Ethiopia’s Transition to A Market-led Economy

Prior to 2019, Ethiopia's economy exhibited sustained growth, despite underlying macroeconomic imbalances. While the government's substantial investment in infrastructure fueled expansion, it also contributed to high inflation, inadequate job creation, and mounting credit pressures.

To address these structural challenges and foster sustainable, inclusive economic growth, Ethiopia initiated an Indigenous Economic Reform Agenda in the first quarter of the 2019 fiscal year. A cornerstone of this reform was the implementation of stringent fiscal policies aimed at stabilizing the macroeconomic environment.

Debt Reduction

To alleviate the country's debt burden, the government has shifted its borrowing strategy away from high-interest commercial loans towards concessional loans with lower interest rates and longer repayment terms.

Furthermore, efforts have been made to reduce borrowing by public enterprises and improve project planning and execution through rigorous research and capacity building. Debt restructuring and negotiation with creditors have also contributed to lowering the overall debt burden.

Balance of Trade

To improve the trade balance and increase national income, tremendous activities have been carried out on boosting production, productivity, and the capacity of sector institutions. By expanding economic growth drivers, particularly in agriculture, industry, tourism, mining, and ICT, tangible results have been achieved.

These reforms have led to increased production, productivity, and foreign trade performance, thereby improving the trade balance and generating sufficient revenue for debt servicing. In the previous fiscal year alone, earnings from goods and services surpassed 10 billion USD, while remittances exceeded 6.5 billion USD. Foreign Direct Investment (FDI) reached 3.8 billion USD in the 2023/2024 fiscal year alone.

Significant strides have been made in import substitution, including wheat. Over the past ten months, the country replaced imports worth 2 billion USD. From 2018/2019 to 2022/2023, average GDP growth stood at 7.1 percent.

Filling Budget Deficit

To address the budget deficit, the government has prioritized increasing revenue as a percentage of Gross National Product (GNP). Recent years have witnessed significant progress in tax administration through the expansion of the tax base and the implementation of a modernized tax collection system. As a result, tax revenue surpassed 529 billion Birr in the previous fiscal year.

Reducing Inflation

Efforts to stabilize prices have centered on increasing product supply, particularly through the “Bounty of the Basket” development initiative, and enhancing productivity. Agricultural output has surged, with harvests exceeding 100 million quintals this year compared to the previous year. Additionally, the government injected 10 billion Birr into the economy and lifted import duties on essential goods.

To control monetary expansion and reduce government borrowing from the National Bank, measures have been implemented to regulate cash flow and restrict credit lending by commercial banks. As a result of these and other adjustments, inflation has declined from over 30 percent to 19.9 percent.

Job Creation

The economic reforms implemented in recent years have yielded significant job creation. Over 3.8 million jobs were generated in the past fiscal year alone, primarily within the industrial, agricultural, urban development, and infrastructure sectors. Concurrently, the government has facilitated legal employment opportunities for over 300,000 Ethiopians abroad.

Comprehensive Macroeconomic Reform Policy Implementation

Building upon the successes of the initial economic reform program while acknowledging the remaining challenges, Ethiopia has launched a comprehensive macroeconomic reform policy. This initiative is centered on four key pillars including establishing a modern, stable, and sustainable macroeconomic policy environment, fostering innovation, competitiveness, and investment, strengthening domestic production and productivity across sectors and increasing the government's capacity to provide quality services.

This reform agenda aims to stimulate robust, private sector-led, inclusive growth and job creation. The overarching goals include sustained high economic growth and single-digit inflation.

By addressing foreign exchange imbalances, strengthening the financial sector, controlling inflation, increasing tax revenue, optimizing government investment, enhancing banking sector competitiveness, and improving the business environment, the government seeks to build a modern as well as globally competitive economy.

Key components of the reform include transitioning to a market-based exchange rate system, implementing a modern interest rate-based monetary policy, reforming fiscal policy to reduce public finance pressures, and optimizing development finance and public debt management. These measures are aligned with Ethiopia's long-term and medium-term development plans.

The anticipated outcomes of these reforms are impressive. Accordingly, the nation is highly expected to register an average annual GDP growth of 8 percent over the next four years and its inflation to reduce to 10 percent. Moreover, the tax revenue as a percentage of GDP is also anticipated to reach 11 percent, government debt-to-GDP ratio decline to 35 percent, export and import trade valued at 20 billion USD, foreign direct investment reaching 8 billion USD, and foreign exchange reserves exceeding 10 billion USD. 

These projections underscore the potential for significant economic transformation. Successful implementation of this comprehensive reform agenda is crucial for safeguarding Ethiopia's national interests and improving the lives of its citizens.