Ethiopia’s economic landscape remains a whirlwind, as the nation navigates the complexities of debt relief and foreign aid contraction. As 2025 unfolds, Ethiopia is still in default, seeking comparable relief from bondholders, even after tentative agreements with official creditors. The IMF’s Nigel Clarke underscores the nation’s precarious position: “downside risks are ever-present,” thanks to ongoing security challenges and dwindling donor support. While foreign aid, which was a robust 12% of GDP a decade ago, has now plummeted to under 4%, Ethiopia grapples with pressing challenges.
Amidst these hardships, the country’s journey toward foreign exchange market liberalization continues, though not without obstacles. A 2.5% central bank commission, limited interbank liquidity, and soaring transaction costs paint a challenging economic picture.
Current Status of Ethiopia’s Debt and Relief Efforts
Ethiopia remains in default and is actively seeking comparable debt relief from bondholders after successfully agreeing on terms in principle with official creditors earlier this year. This agreement marks a crucial step towards resolving financial challenges and improving the nation’s economic stability. Despite the progress, the overall outlook remains clouded by several hurdles. “The outlook remains subject to downside risks given security challenges and declining donor support,” as pointed out by IMF Deputy Managing Director Nigel Clarke.
Agreement with Official Creditors
The agreement with official creditors has been a pivotal element in Ethiopia’s strategy to manage its debt burden and work toward fiscal sustainability. This arrangement reflects a collaborative effort among involved parties to address the pressing issues surrounding Ethiopia’s financial obligations. The involvement of official creditors has provided a structured framework for Ethiopia to re-negotiate terms and lay the groundwork for more sustainable economic management.
Challenges with Bondholders
While progress has been made with official creditors, Ethiopia faces significant challenges when dealing with bondholders. Bondholders are known to seek higher returns and may not readily agree to revised terms that could affect their financial interests. This ongoing negotiation remains a delicate balance as Ethiopia strives to balance its interests with those of its bondholders.
Addressing the concerns of bondholders is essential to ensure a consistent and reliable path forward as the country rebuilds its economic framework. Ethiopia’s determination to reach an understanding with bondholders signifies its commitment to resolving these complex financial matters as part of a broader strategy.
Downside Risks and Security Challenges
Ethiopia’s economic future is still fraught with downside risks and security challenges. The security challenges within the country have had a significant impact on economic activities, contributing to instabilities that affect not only the local populace but also foreign investors and international relations. These challenges may lead to a reduction in investment and growth prospects, further complicating debt relief and financial recovery efforts.
Moreover, declining donor support exacerbates the situation. Foreign aid, which has been a crucial lifeline for Ethiopia, has plummeted to below 4% of GDP from 12% a decade earlier. With agencies scaling back, Ethiopia’s reliance on external aid becomes more strained. The confluence of security and financial challenges demands meticulous planning and execution of policy measures to stabilize the current economic environment and set the stage for future progress.
Foreign Aid Decline and Its Impact
Reduction in Foreign Aid
The reduction in foreign aid to Ethiopia has been a significant trend over the past decade. A decade ago, foreign aid accounted for a substantial 12% of Ethiopia’s gross domestic product. However, this figure has dwindled to under 4% today. This considerable drop is partly due to the changing priorities and shifting commitments of international donors.
Agencies that have historically provided significant support, like USAID, have announced plans to scale back their funding. This trend has put a strain on Ethiopia’s budgetary resources, impacting its ability to finance both ongoing and new development projects.
Impacts on Humanitarian Assistance
The decline in foreign aid has profound consequences on humanitarian assistance in Ethiopia. With less international support, the Ethiopian government finds it increasingly challenging to meet the basic needs of its population. The United Nations has reported that one in every five Ethiopians required food or humanitarian assistance in the past year.
The response plan developed by the United Nations to address these needs remains underfunded, which further complicates efforts to provide timely and adequate relief to those in need. Many humanitarian programs are operating under temporary waivers. As funding becomes more precarious, their ability to sustain these vital services remains in jeopardy.
