In a highly anticipated televised address to the country on the evening of 28 July 2024, Ethiopian Prime Minister Abiy Ahmed announced sweeping economic reforms. The announcement was the culmination of years of economic policy changes since he took office in 2018, aimed at tackling entrenched economic challenges such as debt, inflation, unemployment and low productivity.
Abiy highlighted the first phase of the Home-Grown Economic Reform Programme (HGER 1.0), launched in 2019, which focused on macroeconomic stability, sectoral reforms and correcting economic imbalances. According to the Prime Minister, this phase succeeded in reducing debt and expanding growth, positioning Ethiopia among the world’s fastest-growing economies with an average GDP growth rate of 7.1% from 2019 to 2023. He expressed optimism about the second phase of the economic transformation, which he claimed would ensure higher and more stable economic growth, maintain single-digit inflation and build a globally competitive economy. Is Abiy’s optimism justified? Many disagree with his positive outlook for a number of reasons.
Grim economic realities
For those familiar with Ethiopia’s economic landscape, Abiy’s announcement signalled a likely devaluation of the Ethiopian currency, the Birr. Such a development was worrying given that the Ethiopian Birr has been depreciating by more than 20% per year since mid-2018, a situation driven by the combined factors of political instability, declining export revenues, and reduced foreign direct investment. This depreciation had contributed to significant inflationary pressures, particularly on essential imported goods, exacerbating the economic challenges faced by Ethiopians.
It didn’t help that Ethiopia ran a trade deficit in 2023, where the value of its imports exceeded the value of its exports by $12.09 billion.
To make matters worse, the government, burdened by years of civil war, was cash-strapped in 2023. Its defence budget peaked at $1.54 billion in 2023, apparently for the purchase of advanced military hardware from countries such as Iran, Israel, China and Turkey. These resources were mainly used in the ongoing civil conflicts in Tigray, Amhara and Oromia, further draining the country’s finances. Not surprisingly, the increasing militarisation of Ethiopian society and the substantial resources allocated to the military sector came at the expense of social services such as health and education, as well as infrastructure development. This created a vicious cycle of poverty and violence, with economic instability and unfavourable investment conditions exacerbating the challenges faced by the population.
These economic strains were further highlighted when Ethiopia missed a $33m coupon payment on its $1bn Eurobond in December 2023, joining Ghana and Zambia in the ranks of African countries that have recently defaulted on Eurobond payments. S&P Global Ratings downgraded Ethiopia’s foreign currency sovereign ratings to ‘SD/SD’ (selective default), reflecting the dire state of the country’s finances.
Enter the IMF
After years of negotiations, the IMF has approved a four-year financial arrangement for Ethiopia, providing approximately $3.4 billion under the Extended Credit Facility (ECF) programme. The ECF is designed to support countries that are experiencing protracted balance of payments problems, meaning they have difficulty paying for their international obligations or need help to stabilize their economies. In return, the Ethiopian government finally agreed to a substantial devaluation. Shortly after the IMF approval, the governor of the National Bank of Ethiopia, Mamu Mehratu, announced that the Birr would now be determined by market forces, a significant shift from the previous government-controlled system. The immediate result was a sharp devaluation – 30 per cent – the largest since 1991. Prior to the recent reforms, officially, the Birr was trading at 57 to the dollar, but on the black market, it was worth more than double that. Within days, the Birr had been devalued by more than 100%.
It is worth noting that Ethiopia has devalued the Birr several times since 1991, the most recent being in October 2017. The last devaluation, under former Prime Minister Hailemariam Desalegn, ended up being inflationary and failed to achieve its goals.
A weak currency does not automatically mean that the economy is weak. In some cases, a weak currency can be a deliberate strategy to boost exports and stimulate economic growth. This is unlikely to happen in Ethiopia.
Abiy’s economic reforms and the end of developmental democracy
From the outset of his tenure, Abiy Ahmed set out to dismantle the legacy of the Ethiopian People’s Revolutionary Democratic Front (EPRDF), aiming to liberalise Ethiopia’s economy and introduce reforms that would increase the involvement of the private sector. While it is not uncommon for new leaders to modify or reverse some of their predecessors’ policies – as is often the case in many countries, including the US and the UK, where successive administrations make and unmake policy changes – fundamental national policies tend to remain stable and consistent.
