Ethiopia

Growth is being driven by broad reforms agreed with the IMF

Growth will remain sustained during the 2025-2026 fiscal year (8 July 2025 to 7 July 2026), thanks to the implementation of major reforms agreed in July 2024 with the IMF in exchange for a USD 3.4 billion funding programme. These include restoring debt sustainability, liberalising the exchange rate, creating a stock exchange, and gradually opening the economy to private investors. These measures are stimulating exports and boosting local and foreign investment as part of Phase 2 of the Homegrown Economic Reform Program (2023-24–25-26). The banking sector is benefiting from the Banking Business Proclamation of March 2025, which for the first time allows foreign ownership of up to 49% of Ethiopian institutions.

The performance of the agricultural sector, which is the backbone of the economy (accounting for 35% of GDP and 70% of employment), should benefit from better harvests thanks to the development of irrigation systems and mechanisation. Coffee production (the leading export product) will benefit from a 4% increase in harvested area thanks to the entry into production of new plantations and the rejuvenation of old ones. However, the sector will remain dependent on often insufficient fertiliser imports, pending the construction of the Nigerian company Dangote Industries' USD 3 billion plant, which was recently approved by the government. The mining sector is growing, driven by the commissioning last November of the Segele gold mine and operated by Norway's Akobo Minerals, which is the first to come into production since 1994. The Kurmuk (Allied Gold) and Tulu Kap (Kefi) mines, targeting annual production of 240,000 and 135,000 ounces, respectively, are expected to start up in 2026 and 2027. In addition, the sector will benefit from investment agreements signed in May 2025 with other foreign players in the mining and solar sectors totalling USD 1.7 billion. Furthermore, the Grand Renaissance Dam (GERD), which is a source of tension with Egypt and Sudan, is expected to be officially inaugurated in the second half of the year. Several of the 13 turbines have already been operating since 2022 despite the absence of a tripartite agreement on Blue Nile water management rules. The dam should fully cover domestic demand and export surpluses to Sudan, Kenya, and Djibouti. Last, the airport sector will remain a growth driver, supported by rising revenues from Ethiopian Airlines Group (4.5% of GDP), with positive spillover effects on agro-exports and tourism. The sector will attract significant investment in 2026 as part of the construction of a new airport in Bishoftu near the capital, at a cost of USD 7.8 billion. When completed in 2029, it will be the largest in Africa.

In July 2024, the government replaced its fixed exchange rate regime with a floating one in order to reduce the gap between the official rate and the parallel market rate. The birr depreciated by nearly 50%, making official imports more expensive, but the impact was limited by consumption based mainly on local products, already high recourse to informal channels, and public support measures (state imports of essential goods and regulated tariffs). At the same time, the National Bank of Ethiopia, now independent and active on the open market, is helping to moderate inflation through a high key interest rate (15% in July 2025) and a credit growth ceiling of 18%, supported by a reduction in the monetisation of the public deficit.

External debt restructuring nearing completion

For the 2024-2025 fiscal year, the government has succeeded in significantly increasing domestic revenues by broadening the tax base, revising VAT and excise duties, adopting a new property tax, and digitising public services. At the same time, foreign exchange market reform has enabled the collection of an exceptional tax on imports, boosting customs revenues. The proposed budget for 2025-2026 stands at 2 billion birr (USD 15 billion), which is an increase of 31% over the previous year. The increase is mainly due to the depreciation of the birr, but also reflects the commitment made to the IMF to increase domestic revenues by one percentage point of GDP per year (they accounted for 7.3% in 23-24). In order to mitigate the socio-economic effects of the reforms, a supplementary budget that was passed in October 2024 is temporarily financing subsidies (fuel, fertilisers, cooking oil and medicines), is extending the Productive Safety Net Programme (PSNP) to combat food insecurity and is increasing public sector wages. These measures will be phased out as 2026 approaches. The budget guidelines for the 2025-2026 fiscal year aim to rationalise tax expenditures and strengthen income tax. In terms of external assistance, the country is benefiting from the resumption of World Bank disbursements (USD 1.5 billion) in support of the IMF program, the third review of which released USD 262 million at the end of May 2025. A total of USD 1.5 billion has already been disbursed out of the USD 3.4 billion planned by 2028. However, the suspension of USAID programs (USD 1.2 billion in 2024) and the cessation of aid from the World Food Program are reducing the available budgetary space. Capital expenditure remains mainly focused on financing projects under the PSNP and infrastructure construction.