Role of Agencies like USAID
The role of agencies like USAID has been pivotal in shaping the landscape of foreign aid in Ethiopia. Historically a major provider of aid, USAID has been instrumental in sectors like health, education, and emergency services. However, recent announcements about scaling back funding to Ethiopia reflect broader shifts in the agency’s strategies and geographical focuses.
This pullback has left a significant gap that has yet to be filled by other international agencies or domestic efforts. As USAID reassesses its commitments, Ethiopia finds itself at a crossroads, where developing sustainable local initiatives becomes increasingly critical to fill the void left by reduced foreign aid.
Ensuring continuity in humanitarian and developmental efforts amidst declining foreign aid will require innovative strategies and foster stronger collaboration between the Ethiopian government and international partners.
Central Bank Commission and Interbank Liquidity
One of the pressing structural issues is the 2.5% central bank commission on FX sales. This commission poses a significant cost to traders and can impede the free movement of foreign exchange. Additionally, limited interbank liquidity further exacerbates the problem, as financial institutions struggle to meet the demands of market participants. This scarcity restricts the efficiency and effectiveness of the FX market, creating challenges in currency exchanges and international trade.
Parallel Market Premium
The parallel market premium is another major challenge. Official foreign exchange rates often differ significantly from those available in the informal, or parallel, market, with the premium reaching 15% in some instances. This discrepancy reflects inefficiencies in the official FX market and encourages the growth of an unofficial market where rates are often more favorable. This situation complicates regulatory efforts and fosters uncertainty for businesses reliant on stable currency exchange rates.
Inflation Trends and Monetary Policy
Ethiopia has experienced a faster-than-expected decline in inflation, which can be attributed largely to recent stringent monetary policy measures. Despite these gains, challenges persist in ensuring sustained economic stability.
Tighter Monetary Policy
With inflation previously running high, the Ethiopian government has implemented tighter monetary policy controls. By imposing credit caps and utilizing various monetary tools, these measures have helped curb inflationary pressures significantly. Such actions are crucial as they provide a foundation for economic stability and ensure that inflation remains manageable, protecting the purchasing power of the Ethiopian populace.
Transition to Policy-Rate Framework
The transition towards a policy-rate-based framework is an essential step for Ethiopia. This modern approach to monetary policy will enable more precise control over inflation and economic activity. By improving communication and transparency in monetary policy decisions, Ethiopia aims to bolster the credibility of its financial system. Building this trust is pivotal not only for domestic stability but also for attracting foreign investors who seek a predictable economic environment.
This shift is expected to streamline monetary interventions and make Ethiopia’s financial policies more predictable and effective.
Delays in Privatization
Delays in Privatization continue to pose challenges for Ethiopia’s economic landscape. The privatization process was expected to inject much-needed efficiency and capital into government-run sectors, yet progress has been sluggish. Various state-owned enterprises (SOEs) remain under government control due to procedural hiccups and regulatory bottlenecks. The Ethiopian government had planned to open up key sectors such as telecommunications, banking, and energy to private investors, but these strategic moves have hit numerous roadblocks.
Uncertainty and mixed signals from the government have also contributed to these delays. Investors remain cautious, seeking clarity and consistency in policy directions before making significant commitments. This stagnation has prevented the anticipated flow of capital into these sectors, stalling anticipated improvements in service delivery and technological advancement.
Foreign Direct Investment Trends
Foreign Direct Investment (FDI) trends in Ethiopia show a concerning pattern of underperformance. While Ethiopia has traditionally been seen as a promising destination for foreign investors, recent years have seen a marked decline in investment inflows. Concerns about political stability, coupled with the delaying privatization process, have dampened enthusiasm among foreign investors.
The government’s calls for a more business-friendly environment have yet to fully materialize, with the ease of doing business still facing significant hurdles. Corruption, bureaucratic inefficiencies, and a perceived lack of legal protections for investors further underpin the cautious approach from the international community.
Moreover, the global economic climate has shifted, impacting the availability and willingness of foreign capital to flow into emerging markets like Ethiopia. Competition from neighboring countries that offer better incentives and a more stable environment presents another challenge for Ethiopia to attract the desired level of FDI.
