Ethiopia initiated a comprehensive macroeconomic reform program in July 2024, which represents a paradigm shift in its economic policy direction. The reforms, supported by IMF and World Bank funding, entail the transition to market-determined exchange rates, removing chosen current account restrictions, and introducing a new interest-rate-based monetary policy regime. This is a radical departure from Ethiopia’s previous state-led development strategy that was founded on an overvalued currency, unaffordable levels of debt, and stringent controls that deterred private investment.
The economic context for the reforms is complex. While Ethiopia remains one of Africa’s top-performing and fastest-growing economies with 8.1% growth expected for FY2023/24, it is also one that has massive problems with double-digit high inflation having just gone into debt default during late 2023 and still having about 15 million that rely on food aid. The liberalization of the currency has already caused the Ethiopian Birr (ETB) to devalue against the US dollar by over 115%, which though bitter in the short run, is intended to redress long-standing economic imbalances.
International watchers are most keen on how the reforms will influence Ethiopia’s debt profile and private sector growth. The country’s external debt is close to $30 billion, where debt service is taking up a significant portion of government revenues. World Bank illustrates that “high inflation and tight financial conditions—also partly resulting from severe currency depreciation following the shift to a floating exchange-rate regime will limit economic activity” in the short term. However, if followed, they would stand to unlock Ethiopia’s huge economic potential by attracting foreign investment and making Ethiopian exports more competitive.
Another key component of these reforms is the liberalization of the banking sector. After half a century as foreign investor closed, in December 2024, Ethiopia enacted the Banking Business Proclamation No 1360/2024 that will have foreign banks establish subsidiaries, open branches, or take stakes in domestic banks. The National Bank of Ethiopia will issue foreign banks up to five banking licenses, a step that could bring much-needed capital and expertise into the sector.
