IMF Tells Ethiopia to Stay the Course, with Leap of Faith on the Market

Feb 16 , 2025.

Madame Kristalina Georgieva, managing director of the International Monetary Fund (IMF), recently became the third IMF chief to set foot in Addis Abeba in over 30 years. Her arrival showed Ethiopia’s shifting economic reality. Unlike her predecessors, who once pressed Ethiopian leaders to open strategic sectors to foreign and domestic competition, Georgieva came to take stock of liberalisation efforts launched in 2019 under Prime Minister Abiy Ahmed (PhD).

At a press briefing, she praised the ongoing reforms, urging patience and suggesting that the results would become more visible over time. Behind the scenes, she held private discussions with the Prime Minister, Finance Minister Ahmed Shide, and Mamo Mihretu, governor of the National Bank of Ethiopia (NBE). The IMF voiced apprehension about Ethiopia’s incomplete move toward a floated exchange rate and off-budget spending that could undermine economic stability.

The IMF has played a crucial role in backing Ethiopia’s reform agenda. During the first round of the Homegrown Economic Reform programme, its credit facilities joined funding from the World Bank and other development partners to keep the government’s policy drive afloat. In mid-2024, a fresh arrangement between the federal government and the IMF initiated a second phase of reforms to further liberalise sectors in finance, shipping, and telecommunications, and selling off of state-owned enterprises. At the heart of this plan lies the ambition to let the Birr (the Brewed Buck) move more freely, tame inflation, and tighten fiscal belts.

Central to this approach is the scaling back of the state’s footprint in business. A decade-long blueprint for economic development, adopted in 2021, proposes a decisive shift away from the developmental state model pursued under the EPRDF. The government pumped vast sums into infrastructure and industry back then, and public enterprises dominated strategic sectors. After the 2018 political transition, incumbent leaders tried to chart a more private-sector-oriented course, hoping to entice foreign direct investment (FDI) and stimulate competition where it was deemed less threatening to national interests.

Some of these initiatives, such as streamlining federal agencies and creating a more business-friendly environment, have won broad support. Cutting red tape, modernising the bureaucracy, and offering investors fewer headaches may attract foreign capital and encourage competition in certain sectors. Yet, critics warn that hastily pulling the state from major investments could be risky. They see the private sector still constrained by tight financing, weak capital formation, and a chronic shortage of foreign currency. They would argue that overdependence on private capital is no guarantee of rapid industrialisation, whether foreign or domestic.

This concern about leaving too much to the market echoes in historical examples.

The United States offered generous tariff protections to shield nascent industries from British imports. During Britain’s imperial expansion, London imposed restrictions on textile production in its colonies, safeguarding the home market. Germany, Japan, the Soviet Union, South Korea, Taiwan, and, more recently, China all blended state-led industrial drives with private investments. In China, public enterprises still account for around 40pc of GDP, demonstrating the large public footprint retained even in a market-facing economy.

Advocates of a middle path argue that, given Ethiopia’s low private capital formation, the state should stay active in big-ticket infrastructure and strategic industries, leaving more competitive areas for private initiative. The Ministry of Industry’s policy on manufacturing, issued last year, agrees with this logic, supporting private-led industrialisation but under a framework where the government remains a key provider of physical and institutional infrastructure.

Beyond these structural debates, Ethiopia’s partial step toward a more flexible exchange-rate regime looms large. The economy remains vulnerable, and the Birr’s depreciation has caused turbulence. Banks and firms with foreign-currency debts but local-currency assets have seen their balance sheets eroded. Should policymakers fail to accompany the currency liberalisation with prudent fiscal and monetary responses, these problems could worsen. The IMF fears that the Birr’s “float” is not entirely driven by supply and demand.

Ethiopia is not alone in this. Ghana, Uganda, and Zambia claim to float, yet the IMF classifies their arrangements as managed regimes. Discrepancies between official policy and actual practice leave these countries open to external shocks, depreciations, and prolonged inflation.

In Ghana, five big banks control nearly 70pc of foreign exchange transactions. In Ethiopia, five major private banks — Awash, Abyssinia, Dashen, Wegagen, and Zemen — accounted for 80pc of the nearly 188 million dollars in forex handled by private banks during the fourth quarter of 2023/24. The concentration of currency trading in so few institutions distorts prices, encourages speculative behaviour, and can make it harder for local businesses to obtain foreign exchange.

Under pressure when the Birr starts to slide, Governor Mamo feels compelled to intervene — often discreetly — to avert a steeper fall. Such interventions breed mistrust among market players, leading commercial banks to hoard foreign currency in anticipation of further official moves. What is called a float becomes more akin to a rationing system. Meanwhile, the gap between the parallel and official rates remains around 25pc.

Policymakers, eager to showcase reform success and lure foreign capital inflows, find themselves in a policy tangle. A more liberal economy, in principle, is appealing to external investors, but domestic enterprises, already hamstrung by scarce forex, cannot easily fund long-term industrial ventures. Many opt for quick-return investments that do little to propel structural change. While FDI is sought with enthusiasm, it offers no immediate guarantee of job creation or technology transfer. Building factories, training workforces, and scaling up production all demand time and resources that are not always forthcoming.

Let private capital flourish in non-strategic sectors, but keep the state pouring money into roads, power grids, and other infrastructure that can boost competitiveness. Ethiopia’s history of investing in energy and transport has yielded some success stories, such as in the garment and leather industries, though these remain limited in scope. By shouldering large-scale investments that private entrepreneurs may avoid, the state could pave the way for broad-based growth. In such an environment, private firms can focus on adding value and creating jobs, rather than battling for basic utilities.

Georgieva’s counsel to have patience and keep the reforms on track may hold a certain appeal. Yet, contemporary leaders are juggling competing priorities of a restive population hungry for tangible economic gains, a cost of living surge that eats into wages, and an uncertain exchange-rate market that can spook businesses. The IMF’s emphasis on fiscal discipline and inflation control is not new; Ethiopian policymakers have long tried to balance these prescriptions with their own development ambitions. Still, relying too rigidly on free-market doctrine in a setting with limited private capital formation, economic hardship, and relentless conflict might be perilous. If the currency liberalisation continues without adequate liquidity available to the market, it may simply fuel the parallel market and sharpen price distortions.

If the state retreats too far or too fast, the private sector may not prove robust enough to fill the vacuum. However, retaining a degree of pragmatism is not a bad thing in an economy in flux.

PUBLISHED ON Feb 16,2025 [ VOL 25 , NO 1294]

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