Ethiopian Government’s Economic Gamble: The IMF’s Double-Edged Sword

By: Sirak Zena

(Please note: The following piece presents an analysis and personal opinion rather than an economist’s perspective.)

Introduction

Ethiopia, a populous African nation with 126.5 million people, faces challenges such as internal conflicts, recurring droughts, and poor living conditions. People in rural areas and urban slums face poor economic conditions, limited access to essential services, and limited employment opportunities. The government faces ongoing challenges in providing essential services, employment opportunities, and improving living standards for this large population segment.

The Ethiopian government’s preference for military action over dialogue has redirected resources from economic development to internal conflicts. This approach has intensified tensions, worsened living conditions, and created humanitarian crises. By waging war on its people, the government has hindered economic growth, deterred investment, and perpetuated a cycle of instability.

The economic history of Ethiopia is currently at a pivotal point in its development. The government’s decision to secure a $3.4 billion loan package from the International Monetary Fund (IMF) aims to stabilize the economy amidst numerous challenges. However, this influx of capital comes with stringent conditions and potential risks that have sparked concerns among economists and the Ethiopian populace.

The IMF’s requirement for Ethiopia to abandon its fixed exchange rate system led to a 30% overnight devaluation of the Ethiopian birr. This policy shift raises questions about its impact on Ethiopia’s economy, especially given the country’s reliance on imported goods. There is a prevailing belief that the Ethiopian government has capitulated to the IMF, disregarding its citizens’ needs and sentiments.

In the days following the Ethiopian birr’s initial 30% overnight devaluation, the currency continued to plummet. The birr lost significant ground against major foreign currencies like the US dollar and euro, rapidly deteriorating the exchange rate.

This caused significant economic turmoil in Ethiopia as imports became much more expensive, and the cost of living surged. Businesses and consumers struggled to cope with the rapid depreciation of the local currency, which undermined confidence in the Ethiopian economy.

Concerned about potential social unrest and political opposition amid the economic hardship, the Ethiopian government strengthened security forces to crack down on any public protests or dissent related to the currency devaluation. 

We should understand Ethiopia’s acceptance of IMF conditions in light of its multifaceted economic difficulties, which include high inflation, a crisis in the cost of living, global factors like the COVID-19 pandemic, and domestic challenges like the severe drought and ongoing conflict in the Amhara and Oromia region.

The article analyzes the possible problems of IMF reform requirements and their broader consequences. It delves into what the government should have done before the reform, the burden it brings on the Ethiopian people’s daily lives, the government’s upsetting steps in relinquishing monetary sovereignty, and many more.

Context of Ethiopia’s Economic Situation:

Understanding the multifaceted economic challenges motivating Ethiopia’s extreme financial gamble is imperative to appreciating its gravity. Ethiopia faces numerous economic obstacles, both domestically and internationally.

Rampant inflation, Inflation near 20%, is making everything more expensive, causing people to lose buying power and weakening the economy. Supply chain problems, a weaker currency, and rising global prices are the driving factors behind this. As a result, the cost of essential goods and services has sharply increased, growing faster than wages and forcing many people into poverty.

Global events have further exacerbated these pressures. The COVID-19 pandemic and ongoing international conflicts have compounded Ethiopia’s economic woes by reducing foreign direct investment, disrupting trade flows, and decreasing remittances.

With one of the worst droughts in decades, crop failures, food insecurity, and water shortages have compounded the country’s local challenges. The Tigray conflict, which erupted into civil war in November 2020, has had devastating consequences, destroying infrastructure, displacing people, and causing a humanitarian crisis. This conflict has diverted precious resources to military expenditure, exacerbating the economic challenges.

The ongoing internal conflicts in Oromia and the Amhara region have added to these challenges. These conflicts have further disrupted trade, damaged productivity, and increased security spending. Many national resources diverted to conflict-related expenses rather than development and social welfare have pushed Ethiopia towards a war economy.

The prevalence of food insecurity is increasing due to unfavorable meteorological conditions, locust infestation, conflicts, and worldwide factors contributing to significant inflation of food costs.

