Candid and damning outlooks on the state of Ethiopia’s economy
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Ethiopia’s Investment Crossroads: Promise, Peril, and the Struggle for Reform
By E Frashie Ethiopian Tribune correspondent
In September 2025, the U.S. State Department issued its annual Ethiopia Investment Climate Statement, a sweeping thirty-six-page assessment that amounts to one of the most candid and damning outlooks on the state of Ethiopia’s economy and governance in recent years. While couched in the neutral language of diplomatic reporting, the document paints a portrait of a government struggling to reconcile its reformist rhetoric with entrenched structural weaknesses: chronic insecurity, expropriation of land and property, erratic regulatory practices, corruption, and the overbearing role of state-owned enterprises. For Ethiopia’s leadership, still navigating the aftershocks of war, political reshuffling in financial governance, and tense regional dynamics, the report stands as a sobering external audit. It warns that Ethiopia, despite its youth-driven potential, risks squandering its future unless it can align policy ambition with credible institutional practice.
Ethiopia is often presented as a country of paradoxes. On the one hand, it is Africa’s second most populous nation, home to more than 135 million people, two-thirds of them under the age of thirty. Its low-cost labour, expanding consumer market, and Ethiopian Airlines, Africa’s largest carrier, make it a natural magnet for foreign capital. On the other hand, persistent conflicts, an opaque regulatory environment, and a state that clings to control undermine investor confidence.
In July 2024, the government announced a dramatic reform: floating the birr, which had been overvalued by more than one hundred per cent. The currency depreciated by around 120 per cent, briefly narrowing the gap between official and parallel exchange markets. A four-year, 10.5 billion dollar support package from the International Monetary Fund and the World Bank followed, aimed at stabilising the financial system. The National Bank of Ethiopia was granted greater independence, and reforms were announced in sectors ranging from telecommunications to wholesale trade. Yet optimism quickly waned. By late 2024, a thriving parallel market had returned, inflation surged, and businesses were again hampered by erratic taxation and sudden regulatory changes.
The government’s response was a reshuffle of its financial leadership in early 2025, including the replacement of the central bank governor. While presented as a step towards tightening governance, sceptics view the changes as political manoeuvring rather than a true break from past practices.
Foreign direct investment remains underwhelming. Inflows in 2024 stood at 2.7 per cent of GDP, with China, Saudi Arabia, Türkiye and the United Arab Emirates among the largest contributors. By contrast, Kenya continues to attract proportionally higher inflows, thanks to its diversified economy and relatively stable regulatory environment. Djibouti, though tiny, benefits from its ports and free zones, while Sudan and Eritrea are largely bypassed due to instability and isolation.
(Ethiopia compared with neighbours)
The Achilles’ heel of Ethiopia’s investment environment lies in property rights. The constitution prevents private ownership of land, permitting only leases of up to ninety-nine years. Investors therefore operate under a perpetual risk of expropriation. Since March 2024, “corridor development” projects have expelled tens of thousands of residents and businesses in Addis Ababa and at least forty other towns. Evictions, sometimes enforced at gunpoint, have targeted both locals and foreign-owned enterprises, often without compensation. For investors, this insecurity undermines the very basis of long-term planning.
The dominance of state-owned enterprises adds to the problem. Around forty SOEs control key sectors, from banking and transport to power generation and logistics. Privatisation efforts have failed to attract serious bidders; the sale of eight state-owned sugar enterprises collapsed, and a proposed 45 per cent stake in Ethio Telecom found no buyers. Even when foreign entry is permitted, the terms are restrictive. A December 2024 banking law allowed foreign banks to establish subsidiaries, but capped their ownership at forty per cent and required a forty-million-dollar minimum capital threshold, five times higher than in Kenya.
Corruption and poor governance weigh heavily on investor sentiment. Ethiopia scored 37 out of 100 on the 2024 Corruption Perceptions Index, ranking 99th of 180 countries. While marginally better than Sudan and Eritrea, it lags behind Djibouti. Investors complain of bribery at customs, arbitrary tax demands, and opaque procurement. The introduction of the Asset Recovery and Unexplained Wealth Law in January 2025, permitting authorities to seize assets over ten million birr without documentation, has sparked fears of arbitrary enforcement.
(Higher scores = cleaner governance)
The political backdrop remains volatile. The cessation of hostilities with the Tigray People’s Liberation Front in 2022 ended a bloody conflict, but Amhara and Oromia remain mired in violence. Over 4.2 million people are internally displaced, and one million refugees from South Sudan, Somalia and Eritrea reside in Ethiopia. The U.S. State Department’s travel advisory continues to urge caution, citing conflict, unrest, and crime. In practice, businesses have reported having their properties seized by armed groups and, at times, by government forces.
Labour presents both an opportunity and a challenge. Ethiopia’s workforce is vast and youthful, yet unemployment is high and discontent widespread. The last available data, from 2022, placed urban unemployment at 18.9 per cent, though the figure is likely higher now. By comparison, Kenya’s rate is around 5.5 per cent, and Djibouti’s near 10 per cent. Nearly half of Ethiopia’s workforce is in the informal economy, eroding the tax base. Foreign-owned factories in industrial parks face high turnover: nearly half of employees leave due to low pay, according to an International Labour Organization study.
Ethiopia’s financial sector remains shallow. The relaunch of the Ethiopian Securities Exchange in 2025 was heralded as a milestone, yet with only one firm listed, its impact is symbolic. In December 2023, Ethiopia defaulted on a one-billion-dollar eurobond after missing a thirty-three-million-dollar coupon payment, prompting rating agencies to downgrade it to junk status. A March 2025 agreement with bilateral creditors to restructure 8.4 billion dollars of debt has offered temporary relief, but negotiations with commercial creditors remain fraught. Neighbouring Kenya, by contrast, has maintained access to international markets despite high debt levels, highlighting Ethiopia’s relative weakness.
Looking ahead, the government aspires to join the World Trade Organization by 2026 and expand its role in the African Continental Free Trade Area. Both goals hold promise, but both require reforms Ethiopia has historically struggled to deliver: credible investor protections, transparency in public procurement, genuine liberalisation of key sectors, and, most importantly, political stability.
For now, Ethiopia remains a paradox. It is wealthier in potential than most of its neighbours, yet poorer in predictability. Its size, population, and market potential ensure it cannot be ignored, but its fragility makes it difficult to embrace fully. For investors, the calculation is not whether Ethiopia offers opportunity, it clearly does!but whether the risks of entering a volatile market can be borne. Or, as one Western executive remarked: “In Ethiopia, you can double your money or lose it overnight!”
