Ethiopia’s Economic Reform Path under IMF Oversight: Progress and Challenges

Ethiopia’s Economic Reform Path under IMF Oversight: Progress and Challenges

Introduction

In July 2025, the International Monetary Fund (IMF) concluded its third review under Ethiopia’s Extended Credit Facility (ECF) arrangement. The review marks a pivotal moment in Ethiopia's macroeconomic reform program, as the country struggles with complex challenges: post-conflict reconstruction, fiscal constraints, dwindling donor aid, inflationary pressures, and unresolved sovereign debt issues. Despite the difficulties, the IMF acknowledged meaningful progress in economic stabilisation and reform implementation.

Positive Developments: Reform Progress and Growth Indicators

Ethiopia’s ECF arrangement—approved in July 2024 with a total value of US$3.4 billion—aims to restore macroeconomic stability, support inclusive growth, and strengthen public sector governance. According to the IMF, the third review confirmed that Ethiopia had met all quantitative performance criteria and structural benchmarks set for the evaluation period (IMF, 2025a). As a result, the IMF Executive Board approved an additional disbursement of US$262 million in early July 2025 (Reuters, 2025a).

The report emphasised Ethiopia’s success in tightening fiscal and monetary policy, phasing out fuel and electricity subsidies, and modernising its exchange rate system. Once a persistent economic threat, inflation has reportedly declined more rapidly than anticipated. Additionally, exports have grown significantly, and foreign exchange reserves have moderately improved, though they remain below optimal levels (IMF, 2025a).

Monetary Policy and Exchange Rate Reforms

One of the key reform areas highlighted in the report was Ethiopia’s shift toward a more market-driven exchange rate regime. The country has begun phasing out multiple exchange rates and easing restrictions on foreign exchange access. However, the parallel (black) market still reflects a significant premium—estimated at around 15%—indicating persistent currency misalignment and tight foreign exchange liquidity (Reuters, 2025b). The IMF provides technical assistance in developing a forecasting and policy analysis system to strengthen Ethiopia’s transition to an interest-rate-based monetary framework (IMF, 2025b).

Debt Sustainability and External Financing Gaps

Despite reform progress, Ethiopia’s debt crisis remains unresolved. The country defaulted on its external commercial debt in December 2023 and continues seeking restructuring agreements with official and private creditors. The IMF estimates that a US$3.5 billion reduction in external debt service obligations will be necessary over the next several years to restore debt sustainability (Addis Standard, 2025). Without this relief, Ethiopia’s development financing and poverty reduction goals remain in jeopardy.

Moreover, the IMF report underscores the decline in external aid and concessional financing. Donor support has fallen from 12% of GDP to under 4%, threatening humanitarian operations and budget support. This trend pressures the Ethiopian government to accelerate domestic revenue mobilisation and attract private investment (Reuters, 2025b).

Security and Structural Risks

Ethiopia’s macroeconomic trajectory is further complicated by security instability in several regions, sluggish state-owned enterprise (SOE) privatisation, and a fragile investment climate. The IMF warned that unless peace and the rule of law are consolidated, economic reforms alone will not unlock long-term growth or investor confidence (IMF, 2025a). Continued efforts are needed to strengthen institutional capacity, regulatory frameworks, and transparency in public finance management.

Conclusion

The July 2025 IMF report on Ethiopia presents a mixed but cautiously optimistic outlook. While the Ethiopian government has made significant progress in implementing fiscal and monetary reforms, the path to sustained economic recovery remains vulnerable to external financing gaps, security threats, and incomplete debt restructuring. The success of the IMF-supported program will depend not only on continued domestic commitment to reform but also on renewed international support and peacebuilding efforts. If managed prudently, Ethiopia has the potential to emerge from its current economic crisis with a stronger, more resilient foundation for inclusive development.

References

IMF (2025a). The Federal Democratic Republic of Ethiopia: 2025 Article IV Consultation and Third Review under the Extended Credit Facility Arrangement. International Monetary Fund. Retrieved from https://www.imf.org/en/Publications/CR/Issues/2025/07/15/The-Federal-Democratic-Republic-of-Ethiopia-2025-Article-IV-Consultation-Third-Review-Under-568611

IMF (2025b). Technical Assistance Report – Forecasting and Policy Analysis System. International Monetary Fund. Retrieved from https://www.imf.org/en/Publications/technical-assistance-reports/Issues/2025/07/16/The-Federal-Democratic-Republic-of-Ethiopia-Technical-Assistance-Report-Forecasting-Policy-568688

Reuters (2025a). IMF Executive Board Approves Ethiopia Review, Unlocking $262 Million. Retrieved from https://www.reuters.com/world/africa/imf-executive-board-approves-ethiopia-review-unlocking-262-million-2025-07-02/

Reuters (2025b). IMF Warns Ethiopia That Reform Momentum Faces Risks Amid Waning Donor Support. Retrieved from https://www.reuters.com/world/africa/imf-warns-ethiopia-that-reform-momentum-faces-risks-amid-waning-donor-support-2025-07-15/

Addis Standard (2025). IMF Cautions Ethiopia's Economic Reform Faces Headwinds Amid Falling Aid, Security Risks. Retrieved from https://addisstandard.com/imf-cautions-ethiopias-economic-reform-faces-headwinds-amid-falling-aid-security-risks/