Unemployment remains a significant problem, particularly among young people, with urban youth unemployment exceeding 25%. Rural communities face widespread underemployment, contributing to a concerning brain drain as skilled workers seek opportunities elsewhere. The chronic shortage of foreign exchange has hindered imports and foreign investment, leading to the rationing of foreign currency, delays in import payments, and reduced debt servicing capacity.

These interconnected challenges paint a picture of an economy under immense strain, struggling to maintain stability and growth while dealing with multiple crises. The need for significant intervention and reform is dire. Only decisive action can break the cycle of economic instability, which drains resources, deters potential investors, and disrupts economic activities across various regions.

The government’s recent statement agreeing to market-determined dollar exchange rates and touting economic reforms as a “lifesaver” acknowledges the dire financial situation. However, it raises the question: who is saving whose life? Is the government prioritizing its political survival by presenting these reforms as a necessary evil to salvage a failing economy? Or do these reforms genuinely prioritize the well-being of the Ethiopian people, who bear the brunt of the economic crisis?

Ethiopia’s decision to seek IMF assistance is a desperate attempt to stabilize its economy and attract much-needed foreign investment. However, this move also carries significant risks, as the stringent conditions attached to IMF loans could exacerbate some of the existing economic hardships ordinary Ethiopians face in the short term. The government’s challenge lies in balancing the need for economic reforms with the imperative to protect its most vulnerable citizens from further financial shocks.

Compounding these economic challenges is the government’s apparent lack of political will to resolve the ongoing internal conflicts that have escalated the country’s financial crisis. Despite the clear negative impact on the economy and the well-being of citizens, the Ethiopian government has shown reluctance to engage in meaningful dialogue or pursue peaceful resolutions to conflicts in the Oromia and Amhara regions.

This intransigence not only prolongs the humanitarian crises in these areas but also continues to drain national resources, diverting funds from much-needed economic development and social programs.

The government’s prioritization of military solutions over political negotiations has created a self-perpetuating cycle of violence and economic degradation. This approach has eroded investor confidence, hindered international aid efforts, and contributed to the country’s isolation on the global stage.

A coherent strategy to address these internal conflicts is necessary to ensure economic reforms or international financial assistance, as stability and peace are prerequisites for sustainable economic recovery and growth. Only when the government shows a genuine commitment to resolving these conflicts will Ethiopia’s economic prospects remain stable, regardless of external financial interventions.

Ethiopia’s Government Financial Gamble & The IMF’s Well-Meaning Polices:

In a bold move to stabilize its economy, the Ethiopian government has secured a substantial loan package from the International Monetary Fund (IMF). 

This financial lifeline comprises $3.4 billion from the IMF, to be disbursed over four years, with an initial tranche of $1 billion to be released. However, this IMF loan is just the tip of the iceberg. Ethiopia expects additional financial support from other international lenders, including the World Bank.

We expect the cumulative external loans to exceed $10 billion, representing a significant influx of capital into the Ethiopian economy.

As the saying goes, ‘the lender remains the master of the borrower,’ this principle raises severe concerns about Ethiopia’s financial sovereignty as it enters into this substantial loan agreement with the IMF, potentially compromising its ability to make independent economic decisions in the future.

Notably, the government still needs to provide an indication or statement demonstrating the participation of the House of Representatives, the cabinet, or economists outside the Prime Minister’s inner circle in the IMF deal negotiations. 

The decision-making process has been limited to the Prime Minister, a handful of loyal personnel in the Finance Ministry, and World Bank-affiliated individuals like the National Bank governor, raising serious concerns about the transparency and inclusiveness of this critical economic decision. Furthermore, this could undermine the legitimacy and representativeness of the broader Ethiopian interests.

Ethiopia’s decision to seek such extensive external financing marks a critical juncture in its economic strategy, with potential long-term consequences for its fiscal sovereignty and financial stability. 

The country is placing a significant bet on its future, hoping that this influx of capital will help address its myriad economic challenges.

Despite the potential risks and concerns associated with the IMF’s loan conditions, it is crucial to acknowledge that the IMF aims to assist Ethiopia in overcoming its economic challenges. The IMF’s primary goal is to promote global financial stability and growth, and its support for Ethiopia is driven by the belief that the prescribed reforms will benefit the country and its people.

