Ethiopia Secures $261 Million IMF Funds Amid Economic Reforms

Ethiopia has qualified for the disbursement of $261 million in financing from the International Monetary Fund following the successful completion of the fourth review of its macroeconomic performance under a four-year $3.4 billion Extended Credit Facility approved in July 2024. The latest tranche brings total IMF disbursements to Ethiopia to approximately $2.18 billion, representing a vote of confidence in the East African nation’s ambitious reform agenda as it navigates one of the most comprehensive economic transformations undertaken by any African country in recent decades. The IMF Executive Board’s decision, announced on January 16, 2026, allows Ethiopia to immediately access SDR 191.7 million to meet pressing fiscal and balance of payments needs during a critical period of economic transition. The approval follows better-than-anticipated macroeconomic outcomes driven by strong growth, rising exports, improved revenue collection, and increasing foreign exchange reserves, even as the country continues to grapple with the aftereffects of civil conflict, climate shocks, and a sovereign debt default that has complicated its reintegration into international financial markets. Build the future you deserve. Get started with our top-tier Online courses: ACCA, HESI A2, ATI TEAS 7, HESI EXIT, NCLEX-RN, NCLEX-PN, and Financial Literacy. Let Serrari Ed guide your path to success. Enroll today. Robust Economic Performance Exceeds Program Expectations Ethiopia’s economic performance under the Extended Credit Facility has substantially exceeded initial projections, with real GDP growth projected to reach 9.3 percent in the 2025/26 fiscal year, up from 8.1 percent the previous year. This remarkable expansion comes despite the country facing multiple simultaneous challenges including the transition to a market-based exchange rate system, ongoing debt restructuring negotiations, and the need to rebuild infrastructure and economic capacity following years of internal conflict. More significantly, inflation has declined dramatically from the 32.5 percent average recorded in fiscal year 2022/23 to an expected 11.9 percent in 2025/26, with a clear trajectory toward single digits over the medium term. This sharp reduction in price pressures reflects the effectiveness of the National Bank of Ethiopia’s tight monetary policy stance, improved supply chain functioning following the end of armed conflict in northern regions, and better agricultural production supported by favorable weather conditions. Foreign exchange reserves have also strengthened considerably, projected to rise to 2.2 months of import coverage during the current fiscal year—a critical improvement for a country that has struggled with acute dollar shortages for years. The accumulation of reserves provides essential buffer capacity to manage exchange rate volatility and supports confidence in Ethiopia’s external position as it continues implementing market-based foreign exchange reforms. IMF Deputy Managing Director Nigel Clarke emphasized that Ethiopia has continued making progress in advancing its reform agenda, with measures to enhance the foreign exchange market, modernize monetary policy, mobilize fiscal revenues, and advance the financial regulatory framework delivering “encouraging results” and better-than-anticipated macroeconomic outcomes. “Maintaining the reform momentum remains key to the promising macroeconomic outlook,” Clarke stated, underscoring the importance of sustained policy discipline even as initial reform impacts prove positive. Foreign Exchange Market Transformation and Ongoing Challenges The centerpiece of Ethiopia’s economic transformation has been the transition to a floating exchange rate regime implemented on July 29, 2024, which represents one of the most dramatic policy shifts undertaken by the government. The National Bank of Ethiopia announced reforms introducing competitive, market-based determination of exchange rates, allowing banks to buy and sell foreign currencies at freely negotiated rates and dramatically reducing the central bank’s direct intervention in foreign exchange allocation. The immediate impact of the forex liberalization was stark, with the Ethiopian birr depreciating by approximately 30 percent against the US dollar on the first day following the policy announcement. The currency fell from an official rate of around 57 birr per dollar to approximately 80 birr, dramatically narrowing the gap with the parallel market rate that had been trading around 113 birr per dollar. By December 2024, the birr had further depreciated to 127.92 against the dollar, reflecting continued market adjustment and the release of pent-up demand for foreign currency. The National Bank of Ethiopia is now working to strengthen the functioning of the foreign exchange market through multiple channels. According to the IMF, the central bank is publishing auction guidelines consistent with international best practices, limiting interventions strictly to auctions rather than discretionary allocation, and developing plans to bring the Commercial Bank of Ethiopia’s net open foreign exchange position within prudential limits. These measures aim to create a more transparent and efficient foreign exchange market that can support trade and investment while reducing opportunities for rent-seeking and corruption. “Developing the interbank forex market will be important to strengthen banks’ forex risk management and enhance transparency,” Clarke