Ethiopia’s economic reforms, led by Prime Minister Abiy Ahmed, focus on market liberalization and urban beautification to attract investments. However, these changes displace local residents and face challenges from ongoing conflicts and poor fiscal conditions, raising concerns about job creation and economic stability. While the currency flotation aims to combat black market practices, volatility and insecurity threaten the effectiveness of the reforms.
Ethiopia’s capital, Addis Ababa, is undergoing a significant urban transformation under Prime Minister Abiy Ahmed’s vision, marked by aesthetic enhancements including maroon bike lanes and tree-lined streets. However, these changes, while appealing to investors and tourists, come at the cost of displacing local residents, whose homes and businesses have been lost to redevelopment initiatives. These urban reforms coincide with a broader economic strategy—the most ambitious reform Ethiopia has pursued in a generation—famously characterized by the decision to float the birr, the national currency, on July 29, 2022.
The Ethiopian government is undertaking extensive economic liberalization, aiming to attract foreign investments and reduce state control in key sectors. Though these measures may seem conventional in other nations, they signify a marked shift for Ethiopia, previously dominated by state-led development policies. Mamo Mihretu, the central bank governor, described the reforms as a “transformative moment,” but with considerable risks involved. Ethiopia faces challenges in converting from an agrarian economy to a modern, urbanized one while dealing with a rapidly growing population.
The legacy of the Ethiopian People’s Revolutionary Democratic Front (EPRDF), which governed from 1991 until Abiy’s rise, focused on state-centric development but failed to stave off social unrest. Despite efforts to revamp the political landscape by establishing the Prosperity Party, the country remains mired in conflict, notably the Tigray war and ongoing insurgencies in other regions. These conflicts severely impact public finances; with 37% of the budget dedicated to military spending and debt servicing, the country defaulted on a bond payment in late 2023, exacerbating its financial woes.
In light of external pressures—especially from international creditors requiring a deal with the International Monetary Fund (IMF)—Ethiopia has experienced a dramatic currency floatation. This move, intended to realign the exchange rate and combat black-market practices, resulted in the birr losing over half of its value against the dollar. In preparation for potential inflation, the government has tightened monetary policies, adding further strain to a population already facing economic hardship.
While exporters are optimistic that a weaker birr may enhance competitiveness, domestic manufacturers who rely on imported inputs could face adverse effects. The government’s reform agenda also includes easing constraints on foreign investment and promoting initiatives like the establishment of a securities exchange. However, uncertainty persists regarding the speed and extent of foreign investment during a time of significant national insecurity.
The ongoing violence and instability, compounded by high inflation rates, could further undermine the government’s economic ambitions. As Ethiopia struggles to transition its economy, questions remain about how to generate sufficient jobs and ensure economic stability to avert worsening social tensions that propelled the earlier unrest. Abiy’s focus on improving urban aesthetics may not suffice to address the pressing economic and social challenges that confront the nation.
Ethiopia, a country with a largely agrarian economy, is attempting to shift toward urban industrialization. Prime Minister Abiy Ahmed’s administration is implementing extensive economic reforms to open the economy to foreign investment and liberalize financial markets, moving away from decades of state-led economic policies. However, these reforms occur against a backdrop of significant social unrest, ethnic tensions, and armed conflict, particularly in the Tigray region. The challenges are compounded by Ethiopia’s poor fiscal health and rising inflation, leading to critical questions about creating jobs and fostering a stable economic environment. This context is essential to understanding the implications of Abiy’s reforms and their potential impacts on the broader societal landscape in Ethiopia.
Ethiopia’s economic reforms under Prime Minister Abiy Ahmed represent a crucial shift from state control to market-driven policies, aimed at enhancing urbanization and attracting foreign investment. However, the country’s ongoing conflicts, strained public finances, and the challenge of generating adequate employment opportunities cast a shadow over these efforts. As Ethiopia navigates through these reforms, the success in achieving economic stability and inclusive growth remains uncertain, especially for those adversely affected by the transformation. Without addressing the root economic issues, the superficial urban enhancements might not yield the desired economic prosperity for the broader population.
Original Source: foreignpolicy.com
