Ethiopia: How the Ongoing Macroeconomic Reform Paved Way for Currency Stabilization

In the last seventy years successive governments tried their level best to change the traditional based economy relied on subsistence farming in to the modern one. In the imperial era, the land was owned by land lords and tenants were under harsh rule and more than three quarters of their products was plundered by land lords as the result, they stayed pauperized for many generations.

The emerging of foreign and local based large scale farming in the late 1950s and 60s had brought glimpse of hope in rising productivity and ensuring food security but had not been sustained due to the demise of the system.

Small and medium sized manufacturing industries were flourishing but their contribution to knowledge and technology transfer and create link to the other sectors was negligible. Foreign companies had been involved in the manufacturing and service sectors but their contribution to the country’s Gross Domestic Product (GDP) was very little.

The flourishing of foreign and domestic banks since the early 1930s, the establishing of the Ethiopian airlines and Ethio-telecom in 1940s gave way to the booming of the service sector and its contribution to the GDP was considerable. However, the archaic political system had been a constraint factor for attaining sustainable growth and ultimately it was done away with in 1974.

The Dergue regimes coming to power brought radical change in the mode of production. Due to the socialist based ideology, it nationalized the land and gave use rights to farmers.

It also confiscated the emerging manufacturing from both local and foreign based enterprises and possessed it to be managed by public ownership. Strived to the establishment of command economy devoid of competition and banned private investment and the economy registered negative growth. In the 17 years of the Dergue reign, the nation faced permanent economic and political instability.

The previous EPRDF led regime began liberalizing the economy three decades ago. The objective of liberalization was to abolish the command economy introduced by the Dergue regime which made the economy stagnant.

It opened the economy to the local and foreign private investment, adjusted the over-valued Birr exchange rate against the Dollar and other foreign currencies, revoked laws that had been hampering business activities and introduced new one which created enabling environment for stimulating the economy.

In line with these measures, the government engaged in constructing infrastructure such as roads, air ports, hydro-power generation dams, industry parks, health and educational institutions. Before the coming to power of the current government, over the past 15 years, the Ethiopian economy registered a remarkable double-digit real GDP growth and over a six-fold increase in per capita GDP to about US$865 in 2018. This has been accompanied with significant poverty reduction from 44.2 % in 2000 to 23.5 % in 2015, and improvements in access to education, health, and infrastructure.

High public investment in infrastructure and human capital development fueled the country’s growth.

These investment narrowed fundamental gaps in transport and energy infrastructure and human capital development, there by laying the foundation for a sustained growth. However, the public investment led growth model had its shortcomings while significant strides have been made.

Both GTP I and GTP II have not entirely been successful in achieving structural transformation and stimulating exports. The growth has also failed to stimulate private sector development to create decent jobs and gaps remain in ensuring quality universal access to basic services to all Ethiopians.

Furthermore, the efforts to finance ambitious public investment programs through directing domestic financial resources and significant external borrowing, coupled with poor project execution, resulted in serious macro-economic imbalance- foreign exchange shortages, increased risk of external debt distress, growing financial sector vulnerabilities, limited access to finance for the private sector, high inflation, and potential misallocation of resources. These macro-economic imbalances, if not corrected immediately, jeopardize the journey to a middle-income economy projected by 2030.

Over the past year, Ethiopia–Africa’s second most populous nation, has embarked on a comprehensive transformation of its monetary and exchange rate regimes.

To strengthen the above measures recently, the government has liberalized the types of exchange regime, adopted a more flexible exchange rate, governed by demand and supply based monetary policy and reduced central bank financing of the public sector projects. The measure also aimed at narrowing the gap between the formal channel currency exchange rate and that of the parallel market to contain illegal trade and inflation.

In addition, the private Foreign Exchange Offices owned by Ethiopians are allowed to operate here in order to enhance access to foreign currency to customers.

In parallel, the National Bank of Ethiopia (NBE) is updating its legal framework and smoothed the depositing and withdrawing procedures of hard currency from banks.

These reforms aim to address acute foreign exchange shortages and inflation, creating conditions for high, sustainable growth and attract foreign investment. It also relaxed the process of the opening of letter of credit to secure hard currency in banks to importers.

The authorities are also tackling budgetary constraints, financial vulnerabilities in state-owned enterprises and state-owned banks, and a sovereign debt restructuring while mitigating social impacts and managing humanitarian pressures.

The IMF is supporting Ethiopia’s reform efforts through a four-year 3.4 billion USD Extended Credit Facility Arrangement.

During the 2025 IMF-World Bank Spring Meetings, Mamo Mihretu, Governor of the National Bank of Ethiopia (NBE) discussed these key reforms with Abebe Aemro Selassie, Director of the IMF’s African Department.

On the occasion Mamo explained various issues to the IMF official. As to him, Ethiopia is undergoing significant reforms that are reshaping its economic landscape. After two decades of sustained economic growth, primarily driven by public investment, Ethiopia faced unsustainable macroeconomic imbalances.

In addition, the state’s reliance on external creditors, the large public bank, and NBE led to foreign exchange shortages, limited access to credit for the private sector, high inflation, financial stability risks, and debt vulnerabilities.

He also said that, Ethiopia launched Homegrown Economic Reform Program in 2019. The objective of the reforms was to address fundamentally, boldly, and conclusively the sources of macroeconomic instability in Ethiopia and create a much more open, investment-friendly, and private-sector-friendly environment. These objectives are critical for the country job creation agenda that will increase income and improve livelihoods.

With regard to Ethiopia’s monetary policy, Mamo noted that Ethiopia has made historic changes, including the revision of the Central Bank Act to prioritize price stability. Introduced a monetary policy rate, implemented open market operations for liquidity management with banks, and established a Monetary Policy Committee to give advice on monetary policy decisions based on comprehensive assessment of economic conditions. Interest rates are now positive in real terms. Inflation has declined.