emphasized, noting that a well-functioning interbank market would allow commercial banks to manage their foreign exchange exposures more effectively and reduce dependence on central bank intervention during periods of market stress. The IMF has introduced a new quantitative performance criterion that effectively sets a zero limit on foreign exchange intervention except through auctions, aimed at preventing a return to the discretionary allocation practices that characterized the previous managed exchange rate system. This restriction represents a fundamental shift in how Ethiopia manages its foreign exchange resources and is designed to ensure that market forces, rather than bureaucratic decisions, determine currency allocation. However, the forex market transition has not been without complications. In October 2024, the National Bank imposed a two percent cap on bank bid-ask spreads to enhance market efficiency, while a November 2024 ban on the Franco Valuta system—an informal forex mechanism used by importers—triggered a 3.7 percent monthly depreciation in the birr’s value. The ongoing volatility underscores the challenges of managing a floating exchange rate system in an economy with limited foreign exchange reserves and persistent structural current account deficits. Fiscal Reforms and Revenue Mobilization Progress Ethiopia has made substantial progress in mobilizing domestic fiscal resources, with revenue collection showing strong gains following the implementation of tax policy reforms. The government has successfully broadened the tax base and raised revenue potential above 10 percent of GDP, a significant achievement for a country with historically low tax-to-GDP ratios and widespread informality in economic activity. Tax and customs administration reforms are considered critical to expanding the tax base fairly and sustainably while fostering a stable taxation environment that supports private sector investment. The IMF emphasized that these reforms will be essential for maximizing gains from tax policy changes and creating fiscal space for increased social and capital spending without resorting to unsustainable borrowing. However, fiscal discipline remains a concern. The IMF noted that while the overall direction of fiscal reforms has remained consistent with program commitments, the Federal Budget for the 2025/26 fiscal year deviated from parameters agreed during the third review in May 2025. The authorities have committed to implementing corrective measures to ensure the fiscal deficit remains financeable and that expenditures stay consistent with program objectives, though specific details of these adjustments have not been publicly disclosed. The IMF stressed that prudent expenditure control and sustained efforts to mobilize domestic resources are essential for fiscal sustainability. Phasing out fuel subsidies is identified as particularly important for rebuilding fiscal buffers and improving the efficiency of spending, though the government must balance subsidy reduction against the need to protect vulnerable populations from sharp price increases that could trigger social unrest. “Social protection expenditure should be safeguarded,” the IMF emphasized, noting that while Ethiopia needs to improve fiscal discipline, cutting support for the most vulnerable populations would be counterproductive and could undermine social cohesion during a difficult economic transition. The government’s contribution to targeted social safety nets fell short of program targets during the review period as authorities prioritized absorption of development partner contributions, highlighting the ongoing tension between fiscal consolidation pressures and social protection needs. One decision can change your entire career. Take that step with our Online courses in ACCA, HESI A2, ATI TEAS 7, HESI EXIT, NCLEX-RN, NCLEX-PN, and Financial Literacy. Join Serrari Ed and start building your brighter future today. Debt Restructuring Advances Under Common Framework Ethiopia has made meaningful progress in debt restructuring negotiations under the G20 Common Framework, though significant challenges remain. The country reached an Agreement in Principle with bilateral creditors in March 2025, followed by the signing of a Memorandum of Understanding with the Official Creditor Committee in July 2025 that is expected to provide more than $3.5 billion in cashflow relief. The agreement includes China, which holds approximately one-quarter of Ethiopia’s external debt and whose cooperation has been essential for advancing restructuring efforts. The IMF welcomed this progress, noting that financing assurances received and adjustment efforts made are consistent with Fund policy requirements and program parameters. Public debt, which spiked during the reform transition period, is projected to decline steadily from approximately 45 percent of GDP to below 32 percent by 2030, assuming reform implementation stays on track and debt treatment from creditors is delivered as expected. However, discussions with private external creditors have proven more contentious. Ethiopia defaulted on its $1 billion Eurobond in December 2023 when it failed to make a $33 million interest payment—marking the continent’s largest sovereign default at the time and Ethiopia’s first default on external obligations in decades. Initial debt restructuring talks with bondholders collapsed in October 2025 after the parties failed to reach agreement on terms, with bondholders reportedly expressing skepticism about the government’s claims