The Reform That Broke the Birr
For years, Ethiopia maintained an official exchange rate that significantly overvalued the birr relative to its market value. The gap between the official rate and the informal parallel market rate was wide enough to sustain an entire ecosystem of informal currency exchange. Exporters, forced to surrender foreign exchange at the official rate, had little incentive to bring earnings home. Importers with access to official rate dollars held a significant structural advantage over those who did not. The system was distorting and unsustainable, and almost every serious economic analyst said so.
The National Bank of Ethiopia's decision in mid-2024 to liberalise the exchange rate, announced alongside an IMF program agreement worth approximately 3.4 billion dollars, was therefore not a surprise in principle. It was the scale and speed of the resulting depreciation that caught many off guard. The birr moved from approximately 57 birr per dollar at the official rate to over 130 birr per dollar within months, a devaluation of more than 50 percent. For anyone earning birr and buying imported goods, the effect was immediate and severe.
The IMF program provided the external financing that made the reform politically survivable in the short term. Without it, a government running a fiscal deficit and needing to service substantial external debt obligations would have faced the devaluation with no cushion. With it, there was at least the prospect of stabilisation over time. But stabilisation over time is cold comfort when the price of cooking oil doubles in three months.
What Inflation Looks Like on the Ground
Ethiopia's official inflation figures have moderated from the peaks seen during the Tigray war period, when supply chain disruption, conflict-driven displacement, and deficit financing combined to push consumer prices sharply higher. But moderation in aggregate statistics masks substantial variation by category and by region. Food inflation has remained elevated, particularly for staple commodities that depend on imported inputs or that move through supply chains disrupted by ongoing security issues in parts of the country.
The depreciation of the birr has added a structural layer to imported inflation that will take years to unwind. Ethiopia imports significant quantities of fuel, pharmaceuticals, industrial equipment, and consumer goods priced in dollars. Every dollar that now costs 130 birr rather than 57 birr is a permanent repricing of those goods for Ethiopian consumers. Fuel prices, in particular, have risen substantially, with knock-on effects for transport costs, agricultural production, and the cost of running businesses of every size.
For urban households, particularly those in Addis Ababa with fixed incomes from civil service positions, the squeeze has been acute. Salaries that were set in an environment where a dollar cost 57 birr now have to stretch in an environment where it costs more than twice as much. The real purchasing power of formal sector wages has fallen sharply. The informal economy has been more adaptable, with prices and wages adjusting more quickly, but the adjustment process itself is disruptive and uneven.
The IMF program gave Ethiopia access to financing it desperately needed. It did not give it a way to shield ordinary citizens from the immediate cost of the reforms the financing required.
The External Debt Burden
Ethiopia's external debt has grown substantially over the past two decades, driven primarily by infrastructure investment. The Chinese loans that financed the Addis Ababa light rail, the Addis to Djibouti standard gauge railway, sugar and industrial projects, and a range of other infrastructure have accumulated into a debt stock that generates significant annual repayment obligations. The cost of servicing that debt, which is denominated largely in dollars and Chinese yuan, has risen in birr terms in direct proportion to the depreciation of the currency.
Ethiopia entered the G20's Common Framework debt restructuring process in 2021, making it the first country to do so under the mechanism designed to coordinate restructuring between the Paris Club of traditional creditors and newer bilateral lenders including China. The process has been slow and complicated. China's approach to debt restructuring involves opaque bilateral negotiations rather than the multilateral process preferred by Western creditors, and aligning the two has taken years. A preliminary debt treatment agreement was eventually reached in 2024 as part of the IMF program package, but implementation and the fine details of relief have continued to evolve.
The debt burden matters beyond the fiscal arithmetic. It shapes the government's policy options in ways that constrain its ability to respond to shocks. A government that must service substantial dollar-denominated debt cannot allow the birr to depreciate without limit, because depreciation increases the local currency cost of that debt service. But a government that cannot allow the birr to depreciate enough to reflect market conditions maintains the distortions that the reform program was supposed to eliminate. Threading this needle while keeping the IMF program on track is the central economic management challenge the government faces in 2026.
The IMF's Conditions and Their Political Cost
The IMF program that underpinned the exchange rate liberalisation came with a standard package of structural conditions: fiscal consolidation, reform of state-owned enterprises, revenue mobilisation, reduction of subsidies, and liberalisation of key markets. Each of these conditions has a political cost, and the government has had to manage that cost against the backdrop of ongoing security challenges in Amhara and Oromia, the complex post-war situation in Tigray, and a general environment of public economic frustration.
