Ethiopia: IMF’s forecasts on inflation.

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IMF Predictions on Inflation in Ethiopia

Inflation Forecasts:

The IMF projects Ethiopia’s inflation to reach 25.6% in 2024, easing to 18.2% in 2025 . However, a more recent IMF report (February 2025) revises this downward, estimating a decline from 26.6% in 2023/24 to 20.7% in 2024/25, driven by gradual exchange rate adjustments and price stabilization measures .
Despite improvements, Ethiopia’s inflation remains significantly above the global average (5.9% in 2024) and misses the government’s target of below 20% by 2024 .

Drivers of Inflation:

High inflation is attributed to exchange rate pressures, supply chain disruptions, and structural weaknesses in Ethiopia’s state-led growth model . The IMF notes that recent reforms, such as unifying exchange rates and removing current account restrictions, have partially mitigated inflationary risks but require sustained implementation .

Consequences of Economic Mismanagement

Macroeconomic Instability:
Failure to manage inflation and structural reforms could exacerbate macroeconomic imbalances, including external debt unsustainability and foreign exchange shortages. The IMF warns that delays in reforms, such as modernizing monetary policy or improving tax revenue, could prolong inflation and hinder growth .
Growth Constraints:
Ethiopia’s GDP growth is projected at 6.2–6.6% in 2024/25, below the government’s 7.5% target. Mismanagement risks derailing medium-term growth prospects (7.5–8%) linked to private-sector expansion and export diversification .
Social and Humanitarian Impacts:

Persistent inflation worsens food insecurity, affecting over 20 million people in 2023, and undermines poverty reduction efforts .
Inadequate reforms could stall job creation for Ethiopia’s growing workforce (2 million new entrants annually), heightening social tensions .

Debt and External Sector Risks:
Ethiopia’s participation in the IMF’s Extended Credit Facility (ECF) aims to restore debt sustainability through reforms. Mismanagement could delay debt relief under the G20 Common Framework, risking default and reduced foreign investment .
Climate and Conflict Vulnerabilities:
Economic instability amplifies Ethiopia’s exposure to climate shocks (e.g., droughts reducing GDP by 1–5%) and conflict-related displacement, which already displaced 20 million people .

Key Recommendations from the IMF

Sustaining Reforms: Accelerate exchange rate unification, enhance tax mobilization, and strengthen social safety nets to cushion inflation’s impact .
Private Sector Focus: Reduce state dominance in the economy to attract FDI and boost competitiveness .
Debt Management: Finalize agreements with the Official Creditor Committee to secure moderate debt distress risk by 2025 .

In summary, while Ethiopia’s growth outlook remains positive, mismanagement of inflation and reforms could deepen poverty, destabilize the economy, and erode gains from recent policy shifts. The IMF emphasizes the urgency of maintaining reform momentum to avoid these pitfalls .