regarding recent export performance and concerns about the sustainability of proposed restructuring terms. More recently, Ethiopia has reached an agreement in principle with bondholders controlling more than 45 percent of the outstanding Eurobond, representing tentative progress toward resolving the sovereign default. The latest proposal reportedly involves a 15 percent haircut on the bond’s face value, though the deal still requires clearance from the IMF and the Official Creditor Committee to ensure consistency with Ethiopia’s broader debt restructuring framework and the comparability of treatment principle that governs Common Framework processes. The debt restructuring process has been complicated by coordination challenges inherent in the G20 Common Framework, which requires official creditors to agree on relief terms before private lenders can be offered comparable deals. China’s initial reluctance to provide financing assurances without parallel commitments from private creditors created a sequencing problem, while bondholders awaited clarity on official creditor terms before making their own concessions. This circular dependency has extended Ethiopia’s time in default and complicated its efforts to restore market access and investor confidence. The IMF emphasized that continued avoidance of non-concessional borrowing, except for financing specifically designated for the Koysha hydroelectric dam project, will be critical for containing debt vulnerabilities. Careful evaluation of proposed new concessional debt will also be necessary to ensure that Ethiopia’s hard-won progress toward debt sustainability is not undermined by accumulation of new obligations that could prove unsustainable given the country’s limited export capacity and fiscal resources. Central Bank Governance and Financial Sector Reforms Strengthening the institutional framework governing Ethiopia’s financial sector has emerged as a critical priority under the IMF program. The Fund emphasized that finalizing the National Bank of Ethiopia’s governance reform plan, including appointing new board members in line with the amended central bank law, is essential for ensuring the regulator’s autonomy, strengthening its capacity to execute its mandate, and improving its financial position. Central bank independence has historically been limited in Ethiopia, with the government frequently directing monetary and exchange rate policies to serve fiscal financing needs rather than macroeconomic stability objectives. The governance reforms aim to insulate monetary policy decision-making from short-term political pressures while ensuring appropriate accountability and transparency in central bank operations. Maintaining tight monetary conditions continues to be appropriate for anchoring inflation expectations and supporting further declines in price pressures, according to the IMF. Recent increases in reserve requirements have helped maintain tight liquidity conditions as the National Bank of Ethiopia works toward establishing an interest rate-based monetary policy framework. A phased exit from the cap on private credit growth is planned to support this transition while avoiding an overly rapid expansion of credit that could reignite inflationary pressures or fuel asset price bubbles. Development of interbank money markets and repo markets will be essential for improving monetary policy transmission and allowing the central bank to more effectively influence financial conditions through interest rate adjustments rather than direct credit controls. These market-based transmission mechanisms will become increasingly important as Ethiopia’s financial system deepens and becomes more integrated with regional and global markets. The IMF noted that while most structural benchmarks under the program have been met, publication of Ethiopian Investment Holdings’ financial statements was delayed due to implementation challenges. The state-owned holding company controls significant commercial assets, and transparency regarding its financial position and operations is considered important for assessing contingent fiscal liabilities and ensuring that state-owned enterprises operate on commercial principles rather than serving as vehicles for quasi-fiscal operations. Economic Transformation Amid Geopolitical and Domestic Challenges Ethiopia’s economic reform program is being implemented against a backdrop of significant geopolitical and domestic challenges that continue to shape policy options and constraint economic recovery. The country experienced a devastating civil conflict in the northern Tigray region from November 2020 to November 2022 that resulted in hundreds of thousands of deaths, massive displacement, widespread infrastructure destruction, and severe disruption to economic activity. While the Pretoria Peace Agreement signed in November 2022 ended active hostilities, reconstruction needs remain enormous and the conflict’s legacy continues to affect economic performance. Agricultural production in formerly conflict-affected areas is still recovering, transport corridors have been damaged, and business confidence remains fragile. Additionally, sporadic violence continues in other regions including Oromia and Amhara, creating ongoing security challenges that complicate economic stabilization efforts. Climate shocks have also imposed recurring costs on Ethiopia’s largely rain-dependent agricultural economy. Drought conditions have affected pastoral areas and crop production in multiple regions, while flooding has displaced