Subsidy reform has been particularly sensitive. Ethiopia had maintained fuel subsidies and subsidised prices for a range of other goods as a mechanism for managing the cost of living for urban populations. Their reduction or elimination, required under the IMF framework, has directly increased living costs for the urban middle class that represents the most organised and politically vocal segment of Ethiopian society. The government has tried to offset some of this through targeted cash transfer programs, but the scale and reach of those programs has not matched the breadth of the cost increases.
State-owned enterprise reform has moved slowly. Ethiopia's major state enterprises, including Ethiopian Airlines (which is profitable and strategically important), the Ethio Telecom monopoly (which has been partially opened to competition), and a range of loss-making industrial and agricultural enterprises, represent both political constituencies and sources of patronage. Reforming them at the pace and depth the IMF program envisages has proven more difficult in practice than in the program documents.
- Birr stabilising at a much lower level than pre-liberalisation, keeping import costs elevated.
- Food inflation remaining above pre-reform levels in most urban areas.
- External debt service consuming a growing share of government revenue in birr terms.
- IMF program tranche disbursements conditional on continued reform implementation.
- Ongoing conflict in Amhara and Oromia disrupting agricultural production and supply chains.
- Foreign direct investment recovering slowly as investor confidence rebuilds after the Tigray war.
Investment and Business Confidence
Ethiopia's investment story over the first decade of this century was one of the most remarkable in sub-Saharan Africa. GDP growth averaged close to 10 percent annually. Foreign direct investment, particularly in manufacturing, floriculture, and agro-processing, expanded rapidly. The Hawassa Industrial Park, built to attract garment manufacturers and create formal employment, was held up as a model for African industrialisation. That story was badly damaged by the Tigray war and has been slow to recover.
The currency liberalisation has addressed one significant investor complaint: the difficulty of repatriating profits at realistic exchange rates. When the official and parallel market rates diverged by 50 percent or more, investors faced the choice of accepting the official rate for remittances or operating informally. The closure of that gap has removed a genuine barrier to investment. But it has been replaced by a period of high currency volatility and macroeconomic uncertainty that investors also find uncomfortable.
The sectors that remain attractive to investors are those with hard currency revenue streams: tourism (recovering slowly), floriculture (export-oriented), and technology services. Manufacturing for export has faced a complicated environment: lower local labour costs in birr terms make Ethiopia more competitive, but disrupted supply chains, power shortages, and security concerns in manufacturing corridors have constrained the benefit. Ethiopian Airlines continues to be a bright spot, growing its route network and maintaining its position as Africa's largest carrier by several metrics.
The Everyday Reality
The economic analysis of exchange rates, IMF programs, and debt restructuring matters. But what matters more, for the millions of Ethiopians navigating daily economic life, is whether the reforms are producing visible improvement in their circumstances. On that question, the answer in 2026 remains ambiguous at best.
The removal of the parallel market has simplified foreign exchange access for legitimate businesses, which is a real improvement. Inflation, while still elevated, is not accelerating in the way it was during the worst of the Tigray war period. The IMF program has unlocked financing that is keeping the government solvent and able to pay salaries and maintain basic services. These are not nothing.
But for a government teacher in Addis Ababa, a day labourer in Mekelle, or a smallholder farmer in Oromia, the reform program has made everyday life harder in ways that the macroeconomic statistics do not fully capture. Cooking oil, bread, transport, pharmaceuticals: all are more expensive in real terms than they were before the liberalisation. The promise of the reforms is that, in time, they create the conditions for growth and investment that raise incomes broadly. The problem is that time is measured in years, and the cost is being paid now.
What to Watch
The trajectory of the birr in 2026 is the primary indicator. If the exchange rate stabilises and inflation continues its slow downward trend, the economic picture will gradually improve and the reform program will look, retrospectively, like a painful but necessary adjustment. If the birr depreciates further significantly or inflation re-accelerates, the political pressure on the government will intensify and the capacity to maintain the IMF program conditions will be tested.
The security situation in Amhara and Oromia is the second variable. Ongoing conflict in those regions is not just a humanitarian tragedy. It is an economic drain: it disrupts agricultural production, displaces labour, consumes government resources that could otherwise go to social spending, and signals to investors that the political risk environment remains elevated. A genuine improvement in security would do more for economic confidence than any IMF program condition.
The debt restructuring process, and particularly whether the relief agreed in principle translates into actual reduction in near-term debt service obligations, will determine how much fiscal space the government has to invest in the social programs that give economic reform programs their legitimacy. Without that space, the reforms risk being experienced as pure austerity, and governments that are experienced as purely austere tend not to survive long enough to see the growth that the reforms were supposed to generate.