26 alone highlights the scale of the government’s financial commitments. To meet these payments, the government is borrowing more domestically, which further tightens credit availability for businesses.

This cycle can become a drag on the economy, limiting Ethiopia’s potential to diversify and strengthen its private sector.

Why Reducing Local Borrowing Matters
Scaling down domestic borrowing would:

• Free up capital for SMEs and entrepreneurs, fueling business growth and job creation.
• Help lower interest rates, making credit more affordable economy-wide.
• Strengthen fiscal responsibility, increasing investor confidence.
• Support monetary stability by easing pressure on banks and inflation.

Exploring Alternative Financing
To reduce pressure on domestic credit markets, Ethiopia should:

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

Ethiopia’s ambitious vision depends on a dynamic private sector backed by a sound financial system. Reducing government borrowing from domestic banks is essential to unlocking the capital entrepreneurs need.

By doing so, Ethiopia will pave the way for sustained economic growth, innovation, and job creation — building a future where every Birr works harder for all Ethiopians.