BANKS ETHIOPIA  |  SPECIAL REPORT  |  MAY 2026

The Price of the IMF Deal

What Ethiopia’s reform programme — a floating Birr, subsidy cuts and higher taxes — means for SMEs, entrepreneurs, the middle class and the poor.

For weeks, an IMF team has worked through government corridors in Addis Ababa, conducting the fifth review of Ethiopia’s macroeconomic reform programme. Their conclusions will carry weight far beyond the Ministry of Finance — down to the injera seller in Merkato, the factory worker on the outskirts of the capital, and the small business owner trying to make payroll.

The Fund’s demands are clear: a fuller floating of the Birr, a phased withdrawal of direct state subsidies, and a far stronger push to raise domestic tax revenues. These are not abstract prescriptions. They translate directly into a weaker currency, faster-rising prices, and a higher cost of living. How that plays out depends entirely on who you are and what you do for a living.

A Weaker Birr — Imported Pain

Further floating of the Birr means imported goods become more expensive in local currency. Fuel, medicine, cooking oil, wheat and machinery — much of what Ethiopian households and businesses rely on — will cost more. For exporters earning in foreign currency, this is a tailwind. For importers, manufacturers, and ordinary consumers, it is a headwind that hits purchasing power directly. Transport fares, food prices, and energy bills will all feel the pressure.

Subsidy Cuts — The Cushion Removed

Subsidies keep certain prices — particularly fuel — below what the market would charge. When they are withdrawn, that cushion disappears. A minibus driver paying more for fuel, a small bakery facing higher electricity costs, a household spending on cooking gas: each faces an immediate and unavoidable cost increase. The poor are hit hardest, not because they consume the most, but because food, transport, and energy make up the overwhelming majority of their spending. For a family living close to the edge, even a modest price rise in these categories is a genuine crisis.

Those with the least cushion of their own suffer most when the government’s cushion is removed.

The Tax Push — Reform or Revenue Hunting?

With a tax-to-GDP ratio of just 7.1 percent in 2023/24, Ethiopia ranks among the lowest in Africa. While the government’s objective to increase this by nearly seven percentage points by 2027/28 is fiscally justifiable, the proposed strategy is under fire. A draft amendment to the tax administration law seeks to implement harsher penalties and restrict the evidence businesses can present during disputes, while establishing a mediation process that critics argue is biased toward the tax authority. These changes impose a significant administrative strain on small and medium enterprises already struggling with a depreciating Birr and escalating operational costs. The danger is that excessive penalties may not drive compliance, but instead encourage informal negotiations—such as bribes and illicit agreements—thereby further damaging public trust.

The Middle Class and the Poor: Squeezed Together

Salaried workers — teachers, bank staff, government employees, healthcare professionals — face a particular bind. Their incomes are fixed or slow-rising, while the prices they pay are not. Payroll taxes come out before the salary arrives; higher prices are waiting on the other side. Real purchasing power falls quietly but steadily. For lower-income Ethiopians, the arithmetic is more brutal: seventy to eighty percent of spending goes on food, transport, and energy. Inflation in these categories is not an inconvenience — it is a direct reduction in living standards, with nowhere to cut back.

SMEs and Entrepreneurs: Caught in the Crossfire

Small and medium enterprises are, in principle, the engine of jobs and diversification that Ethiopia needs. In practice, they are disproportionately exposed. Currency volatility squeezes those reliant on imported inputs. Tougher tax enforcement falls on formal businesses while the informal economy remains largely untouched. An entrepreneur trying to formalise and grow faces rising costs, exchange-rate uncertainty, and heavier administrative demands all at once. The policy environment and the government’s stated ambition for private sector growth are pulling in opposite directions.

What Makes Reform Sustainable

Kenya’s 2024 protests — sparked by tax measures imposed on households already stretched by inflation — ended in street violence and a government retreat. Ethiopia’s political landscape is more fractured, its regional tensions sharper. Painful measures imposed on an aggravated public carry consequences beyond the budget. The government knows this. Its medium-term revenue strategy, published in October 2024, signals awareness that a fairer, broader tax base — one built on compliance rather than coercion — is ultimately more durable. Whether enforcement pressure, currency depreciation, and subsidy withdrawal arrive faster than public trust can be built remains the central question.

The IMF team will leave Addis Ababa. The Birr rate, the price of bread, and the tax bill will remain. How Ethiopia manages the gap between what international lenders demand and what ordinary citizens can absorb is, in the end, as much a political question as an economic one.

 Source reference: Addis Fortune, May 2026. Fiscal data drawn from the National Bank of Ethiopia and the Ministry of Revenues.