Navigating Ethiopia’s Economic Crossroads Through Uncertainty

Ethiopia’s economy is on a journey marked by growth and challenges. The government reports a robust 7.2% economic growth, while the IMF estimates a more modest 6.1%, and some financial experts suggest it might be closer to 4.5%. The country’s foreign reserves have dwindled to less than USD 1 billion, barely covering two weeks of imports, and the Ethiopian Birr is under pressure, unofficially trading at 110 Birr/USD against the official rate of 56 Birr/USD.

Fiscal discipline has improved, with the deficit to GDP ratio down to 2.9%, although there are ambitious plans for a USD 20 billion investment in reconstruction.

The National Bank of Ethiopia is managing deficit financing through direct advances and T-bills, leading to a mid-year money supply surge of 26.6%, which has since decelerated to 6.4%. Inflation remains high at 28.7% in December, a slight decrease from March’s peak of 34.2%. The current account deficit stands at USD 5.7 billion, or 3.5% of GDP, contributing to a balance of payment shortfall of USD 752 million.Ethiopia faces a significant debt repayment challenge, with a looming USD 1 billion Euro bond repayment and a recent default on a USD 33 million bond payment, resulting in a downgrade to a “C” rating by Fitch Ratings.

Social spending has been impacted by defense and debt priorities, with external funding constraints leading to reduced poverty-alleviation efforts and a weakened social safety net. The World Food Program anticipates that over 20 million Ethiopians may face hunger in 2024, and UNICEF has observed a decline in federal budget allocations to pro-poor sectors to 33%, down from 59% in 2020. Despite these issues, Ethiopia is committed to structural reforms aimed at fostering private sector-led growth. The nation stands at an economic crossroads, facing inflation, debt, and social hurdles, yet determined to steer towards a more prosperous future.