The accumulation of high external debt (44% of total public debt) related to significant infrastructure investments, civil conflicts, droughts, and the war in Ukraine, led the country to request debt restructuring under the G20 framework in 2021. Negotiations were delayed by the conflict in Tigray until a temporary moratorium was agreed in November 2023 with bilateral creditors (including China) whereupon bilateral debt servicing for 2023 and 2024 was frozen. Despite the truce, the country defaulted in December 2023 by failing to pay a USD 1 billion Eurobond coupon maturing in December 2024. In early July 2025, a memorandum of understanding was signed with the official committee of public creditors, agreeing to a USD 8.4 billion restructuring package and USD 2.5 billion in debt relief during the IMF program (until 2028). Negotiations are continuing on the Eurobond, with private creditors rejecting the proposed 18% haircut, arguing that the country is suffering from a liquidity problem rather than a solvency problem. Once the agreement is finalised, the government says it is ready to take on new debt to finance its development projects.

Exports (3.5% of GDP) will continue to be driven by the depreciation of the birr, high gold and coffee prices (21% and 19% of exports, respectively), and steady growth in electricity sales from the Grand Ethiopian Renaissance Dam (GERD) to neighbouring countries. Imports (14% of GDP) of capital goods to revive infrastructure projects will remain high, supported by improved foreign exchange availability. On the services side, the expansion of Ethiopian Airlines continues to partially offset the trade deficit in goods, while expatriate remittances via banking channels remain strong, encouraged by financial sector reforms. Despite the drastic reduction in US development aid and the disappearance of food aid, foreign exchange reserves are set to continue replenishing, supported by multilateral financial flows and progress in external debt restructuring. At the end of October 2024, foreign exchange reserves were equivalent to 1.6 months of imports.

High domestic security risk and tensions with neighboring countries

Abiy Ahmed has been Prime Minister since 2018. His party, the Prosperity Party (PP), won 410 of the 547 seats in Parliament in June 2021, in a peaceful election albeit tarnished by numerous irregularities. He is supported by the Oromo people, the ethnic group from whom he hails, as well as by the populations from the south. The elections scheduled for June 2026 are likely to be contested. The November 2022 peace agreement ended two years of fighting between federal forces and the Tigray People's Liberation Front (TPLF). At the end of March 2025, the federal parliament approved the extension of the term of office of the provisional administration of Tigray, appointed in 2022, against a backdrop of escalating tensions between factions of the TPLF. The status of disputed territories, particularly those in western Tigray seized by Amhara forces during the war, is to be settled soon by referendum, in order to organize the return of displaced persons and define administrative control over a strategic area bordering Eritrea and Sudan. In the neighbouring Amhara region, tensions have escalated between federal forces and a regional “self-defence” militia (Fano) and led to the declaration of a state of emergency from August 2023 to June 2024. The security situation has not improved since then. The militia has accused the federal government of seeking to dismantle the paramilitary units created by the federal states in order to weaken them and of ceding Amhara land to Tigray under the peace agreement. In the central region of Oromia, clashes with the Oromo Liberation Army (OLA), another non-state armed group, are also disrupting this other major region.

The unrest in Tigray is souring relations with Eritrea. Eritrea's animosity toward the Tigray regional administration is reflected in its continued military presence in the north of the country. Like Somalia, Eritrea perceives Ethiopia's ambitions to gain access to the sea as a threat to its sovereignty. In December 2024, under the mediation of President Erdogan, the Ankara Agreement eased tensions between Somalia and Ethiopia. In exchange for abandoning the January 2024 memorandum of understanding between the latter and the self-proclaimed republic of Somaliland, Somalia has committed to facilitating access for Ethiopian goods to its ports. The memorandum, which was never ratified, granted Ethiopia a coastal strip in exchange for recognition of Somaliland. However, the presence of Egyptian peacekeeping troops in Somalia could jeopardise this agreement due to the dispute over the GERD. At the same time, insecurity in Sudan and South Sudan is fuelling risks along the western border, where the country is experiencing a growing influx of refugees.

Relations with other foreign partners should continue to develop following the agreement reached with the IMF in July 2024. The war in Tigray prompted cooler relations with the US and forced Prime Minister Abiy Ahmed to forge closer ties with new partners such as Russia, the United Arab Emirates and China. In January 2024, the country joined the BRICS and will therefore be able to benefit from financing from the New Development Bank, of which China is the main financier. In addition, the country aims to join the World Trade Organization by March 2026.

Last updated: July 2025