By Kebour Ghenna
Ethiopia is once again defying expectations, and not always in the way policymakers might hope. Despite active conflict in multiple regions, a sovereign default, foreign exchange shortages, and steep cuts to development spending, official reports still project a GDP growth rate of 6.4% in 2025. Inflation, which hovered above 30% in 2023, is now reportedly down to 13%.
It sounds like a success story. But peel back the surface, and what emerges is an economy drifting, not transforming—one where headline numbers obscure underlying vulnerabilities.
Let’s break it down.
1. Falling Inflation—but at What Cost?
Yes, inflation is down. And yes, policy tightening is part of the reason. The National Bank of Ethiopia raised interest rates to 15%, imposed lending restrictions, and government spending was slashed. In parallel, $7 billion in external financing was secured from the IMF and World Bank to support reforms.
But this drop in inflation has more to do with demand suppression than supply-side improvement. Businesses aren’t borrowing. Investment is stagnant. And household consumption has been squeezed by high costs, limited credit, and growing economic insecurity.
That said, one overlooked factor is strong revenue performance. Ethiopia’s tax collection exceeded targets last year – an important signal of improved fiscal discipline. This matters, because inflation often stabilizes when people believe the state is solvent and won’t rely on excessive money creation to fund itself. But that confidence remains fragile.
2. High Interest Rates: A Cure Worse Than the Disease?
Raising interest rates may reduce inflation, but it also raises the cost of government borrowing, discourages private investment, and suppresses economic activity. With Ethiopia already defaulting on its Eurobond and heavily indebted to bilateral and multilateral lenders, rising debt-servicing costs should be a growing concern.
The current strategy may lower prices in the short term, but it also risks strangling productive sectors and prolonging stagnation. If revenues falter or donor support dries up, today’s disinflation may simply be a pause before the next crisis.
3. A Growth Story Without Foundations?
The government reports that the economy is growing, but where is that growth coming from?
There’s little evidence of a manufacturing revival, export expansion, or broad-based investment in infrastructure. Lending to the private sector remains constrained. The urban makeover in Addis Ababa, while visible, has come at the cost of displacement and growing inequality.
So what’s driving GDP?
• Gold and coffee exports – benefiting from price movements, not policy.
• Urban construction – concentrated and disruptive.
• Base effects – a rebound from prior contractions.
This kind of growth doesn’t necessarily improve the productive base of the economy. It doesn’t create sustainable jobs, reduce import dependency, or generate future surpluses. It’s movement, not transformation.
4. Are Fiscal and Monetary Policies Really Working Together?
On paper, Ethiopia’s economic managers appear to be coordinating. But real coordination isn’t about matching high interest rates with lower spending, it’s about aligning policies to drive long-term development, stabilize expectations, and boost productive investment.
Right now, the government is fighting wars it can’t afford, navigating political fragmentation, and keeping strategic sectors, like telecom and banking in prolonged limbo. Add to that the fact that many reforms are driven more by donor conditionality than national consensus, and what emerges is a fragile framework that lacks a clear developmental direction.
5. What Should Be Done?
Instead of simply adjusting macroeconomic levers, Ethiopia’s leaders should focus on the fundamentals:
• Strengthen public investment in productive sectors, including agro-processing, renewable energy, and industrial parks with local linkages.
• Reform the business climate to support domestic firms, not just attract foreign capital.
• Maintain control over capital flows, ensuring foreign exchange is prioritized for sectors that build long-term competitiveness.
• Promote equity in taxation, targeting wealth and large firms rather than relying on indirect taxes that burden the poor.
• Invest in peace and the rule of law—because no amount of economic policy matters without political stability and trust.
Final Thought: Be Wary of Numbers That Shine Too Bright
Yes, inflation is slowing. Yes, GDP looks promising. But the question isn’t just what the economy is doing… it’s why and for whom.
If disinflation comes from suppressed demand, and growth comes without jobs or productivity, then we are merely buying time, not building a future.
To secure real progress, Ethiopia must move beyond stopgap fixes and donor-driven targets. It must pursue a development model grounded in national priorities, shared prosperity, and structural transformation.
Otherwise, today’s stability will be tomorrow’s illusion.
Editor’s Note : The article appeared first on the personal SM page of Kebour Ghenna
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What an economic paradox?. Health professionals are currently in general strike . To the majority of urban citizens the cost of living is unbearable. it is just like telling a starved man begging for food ,inflation is down help yourselves .