The IMF’s decision to provide financial assistance to Ethiopia is based on analyzing the country’s economic situation and identifying key areas that require structural reforms. By offering a substantial loan package and technical expertise, the IMF aims to help Ethiopia address its chronic foreign exchange shortage, improve its fiscal position, and create a more conducive environment for sustainable economic growth.

However, it is crucial to acknowledge that the IMF’s approach to economic reforms is flexible. The institution has faced criticism for its one-size-fits-all prescriptions and the social costs associated with its programs.

To embark on this IMF-supported economic transformation, Ethiopia needs all stakeholders–the government, civil society, and the international community–to engage in constructive dialogue and collaborate to implement the reforms to prioritize the well-being of the Ethiopian people.

The International Monetary Fund (IMF) has often been criticized for favoring developed countries’ policies and political agendas when addressing developing nations’ economic challenges. 

This bias is evident in the conditionalities tied to financial assistance, which frequently reflect the neoliberal economic principles championed by wealthier nations. Such policies may prioritize austerity measures, deregulation, and open markets, potentially undermining developing countries’ local economies and social welfare systems. 

As a result, critics argue that the IMF’s approach perpetuates a cycle of dependency and hinders genuine economic development, as it aligns more closely with the interests of its most influential member states rather than the unique needs and aspirations of the nations it aims to support.

Potential Risks and Concerns for Ethiopian People and Economy:

The IMF’s financial help to Ethiopia, crucial in the current economic context, comes with stringent requirements focused on overhauling the country’s exchange rate system. These conditions have triggered immediate and widespread consequences.

Key policies include transitioning to a market-determined exchange rate, combating inflation through monetary policy modernization, creating space for priority public spending, restoring debt sustainability, and strengthening state-owned enterprises’ financial positions.

The most dramatic change was the scrapping of Ethiopia’s long-standing fixed exchange rate system, resulting in an immediate currency devaluation. The Ethiopian birr experienced a significant devaluation, with its value plummeting from around 57 birr per US dollar to 75 birr overnight, representing a 30% loss. 

Since then, the situation has further deteriorated, with the transactional exchange rate reaching nearly 115 birr per US dollar when writing this article, highlighting Ethiopia’s currency’s ongoing volatility and challenges. This shift has reduced the birr’s purchasing power and increased the cost of imports, exacerbating inflationary pressures.

Due to the persistent drought, the devaluation may impact imports and food, which Ethiopia heavily depends on. This will result in a harmful currency devaluation cycle and inflation, impacting particularly susceptible populations.

The government itself is not immune. Because of currency devaluation, it faces increased costs for servicing foreign debt, reducing the fiscal space for social spending.

The immediate effects on daily life are substantial. Ethiopians face a higher cost of living due to increased prices for imported goods, especially essentials like food and fuel. Rising inflation may erode purchasing power, while businesses facing higher input costs might resort to layoffs, exacerbating unemployment.

Access to foreign currency might remain challenging despite IMF claims. Austerity measures could diminish social services and infrastructure, affecting the overall quality of life. Given the government’s authoritarian tendencies, these economic difficulties could incite public dissatisfaction and demonstrations.

Concerns are raised about the long-term effects on fiscal sovereignty and stability. Ethiopia’s substantial debt burden may become unsustainable, compromising essential public spending. IMF loan conditions could limit fiscal autonomy, constraining independent budgetary decisions.

The country’s increased vulnerability to external shocks and dependence on external financing may lead to a debt cycle and limit economic independence. Currency risks could further strain Ethiopia’s fiscal position, while diverting resources to service debt may hinder long-term economic growth and development.

Combining these factors could fuel social unrest and political instability, undermining Ethiopia’s economic prospects and fiscal stability.

Case Studies:  A Cautionary Tale for Ethiopia:

Nigeria:

In 2022, Nigeria abandoned its fixed exchange rate regime, resulting in severe financial repercussions. The Nigerian naira experienced a dramatic devaluation, losing over 70% of its value, which subsequently triggered an inflation rate of 22.79% by June 2023.

The rapid currency depreciation and the subsequent surge in inflation have swiftly deteriorated the living standards of many Nigerians, creating an urgent and widespread economic crisis.

