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The Ethiopian authorities say China has cancelled the interest on all loans that were taken out before the end of last year.
Prime Minister Abiy Ahmed's office made the announcement following a meeting with President Xi Jinping in Beijing.
Researchers estimate that since 2000 Ethiopia has borrowed more than $12bn (£9bn) from China - including £4bn for a railway linking the land locked country with Djibouti.
The fact that the amount of interest owed has not been made public is a key concern of anti-debt campaigners.
They are calling for loans to be transparent as many African countries have been burdened with unsustainable debts.
Image caption: Ethiopia borrowed money to build a railway.
