The 20-year-old joined Birmingham on an initial six month deal in the summer transfer window and had been hoping to get game time.
This came when Harry Redknapp had been managing the club.
Walsh went on to play three times while Redknapp was in charge, however after the veteran manager was sacked, he did not feature again.
Although the loan deal has not been terminated, Walsh is likely to play games for the Everton under 23 side in order to keep up his match fitness.
He played a key role for the Everton side that won Premier League 2 during the 2016/17 season scoring six goals for the club that was managed by David Unsworth, who is the man currently working as the club's interim first team manager.