The impacts of these policy changes were far-reaching and profound. Over 40% of Nigerians now live below the poverty line, grappling with severe food insecurity. Despite the country’s exit from the COVID-19 recession, per capita income has remained stagnant, failing to improve the economic well-being of the average citizen. 

The devaluation of the naira made imported goods significantly more expensive, putting immense pressure on local businesses and further straining the economy.

Given the escalating economic crisis, the Nigerian government has expanded social safety nets, including cash transfer programs, to cushion the impact on the most vulnerable segments of society. However, the need for revised measures to prevent further erosion of citizens’ purchasing power is pressing, as rapid inflation is outpacing wage growth and eroding savings.

The government likely faced increased fiscal pressure because of the higher costs of servicing foreign debt, as the weaker naira made repayments more expensive in local currency terms. This situation underscores the complex challenges and potential pitfalls of implementing sweeping economic reforms in developing economies with fragile economic structures.

Kenya:

Kenya’s economy is facing a deepening debt crisis and massive public discontent, which has raised considerable concern about the involvement of the International Monetary Fund (IMF). The IMF’s policies have not provided respite but worsened Kenya’s financial difficulties, intensifying social tensions throughout the nation.

The Debt Crisis: From 2013 to 2020, Kenya’s external debt surged from $10.2 billion to $34.8 billion. Notwithstanding this concerning increase, the IMF persisted in granting loans, including a recent $1 billion package to tackle economic issues and climate change.

However, these loans came with strict conditions that forced the Kenyan government to implement unpopular austerity measures. These measures involved reducing subsidies and increasing taxes on necessary commodities, significantly impacting the most economically disadvantaged groups and resulting in widespread demonstrations.

The IMF’s policies had a profound effect on the economy. They required implementing measures to reduce government spending, which led to substantial reductions in essential areas such as healthcare and education.

As an illustration, the tuition costs of public universities increased threefold because of the implementation of the IMF policies, leading to a powerful reaction from both students and instructors. The escalating expenses and substantial joblessness have compelled many Kenyans to reduce their daily food intake, underscoring the harsh reality of a strategy that prioritizes financial objectives over the welfare of the people.

Kenya’s dilemma is not unique. IMF interventions in Argentina, Ukraine, Greece, and Egypt have resulted in economic misery, social unrest, and political instability. Critics contend that the IMF and World Bank worsen economic crises in the nations they purport to aid by prioritizing the interests of foreign creditors rather than the well-being of the local population.

Kenya’s experience highlights the broader consequences of IMF interventions in developing countries. Despite their intended economic stabilization, these interventions often lead to increased debt, social unrest, and political instability.

The Nigerian experience underscores the importance of careful planning, robust social protection measures, and a flexible approach that can adapt to emerging challenges. It also highlights the need for transparency and effective public communication during economic transitions. As Ethiopia embarks on similar reforms, balancing long-term financial goals with short-term social welfare will be crucial for success.

Optimal Conditions for Adopting a Market-Determined Exchange Rate:

To ensure favorable economic conditions before accepting IMF assistance, the Ethiopian government should have considered several factors:

 A. Exhaust all viable domestic policy options before turning to the IMF.

Before turning to the IMF, countries like Ethiopia should consider several viable domestic policy options to address their economic challenges. 

Here are a few strategies to consider:

These include fiscal policy adjustments, such as budget reallocation to prioritize essential services and infrastructure, and tax reforms to increase revenue without overburdening the population.

Monetary policy adjustments, such as interest rate management and money supply regulation, could help control inflation and stimulate economic activity. Structural reforms Simplifying regulations and supporting small and medium-sized businesses could improve the business environment and help the economy grow. 

Implementing trade and investment policies to promote exports and attract foreign direct investment has the potential to diversify the economy.

Investing in agricultural and rural development through farmer subsidies, modern equipment, and infrastructure improvements would ensure food security and reduce urban migration.

Expanding social protection programs, including safety nets and investments in health and education, would protect vulnerable populations.

Leveraging public-private partnerships for infrastructure development and innovation could drive economic modernization without overburdening public finances. Improving debt management through restructuring and exploring domestic borrowing options would help manage debt. 