To reverse these trends, it will be crucial for Ethiopia to not only expedite the privatization agenda but also to establish transparent and consistent policies that build trust and confidence within the international investment community. Strengthening legal frameworks and reducing bureaucratic red tape could spark a renewed interest in investment opportunities, potentially revitalizing Ethiopia’s economic prospects.
Export Outlook and Economic Prospects
Ethiopia’s export outlook is showing signs of optimism as the country anticipates an improvement in its export performance over the coming fiscal periods. This upward trend is buoyed by a positive shift in economic policies and strategies which align with global demand dynamics and domestic potential.
Role of the IMF Program
The International Monetary Fund (IMF) program plays a pivotal role in Ethiopia’s economic prospects, serving as a catalyst for continued growth and stability. The IMF’s involvement, through financial support and policy guidance, has been instrumental in helping Ethiopia address macroeconomic imbalances and execute reforms crucial for sustainable growth.
In recent months, Ethiopia received a significant disbursement of $262 million under the IMF program, which is intended to bolster the country’s foreign reserves and support necessary economic reforms. Through the Extended Credit Facility framework, the IMF extends further support by providing comprehensive strategic advice on improving monetary policies, managing fiscal discipline, and fostering an environment conducive to economic development.
With the IMF’s backing, Ethiopia continues to implement reforms aimed at enhancing monetary policy frameworks, ensuring financial stability, and driving economic growth. The alignment with the IMF’s objectives is poised to strengthen Ethiopia’s economic resilience and set a robust foundation for future prosperity.
The combination of an improved export forecast and IMF program support offers Ethiopia a pathway out of previous economic hardships and towards a brighter, more sustainable future for the nation and its people.
Flexible Exchange Rate Regime
One of the notable achievements in the first year of the HGER is the transition towards a flexible exchange rate regime. This shift was designed with the intention of reducing external imbalances and enhancing competitiveness. The results have been promising, with minimal disruption observed in the financial markets. This more adaptive exchange rate has improved Ethiopia’s ability to respond to external shocks, fostering greater economic stability.
Modernization of Monetary Policy
Modernizing monetary policy has been another significant milestone in the HGER. By adopting tighter monetary measures, Ethiopia has successfully curbed inflation, stabilizing the domestic currency. The introduction of a new policy-rate-based framework has further helped in achieving these results. Improved communication strategies alongside these advancements have bolstered the policy’s credibility.
Strengthening Social Safety Nets
Improving Ethiopia’s social safety nets is crucial in ensuring that economic reforms benefit all segments of society. Over the past year, investments in social services have increased, aiming to provide a more comprehensive safety net for the vulnerable. Enhancements in healthcare, education, and basic infrastructure are central to these efforts. These measures will go a long way toward reducing poverty and fostering a more inclusive growth trajectory.
Future Considerations and Growth Support
Looking ahead, the HGER plans to maintain its reform momentum by focusing on further liberalizing markets and investing in infrastructure. Ethiopia aims to attract more foreign direct investment and enhance its export capacity. As the reform agenda progresses, continuous support from international organizations like the IMF will be instrumental in facilitating sustained growth and ensuring that Ethiopia remains on a path to a prosperous economic future.
July 16, 2025
The Habesha
Nice Job, IMF.
IMF is like the guy who let loose a German Shepherd dog on you and warned you that the dog might tear you to pieces. What is IMF’s purpose to start with? Is it not enticing with loan money and then arm-twisting with impossible debt until the western corporations own the very life essence of the nation?
