Breaking the Chains to Protect the Vulnerable During Painful Reforms

Jan 18 , 2025.


Adanech Abebie, the mayor of Addis Abeba, addressed last week a warm-up session for her party’s upcoming convention, urging cadres of the Prosperity Party - Prosperitians - to embrace what she described as “broad and inclusive” gains. Her assertions might have inspired the foot soldiers of the incumbent had it not collided with the realities unfolding across the country. But it manifests a contradiction between official narratives of transformation and the depressing figures documenting widespread deprivation that casts a pall over the leaders' declarations of prosperity.

Despite policymakers' complacent views about the dropping of the Consumer Price Index (CPI) rate and a purported 400 billion Br in fuel subsidies and 60 billion Br for social safety nets, ordinary Ethiopians continue to feel the sting of rising prices and deepening poverty. Aggressive economic policy reforms, including a floating currency, financial sector liberalisation, the opening of the trade sector for external competition, and the hurried removal of public subsidies, have led to soaring living costs for many.

A year remains before the complete phase-out of fuel subsidies is scheduled, and many fear that such rapid moves, coupled with the value-added tax (VAT) on previously exempt goods, risk undermining the welfare of low-income households.



In the four years beginning in 2020, the federal government’s education budget dropped from 123 billion Br to 55.8 billion Br, a 55pc reduction that risks hobbling human capital formation. The health budget’s decline, from 51 billion Br to 22.6 billion Br, amounts to a 56pc cut. Although these measures might shore up the federal government's fiscal position and free resources for different priorities, critics of the Prosperitians see them as representing a misguided approach, especially in a country struggling to develop its human capital.

Policymakers insist these reductions will improve market efficiency and the equitable distribution of resources through targeted social programs. They tout this as part of a pragmatic macroeconomic policy approach.

However, the grim facts on the ground are hard to ignore. Once lauded for double-digit growth, Ethiopia now faces mounting evidence of deteriorating social conditions. The federal government’s pledges to “stabilise” or “streamline” budgets ring hollow to Ethiopians who confront the abrupt removal of fuel subsidies, rising commodity prices, and a tax regime and enforcement that burden businesses.

The most damning portrait of the country’s predicament appears in the 2024 Global Multidimensional Poverty Index, which notes that Ethiopia remains home to 86 million multidimensionally poor people, amounting to 7.8pc of the global total. The report finds that 83.7pc of the world’s multidimensionally poor reside outside urban centres, and Ethiopia illustrates this rural-urban divide. Close to 64.5pc of its rural population lacks essential necessities such as sanitation, cooking fuel, and adequate housing, making a mockery of official pronouncements of "inclusive prosperity."

These numbers do not exist in a vacuum. They reflect the lived experiences of individuals who rely on subsistence farming yet lack electricity and clean water.

The northern regions, particularly Tigray Regional State, have seen their infrastructure destroyed by the civil war, pushing poverty rates even higher. Humanitarian aid is often unable to keep pace with the needs of displaced populations, where 44.2pc of Ethiopians live in households with children under five remain undernourished. Unicef reported that no less than nine million children remain out of school, driven away by conflict, violence and natural disasters.

It would be wise to acknowledge that this is a crisis that threatens to undermine the country’s long-term development as children bear the brunt of poverty. Close to 53.7pc of Ethiopia’s multidimensionally poor are minors, many of whom grow up without basic healthcare or education. In the six years beginning in 2015/16, the absolute poverty rate resurged by 10 percentage points to 33pc, an annual increase of nearly 1.6pc. It is a regrettable backsliding, especially pervasive in rural regions, where poverty soared from 25.6pc to 47.5pc.

Neither have urban centres been spared. Addis Abeba and other cities saw poverty rates climb from 14.8pc to 17.5pc. Meanwhile, inflation has surged at alarming rates, with Harari Regional State experiencing a 109pc year-on-year (YoY) rise in the cost of living between 2018 and 2022, and 85pc in the Oromia Regional State. The federal government’s push for flashy public projects does not appear to have benefitted the majority. According to the Ethiopian Economics Association (EEA), the Gini coefficient measuring inequality jumped from 32.8pc in 2015/16 to 39.3pc in 2021/22, uncovering that growth, however lauded, has been anything but inclusive.

