Ethiopia’s Economic Crossroads: A Budget Between Austerity and Ambition

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By Financial Columnist, Ethiopian Tribune
© 2025 Ethiopian Tribune. All rights reserved.

A critical examination of Ethiopia’s record 1.93 trillion Birr federal budget reveals a nation caught between external pressures and domestic aspirations

Standing at the crossroads of Africa’s economic transformation, Ethiopia finds itself grappling with a fundamental question: can a nation simultaneously appease international creditors whilst fostering genuine domestic development? The answer, embedded within the recently proposed 1.93 trillion Birr federal budget for 2025/2026, has ignited fierce debate amongst economists, policymakers, and civil society alike.

This budget—the first since Ethiopia’s landmark USD 3.4 billion agreement with the International Monetary Fund and World Bank in May 2024, represents more than mere fiscal planning. It embodies a philosophical battleground between those who champion fiscal discipline as the path to long-term stability and critics who argue that the nation has surrendered its economic sovereignty to foreign dictates.

The Numbers That Tell a Story

The proposed budget’s structure reveals telling priorities. Of the 1.93 trillion Birr allocation, a substantial 1.2 trillion is earmarked for recurrent expenditure primarily salaries and operational costs that maintain the status quo rather than build for the future. Capital expenditure, the engine of transformational growth, receives a comparatively modest 415 billion Birr.

Perhaps most striking is the allocation of 463 billion Birr for debt servicing 48 billion Birr more than the entire capital expenditure budget. This arithmetic underscores what critics describe as a “maintenance budget” focused on immediate financial obligations rather than a “transformational budget” designed for long-term prosperity.

The government’s financing strategy compounds these concerns. With over 70% of the budget to be financed through taxation, Ethiopia’s citizens face an unprecedented fiscal burden. Finance Minister Ahmed Shide has stated that the government would maintain “strict monetary and fiscal policies” to manage this ambitious revenue target, but the question remains: at what cost to ordinary Ethiopians?

The Reform Imperative: Context and Consequences

Ethiopia’s economic trajectory has been remarkable yet problematic. Despite achieving an estimated 8.1% growth in fiscal year 2023/24, the nation remains amongst the world’s poorest, with a per capita gross national income of merely $1,020. More troubling, poverty has increased from 27% in 2016 to 32% in 2021, whilst the economy struggles to create jobs for approximately two million new job seekers annually.

The Homegrown Economic Reform programme, launched in July 2024 with IMF and World Bank support, represents a decisive pivot from the previous state-led development model. This earlier approach, whilst improving infrastructure and living standards, ultimately generated unsustainable debt, an overvalued currency, and regulatory constraints that stifled private investment.

The reform’s centrepiece, a transition to market-determined exchange rates, has yielded mixed results. The gap between official and parallel market exchange rates, which once exceeded 100%, narrowed to less than 15% by February 2025, yet the IMF has noted the spread widening again in early 2025, suggesting persistent market distortions.

The Credibility Crisis: When Numbers Don’t Add Up

A fundamental challenge plaguing Ethiopia’s economic discourse is the reliability of official data. Government projections of 8.9% GDP growth for 2025/2026 stand in stark contrast to more conservative estimates from international bodies, which range from 6.4% to 7.1%. Similarly, inflation figures present a bewildering array of statistics, from government claims of 18% to IMF projections of 20-25%.

Economic analyst Mohammed Aberar has openly questioned the independence of institutions responsible for generating this data, noting the lack of external scrutiny in planning, collecting, and publishing economic indicators. This data credibility crisis is more than academic, it undermines public trust and complicates policy assessment when the very metrics used to measure success remain contested.

The disconnect between official statistics and lived experience is particularly acute regarding inflation. Whilst the rate of price increases may have slowed, the absolute cost of living remains prohibitively high for many Ethiopians. As one expert noted, even if inflation decelerates, the impact of earlier price spikes continues to erode purchasing power, particularly affecting urban dwellers on fixed incomes.

The Austerity Debate: Foreign Dictates vs. Domestic Priorities

Critics argue that Ethiopia’s budget reflects “foreign dictates more than local priorities,” characterising the reform framework as “reactive rather than reformative.” This perspective suggests that the nation has largely surrendered its policy independence, finding itself constrained by external pressures from the IMF and World Bank.

Economic analyst Kebour Ghenna has described the budget as “an economic obituary for the public sector,” pointing to its lack of new infrastructure projects, absence of manufacturing stimulus, and insufficient support for the poor. The budget’s emphasis on increased taxation over productive investment has raised concerns about a potential “crowding-out effect” on private sector activity.