IMF warns Ethiopia: Challenges Ahead Despite Economic Reforms
Who wrote this article? What kind of economic reform was implemented in Ethiopia? What is the name of this particular reform? What is the aim of the economic reform that the IMF and you yourself are telling us? What do you understand when you are writing about economic reforms that are being practiced in Ethiopia? Which scientific methodology do you apply when you write such kinds of articles? Please try to answer all these questions. When the EPRDF government, led by the TPLF seized political power, the regime advised by the IMF and the World Bank has introduced a neo-liberal economic policy. The name of this “reform” is the so-called Structural Adjustment Programs (SAP). The policy reforms were devaluation of the Ethiopian Birr compared to the Dollar, privatization of state-owned companies, liberalization of the market, and reducing the state budget, which will be allocated for those who have not sufficient income to buy the necessary things. The IMF and the World Bank were convinced that time, if the TPLF regime implements all these instruments that were suggested by the IMF, and the World Bank market economy will flourish. The regime of Abiy Ahamed, after it has seized political power, has been practicing the same kind of “reform”. If you have studied the nature of the IMF so-called economic policy reform, it is more ideological than transformative. It is not scientific by nature. Therefore, it cannot eradicate poverty and underdevelopment. Their main aim is to make Ethiopia more dependent on the capitalist countries rather than to make our country more productive and self-sufficient. Experiences from other countries that have applied the same kind of economic policy prove that these countries could not utilize their resources properly. On the other hand, this kind of so-called economic reform paves the way for a few people to plunder the resources of their countries. The resources that are being plundered will be exported without being processed. Those who have bought state-owned industries by borrowing money from Banks could not become innovative. In other words, they have never invested in new technologies that could create job opportunities for those people who are looking for employment opportunities. By in large, the policy suggestions of the IMF and the World Bank could not transform the nature of the Ethiopian economy. Subsistence farming and the so-called informal sector are still the economic foundations of the majority of the Ethiopian people. Devaluation, instead of making the Ethiopian economy more competitive, it has worsened the trade balance. That means the country imports more than it exports. As things on the ground prove, the policy suggestions of the IMF and the World Bank have created more imbalances in all sectors. Instead of creating employment opportunities, they have produced a reserve army that cannot easily find job opportunities. The other negative side of applying a neo-liberal economic policy is, it inevitably produces criminality and spreads drug consumption, especially in big cities. At the same time, such an unscientific economic policy produces an arrogant class that serves the interests of foreign forces. To remain in power and plunder the resources of the country, the ruling class that controls the state apparatus becomes fascistic, or more repressive. The situation in Ethiopia shows us that the regime of Abiy Ahmad has become more repressive and fascistic. In short, applying a neo-liberal economic policy does not enhance democratic values. After all, there is no macro-economy in Ethiopia. Macro-economy can only exist when a given country has a dynamic economic structure that is based on science and technology. When all sectors are interconnected, and when there is true division of labor in the society, one can say there exists a macroeconomic structure. If you look at those countries, like South Korea, Singapore, Taiwan, China and others that have never accepted the advices of the IMF and the World Bank, they could build strong economies. They produce competitive products, like cars, smartphones, refrigerators, and other technology-based products. From within, they have interconnected market structures. They have well-developed, and clean cities, that are connected by train systems, and other transportation systems. In short, the reform suggestions of the IMF and the World Bank, scientifically seen, are not economic reforms. Only a scientific economic policy could eradicate poverty and underdevelopment. A scientific economic policy will enable a country like Ethiopia, and other Third World Countries to pursue an inward-looking strategy that could create job opportunities for the millions of the people that are roaming around the cities. At the same time, it brings the society together, and enables to build a strong economy that will be the foundation of true Nation-State. In order to introduce true economic reforms, we have to reform the political and the state structures of our country. Only a strong and dynamic intellectual force, that is patriotic could transform Ethiopia from the present shameful situation that our people are suffering to a more respectful and self-sufficient economic system.
Fekadu Bekele is a political economist, and a development economist
Please try to read my book: African Predicaments and the Method of Solving them Effectively. Visit also my website: http://www.fekadubekele.com
Warning: Please do not write such kinds of misleading articles.
For more knowledgeable Information, look at these Books.
Binyamin Appelbaum; The Economists’ Hour: False Prophets, And The Fracture of Society,
USA, 2019
Erik S. Reinert; How Rich Countries Got Rich… and Why Poor Countries Stay Poor,
Lonon, 2007
Frederick G. Lawrence, Patrick H. Byrne and Charles C. Hefling Jr. (eds.) Macroeconomic Dynamics: An Essay in Circulation Analysis, London & Toronto, 1999
John Maynard Keynes; The General Theory of Employment, Interest and Money, London &
Toronto, 1967
Naomi Klein, The Shock Doctrine, London, 2007
Tomáš Sedláček; The Economy of Good & Evil,
New York, Oxford University Press