The destruction of livelihoods in Oromia, Tigray, Amhara, Somali and Afar regional states due to wars and militarised conflicts, combined with stubborn inflation, has widened the gap between rich and poor. Conflicts have stymied economic expansion and discouraged investors who once viewed Ethiopia as an attractive frontier market. Foreign investors now see heightened risks, leading to capital flight and a decline in the foreign direct investment needed to fund poverty-reduction programs.

The ballooning need for humanitarian assistance, which over 21 million Ethiopians depend on, can prove how volatile the situation remains. The federal government’s attempts to repair the fiscal ledger through tax raises and subsidy withdrawals could inflict further pain on a population that has already endured more than its fair share of suffering.

The Homegrown Economic Reform Agenda, whose bill is paid by the International Monetary Fund's (IMF) extended credit facility, amounting to 3.4 billion dollars, aspires to rectify macroeconomic imbalances, restore debt sustainability, and stimulate private-sector-led growth. The IMF’s prescriptions might stabilise the government’s balance sheets, but they may well do so at the expense of the most vulnerable.

The measures required to meet the policy goals impose heavy burdens on those least equipped to shoulder them. It could not have come at a more unlikely time when the country and its population face a difficult political and social fate.

A market-determined exchange rate is expected to exacerbate Birr’s depreciation, pushing inflation to what the IMF projects to 30pc to 35pc this year. Food inflation has picked up at 20pc for much of 2024, and further loss of ground by the Brewed Buck will only tighten the squeeze on household budgets. Although the authorities have earmarked 1.5pc of GDP for social safety nets, including cash transfers that amount to 0.4pc of GDP, doubts persist that these efforts can keep pace with the rising cost of living.

Removing fuel and fertiliser subsidies would particularly threaten food security in rural communities. The agricultural sector is already reeling from conflict and erratic weather patterns, and rising fertiliser costs would likely cut production and place more families at risk of hunger. A phased approach with expanded social safety nets might address this concern, yet policymakers seem reluctant to adjust the timetable.

Capital expenditures, meanwhile, have been slashed, jeopardising infrastructure projects that could have spurred equitable growth. At a scant 6.3pc last year, the tax-to-GDP ratio trails far behind the sub-Saharan average of 15pc. The federal government plans to increase it to 10.8pc by 2026 through reforms that may well hit low-income households hardest.

Whether the reforms can balance macroeconomic stability and inclusive growth remains to be seen. Liberalisation advocates claim it will bring transparency, better governance, and climate-smart investments, but the key test lies in protecting those perched precariously above the poverty line. Prime Minister Abiy Ahmed’s (PhD) administration has staked much on rebranding Ethiopia as a magnet for capital, but it should also ensure that austerity does not transform the country’s poorest citizens into collateral damage of economic orthodoxy.

Between 2016 and 2019, Ethiopia was one of seven African countries to achieve rapid reductions in poverty, a momentum derailed by war, conflict and global disruptions. The potential for renewal exists if policymakers prioritise social investments, rural infrastructure, and robust safety nets. Doing so might help restore trust in a government that once promised a renaissance but now faces a frowning reality. Whether Ethiopia will harness its natural resources and youthful population to reverse the alarming slide into more profound deprivation or remain trapped in a cycle of conflict and want is yet to be seen.

Despite its current travails, however, Ethiopia need not be doomed to perpetual hardship. Alternative policy paths do exist.

It is up to its contemporary leaders to secure debt relief from servicing costs that consume large portions of the country's public revenue. Achieving this could open up space for social spending while redeploying resources from security budgets to health and education to better serve developmental goals. Yet, such approaches seldom tower discussions in the corridors of power or the boardrooms of multilateral lenders.

As Mayor Adanech issues rallying cries to party loyalists in Addis Abeba tout her government’s reforms, it is worth remembering that slogans cannot paper over hard data. Poverty waits for no one, and Ethiopia’s economic future is being shaped not by lofty declarations, but by the policies now put in place. The choices made now will no doubt resonate for years to come.





PUBLISHED ON Jan 18,2025 [ VOL 25 , NO 1290]


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