populations and damaged infrastructure in other areas. These climate-related disruptions compound the challenges of managing economic reforms and maintaining macroeconomic stability during a period of significant structural adjustment. Prime Minister Abiy Ahmed’s administration has faced mounting pressure from the IMF and World Bank to implement comprehensive economic reforms as conditions for financial support. The forex market liberalization, in particular, was a key IMF demand that the government resisted for years before finally implementing in July 2024. The rapid depreciation of the birr following liberalization triggered sharp price increases for imported goods, leading to public discontent and enforcement actions against businesses accused of unjustified price gouging. Critics have argued that the government implemented forex liberalization too abruptly without adequate preparation or communication, potentially exacerbating inflationary pressures and social hardship. However, defenders of the reform point to the unsustainability of the previous system, where a massive gap between official and parallel market exchange rates created rent-seeking opportunities, discouraged formal exports, and starved the economy of foreign exchange needed for productive investment and essential imports. Prospects for Sustained Reform and Economic Recovery Looking ahead, Ethiopia’s ability to consolidate recent macroeconomic gains and achieve sustained recovery will depend critically on maintaining reform momentum across multiple policy domains simultaneously. The country must continue tightening monetary policy to anchor inflation expectations while avoiding excessive credit restriction that could choke off private sector growth. Fiscal consolidation must proceed without undermining essential social protection or productive public investment. The foreign exchange market must continue developing greater depth and transparency while the central bank builds capacity to manage volatility through market-based interventions. Debt restructuring negotiations must reach successful conclusions with both official and private creditors to restore market access and reduce the share of fiscal resources devoted to debt service. Infrastructure reconstruction and conflict-affected region rehabilitation require substantial resources even as fiscal space remains constrained. And all of this must occur while managing political tensions, regional security challenges, and vulnerability to climate shocks that could derail progress at any moment. The IMF’s continued engagement and financial support provide important external validation of Ethiopia’s reform trajectory and help catalyze additional financing from other development partners. The World Bank, African Development Bank, and bilateral donors have all indicated willingness to scale up support contingent on continued reform implementation and achievement of agreed performance targets. This international backing is essential given Ethiopia’s limited fiscal resources and need for concessional financing to support development spending without accumulating unsustainable debt burdens. However, sustained reform implementation ultimately depends on domestic political will and capacity. The government must navigate competing pressures from different constituencies while building public understanding of why difficult reforms are necessary. Technical capacity within key institutions—including the Ministry of Finance, National Bank of Ethiopia, and revenue authorities—must continue strengthening to ensure effective policy design and implementation. And coordination across government agencies must improve to ensure reforms in different areas reinforce rather than undercut each other. The international community’s role extends beyond financing to include technical assistance, policy advice, and diplomatic support for Ethiopia’s economic transformation. The IMF program provides a framework for coordinating this support while holding Ethiopian authorities accountable for agreed reforms and performance targets. Whether this partnership can navigate the inevitable challenges ahead will determine not only Ethiopia’s economic trajectory but also serve as an important test case for how low-income countries can implement comprehensive reforms under exceptionally difficult circumstances. For Ethiopia’s 120 million citizens, the stakes could hardly be higher. Success would mean restored macroeconomic stability, improved living standards, expanded economic opportunities, and a foundation for sustained development. Failure could mean prolonged economic stagnation, continued balance of payments crises, inability to service debt obligations, and deepening poverty and social instability. The IMF’s latest disbursement and endorsement of progress to date provides grounds for cautious optimism, but the most difficult phase of Ethiopia’s economic transformation may still lie ahead. Ready to take your career to the next level? Join our Online courses: ACCA, HESI A2, ATI TEAS 7 , HESI EXIT , NCLEX – RN and NCLEX – PN, Financial Literacy!🌟 Dive into a world of opportunities and empower yourself for success. Explore more at Serrari Ed and start your exciting journey today! ✨ Track GDP, Inflation and Central Bank rates for top African markets with Serrari’s comparator tool. See today’s Treasury bonds and Money market funds movement across financial service providers in Kenya, using Serrari’s comparator tools. Photo source: Google By: Montel Kamau Serrari Financial Analyst 21st January, 2026