However, Abiy has been particularly vocal about erasing what the EPRDF built. This brings to mind the words of the prominent Somali writer Nuruddin Farah, who described Ethiopia as a “demolition site,” a country under constant rebuilding, where laws are often dismantled to suit the new rulers and the nerves of the people are often frayed by regime changes that demolish what came before.
Abiy’s vision included plans to partially privatise key state-owned enterprises such as Ethiopian Airlines, Ethio Telecom and the Ethiopian Shipping and Logistics Services Enterprise. In particular, the decision to open up the telecommunications sector marked a significant departure from the securitarianism of the EPRDF. Abiy’s policy approach allowed new players in the telecommunications sector, such as Safaricom, to enter the market. However, the proposed privatisation of Ethiopian Airlines, a successful and profitable company, caused a significant public backlash, leading to its suspension for the time being.
In parallel with this privatisation process, the government hinted at allowing foreign banks to operate in Ethiopia, a move that would mark a significant change in a sector traditionally shielded from foreign competition.
By implementing the recent reforms, Prime Minister Abiy has put the final nail in the coffin of the EPRDF’s developmental democracy model, which had guided Ethiopia’s economic policies for decades. This model, characterised by a strong state-led approach to economic development, achieved remarkable success from 1992 (around 5 Birr to 1 USD) to 2018 (around 27.5 Birr to 1 USD). During the EPRDF period, Ethiopia experienced double-digit economic growth, significant poverty reduction and diversification of the economy, with key sectors such as agriculture, construction, manufacturing and services driving job creation and economic expansion. Economic growth has been achieved even when Ethiopia has no ports of its own, a fact that calls into question Ethiopia’s aggressive pursuit of access to the Red Sea, which has put the entire region on edge and brought Egyptian troops to its borders with Somalia.
Suffice it to say that despite these achievements, the EPRDF’s economic policies were not without their flaws. Regional disparities, rural poverty, and vulnerability to economic shocks remained significant challenges. These regional disparities have often led to civil strife, which was always met with state repression.
Meanwhile, regional rivalries have led to violent conflicts, with the Tigray war alone resulting in the deaths of an estimated half to one million people and the displacement of hundreds of thousands. The economic cost of recovery from these conflicts was estimated at $44 billion in five years, a staggering burden for an already struggling economy.
The path forward: Peace and stability
The long-term outcome of Abiy’s economic reforms remains uncertain. The experiences of other African countries that have implemented IMF-prescribed policies provide a cautionary tale. In countries like Zambia, Nigeria, and Zimbabwe, the social costs of these reforms—rising poverty, unemployment, and inequality—often outweighed the economic benefits, leading to public dissatisfaction and unrest.
Unless Ethiopia can achieve peace and stability, the IMF-prescribed policies are likely to hit the most vulnerable populations the hardest without producing the desired outcome. The country’s ongoing conflicts, both internal and with neighbouring states, pose a significant obstacle to the success of these economic reforms. Abiy’s focus on building a more open and market-oriented economy, while understandable in theory, has been undermined by the substantial resources diverted to military expenditure and the ongoing violence that has plagued the country.
The ongoing conflicts have not only drained the country’s financial resources but have also led to social fragmentation and a breakdown of trust within communities. This social disintegration has made it even more challenging to implement collective solutions to poverty and developmental challenges, further entrenching the cycle of poverty and violence. Ethiopia at present is plagued by a kidnapping epidemic, making it risky to venture outside Addis — a situation that tends to confine the entire country to the capital city.
Abiy’s rise to power was marked by grand promises of economic transformation and national rejuvenation. However, his tenure has been characterised by a relentless dismantling of the EPRDF’s legacy, a focus on superficial projects, and a continued investment in military hardware to prosecute wars. This shift in priorities has had significant consequences for Ethiopia’s economic development, creating an unfavourable investment climate, diverting resources from essential services, and entrenching poverty.
Without addressing the root causes of political instability and social fragmentation, the current reforms will likely fail to deliver the promised benefits, which will lead Ethiopia further down a perilous economic path.
