In his last week's address to Parliament, Prime Minister Abiy Ahmed (PhD) painted a picture of an economy at a crossroads, poised for transformative reforms but not without the requisite pain such shifts entail. He warned of an ominous period filled with seismic shifts in macroeconomic policy management, with transgenerational impact.

"Successive administrations will benefit from our fiscal policy orientations," he told Parliament. "I'll not go into the details now."

The Prime Minister forecasted a robust 7.9pc GDP growth for the year, more than double the IMF projected for the sub-Saharan Africa average. However, he tempered this optimism with a candid acknowledgement of the macroeconomic misalignments he argued were inherited from past administrations and vowed to address them through sweeping reforms. Abiy likened the necessary economic policy adjustments to the acute, albeit fleeting, pain of tooth extraction — a metaphor he used to signal his administration's resolve to deal with issues having immediate discomfort for long-term health.

"A dentist is usually at the receiving end of insults," said the Prime Minister. "Only to be welcomed once the source of pain dissipates."

The Prime Minister's announcement comes against the backdrop of an economy under the firm grip of rampant inflation, 28pc for December, signalling a critical need for what he referred to as "pinching adjustments." Abiy's speech alluded to a period of significant transformation in macroeconomic policy management, suggesting that these reforms would serve as a legacy for successive administrations. While specific details were scarce, the promise of addressing longstanding economic maladies was clear.

The National Bank of Ethiopia (NBE) has unveiled a strategic plan set to span three years, targeting fundamental weaknesses in monetary policy and exchange rate management. A notable goal is revising the foreign exchange reserve management guideline by June 2024, alongside a shift towards a price-based monetary policy system that emphasises interest rates and open market operations.

The central bank's cautious approach to disclosing foreign currency management policy information was evident in Governor Mamo Miheretu's recent interactions with Parliamentarians. In December, he stressed the importance of discretion in public comments to avoid fueling speculation. Despite inquiries, details on the restitution of the foreign exchange investment committee remained scant, with an official noting its pending establishment.

"It's not yet been formed," Yenehasab Taddesse, director of foreign exchange monitoring & reserve management at NBE, told Fortune.

However, the Governor disclosed ongoing discussions with the International Monetary Fund (IMF) to enhance foreign currency management through structural adjustments.

Ethiopia's foreign currency reserve currently falls short of the optimal five month import, maintaining only enough for a few weeks. Despite this, foreign currency earnings last year amounted to 24 billion dollars, with significant contributions from services (29.5pc), remittances reaching 6.8 billion dollars and foreign direct investment short of 200 million dollars from the 3.6 billion dollars the economy generated from export earnings. Government borrowing and foreign aid contributed nearly one billion and 1.1 billion dollars. The balance of payments recorded a deficit of 63.6 million dollars during the fourth quarter of 2022/23, a diminished amount compared to the deficit of 307.2 million a year ago.

Economist Atlaw Alemu (PhD) observed a defacto floating foreign currency market, a parallel market system where most commodities are imported at nearly double the official exchange rates.

"They might as well try floating it," he told Fortune. "Everything else seems not to be working."

He believes that a committed improvement in capital and labour productivity could enhance the balance of payments, proposing that temporary shocks might yield long-term benefits if managed correctly.

Observers of the state of Ethiopia's economy blame underlying political and security issues that disrupt market linkages for monetary and fiscal crises.