International Monetary Fund (IMF) has projected that Ethiopia’s economic recovery under the new macroeconomic reform will advance slowly, tempered by tight financial conditions and lingering uncertainty as economic players adjust to a revamped fiscal environment. Inflation is expected to peak at around 29pc in 2025, as the first review of Ethiopia’s Extended Credit Facility (ECF) reveals.

The IMF report, released last week, underlined that stringent financial controls and the cessation of monetary financing for fiscal deficits should help ease inflationary pressures, while temporary fiscal spending is sought to buffer socioeconomic impacts. Despite the reforms, unmet demand for foreign exchange and lingering inflationary risks remain, as currency supply to the market has progressed slower than anticipated.

Economic analysts caution that the effects of the shift to a flexible exchange rate and other reforms are still unfolding. Macroeconomist Tewodros Mekonnen (PhD) noted, “while we have seen some stability, inflationary pressures are likely as the full scope of the transition takes shape.”

The IMF’s conservative growth projection for Ethiopia stands at 6.5pc for this fiscal year, a figure notably lower than the 8.4pc forecasted by Prime Minister Abiy Ahmed (PhD)during a recent parliamentary session. This discrepancy displays the cautious stance taken by the IMF, which, alongside national reforms, approved a 340.7 million dollar disbursement in August, the first in a 3.4 billion dollar four-year credit package to stabilize the economy.

Tight fiscal and monetary policies are already impacting local businesses, noted Martha H.Mariam, an advisor to the Vice Governor of the Central Bank. She said the current policies have been effective in containing inflation, but adjustments will likely follow while finding a balance between restrictive and supportive measures.

The report suggests promising yet tentative improvements such as the gap between the parallel and official exchange rates has narrowed remarkably, shrinking from 96pc to around five percent. This convergence has bolstered investor confidence but remains delicate amidst regional conflicts and fluctuations in export earnings.

IMF also praised Ethiopia’s gradual phasing out of deficit financing for the federal government, coupled with reforms to the Treasury bill market and new open-market operations by the National Bank of Ethiopia (NBE). Although the regulator recently auctioned 30 million dollars to banks to ease foreign exchange pressures, unmet demand persists.

Advising caution, Tewodros urged the Commercial Bank of Ethiopia (CBE) to avoid speculative currency practices that could heighten financial risks.