Issue No.297

IMF relief amid fragile foundations
 

Twelve months into Ethiopia's International Monetary Fund (IMF)-backed macro-economic relief and reform programme, the financial outlook is decidedly mixed. Inflation has dropped from the punishingly high 20s and 30s down to the low teens, Ethiopia's creditors have agreed on a new deal, and the IMF continues to disburse funds for Addis. And with money being ploughed into gleaming sidewalks and palaces in Addis, one might think that Ethiopia was enjoying some sort of extraordinary economic boom. The reality is– as ever– more complex. Although diminished inflation has brought some relief to Ethiopians, the forex parallel market remains swollen, and the broader foundations for sustained growth in the country are shaky at best—particularly with the reverberations of the insurgencies in Oromia and Amhara, as well as the Tigray war. 

In mid-2024, the IMF and the Ethiopian government agreed to a four-year USD 3.4 billion relief agreement —with USD 1 billion to be disbursed immediately — to help Ethiopia tackle high inflation, unsustainable debt, and shortages in foreign exchange. The Prosperity Party-dominated Parliament was kept in the dark before being hastily summoned to vote on the sprawling agreement that further reshapes Ethiopia's political economy. It represented quite the about-turn for Addis's economic policies of two decades ago, drawing it more firmly into the world of liberalised interest and market exchange rates. Fiscal and monetary policy was to be tightened as well, the 'medicine' that would hurt in the immediate and draw the sting of inflation, but supposedly help Ethiopians in the long term. Still, Addis secured IMF support for a handful of long-standing government subsidies that are regarded as central to the country's social contract, including fertiliser and fuel.

As part of the relief agreement, the most notable consequence was the floating of the Ethiopian Birr (ETB), which triggered a 100% devaluation of the national currency in under two weeks last year, resulting in an exchange rate of ETB 114 per USD. Years of a booming parallel market in Ethiopia had created several problems in the country, depleting foreign reserves and driving demands for artificially cheap imports. Since then, devaluation has helped improve the country's exports, raking in USD 8bn in revenue for the 2024/2025 fiscal year, in large part due to thriving gold and coffee prices. In recent years, the often-violent and interconnected political economy of gold within Ethiopia and across the Horn of Africa has become one of the frontlines of the Gulf's penetration through the region.

Repeatedly this year, Ethiopian officials have argued that the economy is going from strength to strength and that the floating of the Birr has been nothing but a resounding success. Yet bringing the black market in line with the formal exchange rate has floundered somewhat, with the IMF raising concerns in late July about their continued divergence. Today, the ETB is trading at around 142 against the dollar, while in July, it was ETB 160 per USD on the parallel market. And in early August, the Ethiopian National Bank announced a USD 150 million currency auction blitz to dampen the parallel market. At the press conference, National Bank Governor Mamo Mihret insisted that the IMF had no complaints about Addis's fiscal direction, citing rapid economic growth and increasing foreign exchange reserves as positive signs. And yet. Little of this constitutes a genuine alternative to the foundations of sustainable economic growth, based on production, investment, and employment.

The structural issues that continue to hinder Ethiopia's development are significant, to say the least. Leaving aside the economic devastation in Tigray-- some estimates put reconstruction costs as high as USD 20 billion-- low productivity, over-reliance on agriculture, and poor infrastructure continue to stymie its growth. With most of the country still dependent on agriculture (around 70%), a transition to secondary and tertiary industries does not appear likely anytime soon, particularly with the government unable to subsidise the quantity or quality of sufficient fertilisers to make small-hold farming more productive and secure. Indeed, one of the motivations of disenchanted farmers joining the Fano insurgency in Amhara was precisely this lack of fertiliser. Furthermore, as the ETB's value gradually falls, the costs of these critical imports will continue to rise and be passed on to consumers as well. A persistent concern is any rapid widening of the official and parallel market gap, which can trigger an inflationary spiral. The near-completion of the Grand Ethiopian Renaissance Dam (GERD) will provide some much-needed electricity for the manufacturing and industrial sectors, but broader infrastructure lags far behind across most of the country. Funds for infrastructure development in the Somali region, for instance, have been repeatedly siphoned off by the regional goverment.

The floating of the Ethiopian Birr was heralded as a seismic shift in Addis's financial strategy-- an oblique but declarative move away from the days of the 'developmental state' of Abiy's predecessor, Meles Zenawi. The former leader of the Tigray People's Liberation Front (TPLF), who oversaw a radical transformation of Ethiopian politics and society in the 1990s and 2000s, was renowned for designing an insular economy in the style of the 'Asian Tigers,' characterised by heavy state involvement and investment in development. Fast forward to today, many of the elements of the developmental state are absent-- though market liberalisation and loosening of regulations are not, in themselves, 'anti-developmental state.' But the 'pro-poor' welfare agenda of the TPLF government has largely been abandoned, dwarfed by the spending on the security sector for domestic wars. And the institutions at the centre of the state have been further corroded as well.

The privatisation and liberalisation of the banking and telecommunications sectors have been significant, but much of the proceeds gained from these sell-offs have been reinvested in purchasing foreign armaments and drones. Prior to 2020, it might have been possible to develop an economy that benefited a domestic class of investors, allowing them to establish stakes within the capitalist model that Addis was pivoting towards under PM Abiy Ahmed. Rewiring the country's monetary and fiscal policies had the potential to reform and help raise the peasant class out of poverty. However, any chance of this was dashed on the rocks of Tigray, and the state—and subsequent economic policies—have been reactive ever since, with rent-seeking prioritised. A country that once prided itself on an absence of corruption has seen it seep into the political economy. 

This reflects another dynamic at play in the country today: a concentration of spending and the importance of Addis has risen, while the state's presence elsewhere in the country is contracting. From Tigray to Oromia to the Somali region, persistent inflation and government withdrawal have slashed investment in healthcare, education, infrastructure, and other social services-- many of the foundations of a thriving economy. Furthermore, the state's shrinking presence across the country is being further accentuated by the diminished overseas development and humanitarian assistance, particularly the USAID funding cuts. With Ethiopia also pushing to develop its domestic revenue and taxation, given the widespread conflict and insecurity across the country, this is likely to struggle in the longer term.

Another problem facing Addis is that it does not have any kind of significant financial reserves to fall back upon. They are building up, but Ethiopia's coffers are looking awfully empty for a country with such grand ambitions of 'sea access.' Addis is still clamouring for war with Eritrea– potentially the most calamitous economic decision the federal government could yet make. It is unclear whether it can 'afford' another war, but it may not matter to PM Abiy Ahmed, who clearly covets sea access. Losing further donor funding would surely come hand in hand with any invasion as well. But it would also be a mistake to underestimate the Ethiopian state; although it is haphazard in nature, it nevertheless has significant power projection. Though too often overlooked by the Washington Consensus and the Bretton Woods systems, only a broader political settlement within Ethiopia that can stabilise the country can return it to a trajectory of long-term, sustainable growth. Monetary policy may stabilise inflation, but perennial domestic wars will continue to sow the seeds of economic failure and prevent a geniune Ethiopian transition.