Enhancing institutional capacity by strengthening public institutions, combating corruption, and improving data analytics capabilities would ensure effective policy implementation.

Harnessing diaspora resources through diaspora bonds and favorable remittance programs could generate foreign currency and investment funds.

B. Internal stability is paramount. The Ethiopian government should have prioritized addressing ongoing conflicts in the Oromia and Amhara regions through dialogue.

This involves engaging all stakeholders, understanding root causes, and working towards comprehensive peace agreements. Peace-building efforts should include implementing ceasefires, ensuring safe passage of humanitarian aid, facilitating the return of displaced persons, and investing in reconstruction. The government must prioritize the well-being of conflict-affected citizens by ensuring essential service delivery and collaborating with international organizations for relief efforts.

C. Building national consensus and strengthening institutions and governance is crucial. This requires transparent public consultations on proposed financial reforms and fosters a sense of national unity. Strengthening institutions and governance by enhancing transparency, accountability, and ethical governance practices is essential for a successful economic transformation.

D. To revitalize the economy, the government should have focused on the war- and drought-ravaged Tigray region, concentrating efforts on reconstructing destroyed manufacturing plants and infrastructure and bringing people’s lives back to normal.

Without these foundations, the economic transformation process risks exacerbating existing social and political tensions, leading to further instability and disastrous consequences for the Ethiopian people.

By implementing these comprehensive domestic measures, Ethiopia could have stabilized its economy, addressed structural issues, and reduced the need for external financial assistance, ensuring favorable conditions before adopting a market-determined exchange rate under IMF guidance.

Ethiopia’s Economic Crossroads: Arbitrary Government, Reform, and the People’s Breaking Point:

Ethiopia’s arbitrary government and disregard for citizens’ well-being will probably exacerbate the negative impacts of IMF-mandated economic reforms. The government’s coercion and incarceration of journalists, disruption of internet connectivity, and prohibition of media impede the unrestricted dissemination of information, impeding public access to precise and timely updates on the economic situation and the repercussions of the changes.

This lack of transparency can lead to confusion, anxiety, and mistrust among the people, further eroding their confidence in the government’s ability to navigate the economic challenges effectively. Its dismissive attitude towards people’s economic grievances, exemplified by tone-deaf advice, showcases a profound disconnect between the ruling elite and ordinary citizens’ struggles.

The government’s focus on extravagant palace projects, city beautification, spending on drones to kill its people, and corruption instead of addressing critical social, medical, infrastructure, and educational needs highlights its misguided priorities.

This approach, coupled with the potential hardships of IMF reforms like currency devaluation and austerity measures, could fuel resentment and anger among the populace.

A transparent and responsive government is necessary to mitigate the adverse effects of reforms, such as rising inflation, increased living costs, and potential job losses. Repressive tactics stifle public debate and participation in the reform process, leading to a need for more local ownership.

However, the Ethiopian people have shown remarkable resilience in recent challenges. As economic difficulties intensify, the population may reach a critical point, potentially demanding greater accountability and transparency from the government.

 The success of Ethiopia’s economic transformation will depend not only on the practical implementation of reforms but also on the government’s willingness to engage with its citizens. The Ethiopian government’s acknowledgment of its people’s resilience and potential is not just a responsibility but a necessity.

Bridging Divides: A Pan-Ethiopian Approach to Economic Challenges:

The government’s current struggle to manage these complex issues, coupled with the ongoing internal conflicts, presents a pressing and urgent situation. It’s surprising that despite the severe suffering of the Ethiopian people, there hasn’t been more pressure on the government for change. The era of passive acceptance of hardship must end now, and we must act urgently.

Ethiopia’s future depends on active engagement from all sectors of society to navigate these economic challenges while addressing the root causes of internal conflicts. We must come together as a nation to overcome these hurdles. Ethiopia hopes to emerge stronger from this critical juncture through collective action and a commitment to transparency, peace, and inclusive growth.

Ethiopia’s economic challenges transcend ethnic boundaries, affecting all citizens regardless of their background. The hardships brought on by inflation, currency devaluation, and potential austerity measures do not discriminate based on ethnicity. 

