Ethiopia: IMF Cautions Ethiopia’s Economic Reform Faces Headwinds Amid Falling Aid, Security Risks

Addis Abeba — The International Monetary Fund (IMF) has cautioned Ethiopia that its reform program under a $3.4 billion Extended Credit Facility (ECF) arrangement is facing mounting risks due to declining foreign aid, fragile security conditions, and a resurgent parallel currency market, despite progress in meeting key program benchmarks.

In a report released on 15 July following its Article IV Consultation and the third review of Ethiopia’s program, the IMF commended Ethiopian authorities for difficult economic reforms, including subsidy cuts, tax restructuring, and tighter monetary policy.

In February this year, Kristalina Georgieva, Managing Director of the Fund acknowledged the challenges of the macroeconomic reforms, describing them as “tough” and noting that they “take time.” During her visit to Ethiopia, the IMF chief urged the public to “maintain unity” in implementing these policies, emphasizing that they would ultimately yield “tremendous outcomes.”

The Fund’s latest report stressed that “downside risks remain elevated,” citing persistent security challenges, delays in privatization, weakening foreign direct investment (FDI), and the continued underperformance of the export sector.

“The outlook remains subject to downside risks given security challenges and declining donor support,” said IMF Deputy Managing Director Nigel Clarke. Foreign aid has dropped sharply, falling from 12% of GDP a decade ago to below 4%, with more cuts expected. The Fund warned that “larger than expected cutbacks in assistance from development partners could have significant humanitarian implications.”

According to the IMF, one in five Ethiopians will require food or humanitarian assistance in 2025, with the UN’s response plan underfunded and many programs reliant on temporary waivers.

Restructuring underway but debt payments to resume

Addis Standard reported on 01 July that Finance Minister Ahmed Shide told parliament Ethiopia is in the final phase of negotiating a $3.5 billion debt relief agreement with creditor countries. Speaking during the presentation of the 2025/26 draft federal budget, the Minister said, “The agreement will be signed soon,” but added that even with the restructuring, Ethiopia’s external debt payments will rise under revised terms starting next year.

If concluded, the anticipated debt relief brings positive steps to the ongoing macroeconomic reform program, which began in July 2024 and led to the government to shift from a crawling peg exchange rate system to a market-driven regime, helping unlock over $10.7 billion in promised external financing from the IMF, World Bank, and other partners.

The IMF echoed concerns about debt sustainability, noting that “policy slippages or delays in reform implementation in response to social pressures” could widen financing gaps and threaten donor or creditor support. Inconsistent progress on key reforms, including exchange rate liberalization and fiscal adjustments, was marked as a key vulnerability.

The country’s ongoing debt crisis has further complicated its recovery as Ethiopia remains in default, even as it nears a deal with official creditors and seeks comparable treatment from private bondholders, IMF said.

FX market strains and trade fragility add to pressure

While acknowledging steps toward foreign exchange reform, the IMF highlighted enduring problems in the currency market. A central bank commission of 2.5% on FX sales, limited interbank liquidity, and high transaction costs have helped sustain a 15% parallel market premium. These distortions complicate macroeconomic stability efforts and undermine investor confidence.

Ethiopia’s limited export base – goods exports accounted for less than 6% of GDP in 2023/24 – leaves it exposed to balance of payments risks. Although recent U.S. tariffs are expected to have a “marginal impact,” the Fund warned that prolonged global uncertainty or trade shocks could deter FDI and stall export-sector growth. Nevertheless, Ethiopia has recently stepped up its efforts to accelerate WTO accession and unlock new markets.

Government optimistic about growth and reform impact

In its response, the Ethiopian government expressed broad agreement with the IMF’s findings but projected a more optimistic growth outlook of 8.4% for the 2024/25 fiscal year, the report said. Officials cited improved performance in manufacturing, exports, and construction, as well as early gains from structural reforms.

Ethiopian authorities also largely agreed with the its views on inflation, the external sector, and reserve projections, including key components like remittances, coffee and gold exports. On the financial sector, they shared the Fund’s assessment of risks but argued current trends suggest room for stronger outcomes on price stability.

Stronger disaster response framework

As the IMF warns, however, sustaining reform momentum will require shielding the most vulnerable from deepening humanitarian strain while maintaining investor confidence in an increasingly fragile economic and political environment.

The Fund underscored the urgency of strengthening national and regional mechanisms to better manage macroeconomic shocks and crises.

“Curtailment of overseas development assistance would disproportionately affect regions with large humanitarian and disaster risk expenditure requirements,” the IMF said, adding that such a scenario “would increase the value of a stronger framework to manage regional macroeconomic shocks.”

To mitigate such vulnerabilities, the IMF welcomed the Ethiopian authorities’ plan to establish a national disaster risk management fund. “Setting up an adequately funded national disaster risk management fund… could help strengthen the response to natural disasters and humanitarian crises and channel available international resources transparently.”

The IMF also emphasized the importance of reinforcing interregional stabilization and resilience, recommending the expansion of safety nets, a stronger focus on livelihoods, and greater efficiency through digitization. “Interregional stabilization and resilience to shocks can be strengthened through broadening the geographic reach of the safety nets, enhancing focus on livelihoods, and improving efficiency through e-payments, digitalization, and establishing a National Social Registry,” it stated.

Furthermore, the Fund highlighted the need for better data systems to support equitable resource allocation, saying: “Producing timely and adequate regional data to inform periodic updates of regional grant shares would also help.”

By Addis Standard.