Evidence supporting these concerns is mounting. Credit to the private sector has declined due to ceilings set by the National Bank of Ethiopia, with IMF projections indicating a stark -24% growth in credit to private enterprises for 2024/25. Ethiopia’s investment and savings to GDP ratio has fallen dramatically from 35.3% in 2019 to 20.5% in 2024, constraining the manufacturing sector’s ability to create jobs and drive economic diversification.

Government Counterarguments: The Long View

Ethiopian officials and international financial institutions maintain that current reforms are essential for long-term stability. They point to several positive indicators: foreign reserves have more than doubled to $3.4 billion, debt service agreements have provided temporary relief, and the government has implemented social mitigation measures including expanded safety net programmes and increased civil servant salaries.

The IMF’s assessment that Ethiopia’s macroeconomic performance has “exceeded program expectations” in areas such as inflation control and export growth provides some validation for the reform approach. Officials argue that the previous state-led model’s shortcomings, unsustainable debt, overvaluation, and regulatory constraints, necessitated the current course correction.

However, this optimistic narrative must be weighed against the declining share of federal budget allocated to “pro-poor” sectors since 2022/23. With Ethiopia ranking 176 out of 193 on the Human Development Index and 21.4 million people requiring humanitarian assistance, the budget’s social impact remains a critical concern.

Global Context: Lessons from Elsewhere

Ethiopia’s experience echoes broader debates about IMF interventions in developing countries. Historical examples from Argentina, Greece, and Indonesia demonstrate how austerity measures can exacerbate economic downturns and trigger social unrest. Critics argue that the IMF’s traditional focus on macroeconomic stability often comes at the expense of social welfare and employment.

Conversely, cases like Uganda’s sustained structural adjustment from 1987-1995 show that fiscal discipline can coexist with social investment when policies are well-designed. Uganda achieved 6.4% average annual growth whilst increasing health and education spending, demonstrating that reform success depends on strong government commitment and robust social protection measures.

Alternative Pathways: Beyond the Washington Consensus

The limitations of traditional austerity approaches have prompted exploration of alternative development models. These include progressive taxation targeting corporate profits and wealth rather than labour, utilising government reserves for domestic development, and re-allocating expenditures from low-impact to high-impact investments.

Ethiopia could explore channelling Special Drawing Rights from the IMF without additional debt burden, prioritising grant funding over loans for critical development needs, and advocating for comprehensive debt relief mechanisms that ensure fair burden-sharing among all creditors.

The Path Forward: Recommendations for Transformation

Ethiopia’s economic future depends on navigating several critical challenges. Enhancing data transparency through independent verification mechanisms would build public trust and enable more informed policy decisions. Re-balancing fiscal priorities to favour productive capital investments over debt servicing could unlock transformational growth potential.

Implementing progressive revenue mobilisation targeting wealth and corporate profits rather than labour would create a more equitable tax system. Strengthening social safety nets and increasing real budget allocations to pro-poor sectors remain essential for inclusive development.

Perhaps most importantly, Ethiopia must foster genuine private sector partnership by addressing binding constraints on domestic enterprises, particularly access to affordable capital. This requires reducing the crowding-out effect of government borrowing and creating an enabling environment for local entrepreneurs.

Conclusion: The Choice Ahead

Ethiopia’s 2025/2026 budget represents more than fiscal planning, it embodies a choice between short-term financial stability and long-term transformational development. Whilst the government’s emphasis on fiscal discipline and revenue mobilisation addresses immediate macroeconomic imbalances, the budget’s structure raises fundamental questions about the nation’s developmental trajectory.

The stark reality that debt servicing exceeds capital expenditure reflects the constraints of external agreements, but it also highlights the urgent need for more comprehensive debt restructuring. Ethiopia’s experience demonstrates that genuine reform requires more than meeting IMF targets, it demands policies that prioritise human development, social equity, and sustainable growth.

As Africa’s second most populous nation stands at this economic crossroads, the choices made today will determine whether Ethiopia emerges as a beacon of prosperity or remains trapped in a cycle of dependency. The budget may satisfy external creditors, but its ultimate test lies in whether it can deliver the inclusive growth and social progress that Ethiopia’s 126.5 million people deserve.

The debate continues, but one thing remains clear: Ethiopia’s economic future cannot be built on austerity alone. It requires a bold vision that balances fiscal responsibility with transformational investment, external agreements with domestic priorities, and short-term stability with long-term prosperity. The choice is Ethiopia’s to make, and the world is watching.