It’s puzzling that despite the shared hardships, Ethiopians haven’t come together to demand change from their government. The time has come for all Ethiopians to realize their economic interests are interconnected. They can only hope to influence policy and improve their situation through unified action.

We call on all Ethiopians to set aside ethnic divisions and unite to address these pressing economic issues. It’s time to focus on our shared challenges and work towards a common solution. Form inclusive advocacy groups engage in a national dialogue about financial policies and demand transparency and accountability from the government.

The path to prosperity lies not in ethnic allegiances but in a united front that prioritizes the economic well-being of all Ethiopians. By standing together, the people can pressure the government to implement policies that benefit everyone, regardless of ethnicity.

Ethiopia’s path to economic prosperity lies in unity, not division. By coming together as one people to address these shared economic challenges, Ethiopians can create a more stable, prosperous, and fair future for all. Let’s unite and work towards a better future for Ethiopia.

Conclusion:

Ethiopia’s high-stakes gamble with IMF loans and the accompanying policy prescriptions is a pivotal moment in the country’s history and emblematic of African economies’ complex challenges in their interactions with international financial institutions. 

While these institutions offer much-needed financial aid, their interventions often have substantial economic and social consequences, highlighting their double-edged nature.

For IMF-mandated measures to succeed, specific requirements must be met, including settling internal conflicts, achieving peace, providing humanitarian assistance, fostering national unity, and improving institutions. Without these crucial elements, such policies risk amplifying existing tensions, potentially leading to greater instability. 

Because of the ongoing pattern of IMF involvement and social unrest in Africa, a critical reassessment of the existing model of international financial intervention within developing nations is necessary. The global community must address the complex issue of supporting economic growth and stability in these countries without imposing undue burdens on their most vulnerable populations.

Ethiopia’s experience with IMF-supported economic reforms has significant implications for the country and the future of international development economics. The world observes how this experiment unfolds, recognizing its broader significance for developing nations.

The Ethiopian government’s inability to effectively address the essential conditions required for successful economic reforms raises severe concerns about the likelihood of these reforms benefiting most Ethiopian citizens.

The need for concrete plans and actions to address these conditions, particularly in areas such as internal stability and creating an environment conducive to open and honest dialogue, suggests that the reforms exacerbate existing problems rather than alleviate them. The absence of concrete plans to tackle these crucial issues is deeply troubling for several reasons.

It increases uncertainty surrounding the economic reforms, casts doubt on their effective implementation, questions the government’s genuine commitment to the process, and suggests a potential lack of prioritization of all Ethiopians’ welfare in the economic strategy.

This lack of preparation and apparent disregard for fundamental prerequisites significantly increases the risk of reform failure, potentially leading to outcomes that fail to benefit most Ethiopian citizens and exacerbate existing problems and inequalities.

The government’s lack of readiness or willingness to lay the fundamental crucial groundwork in this article is a significant red flag for the reform process. It highlights the need for a more comprehensive and inclusive approach to ensure the success and equitable impact of the proposed economic changes and to prioritize all Ethiopians’ welfare in the financial strategy.

 References:

● International Monetary Fund. (2023). IMF support for Ethiopia: Economic implications and challenges. URL: https://www.imf.org/en/Countries/ETH

● International Monetary Fund. (2024). The Federal Democratic of Ethiopia For an Arrangement Under The Extended Credit Facility URL : https://www.imf.org/en/Publications/CR/Issues/2024/07/29/The-Federal-Democratic-Republic-of-Ethiopia-Request-of-an-Arrangement-Under-the-Extended-552778

●     World Bank. (2023). Ethiopia: Economic overview and outlook. URL: https://www.worldbank.org/en/country/ethiopia/overview

●     African Union. (2023). Addressing the challenges of IMF interventions in Africa. URL: https://au.int/en/economic-affairs

●     Economic Community of West African States. (2023). Regional monetary policies and economic stability. URL: https://www.ecowas.int/ecowas-sectors/macroeconomic-policy/

●https://www.imf.org/en/News/Articles/2024/05/08/pr-24144-nigeria-executive-board-concludes-2024-art-iv-consultation

●https://www.elibrary.imf.org/view/journals/002/2024/090/article-A001-en.xml