Ethiopia

Growth driven by reforms agreed with the IMF

Despite the consequences of the war in the Middle East – notably higher import costs (oil and fertiliser) and, to a lesser extent, a slowdown in foreign capital inflows and domestic demand – growth is expected to remain strong during the 2026-2027 fiscal year (8 July, 2026, to 7 July, 2027), supported by the private-sector reforms agreed with the IMF in July 2024 as part of the Homegrown Economic Reform Program. In exchange for USD 3.4 billion in financing over four years – of which USD 2.6 billion had already been disbursed by July 2026 – in addition to USD 5 billion in grants and concessional loans from the World Bank over the same period, Ethiopia has committed to a broad program of economic and financial liberalisation (gradual liberalisation of the foreign exchange market, multiple privatisations open to foreign investors, the launch of a stock market and a financial market, etc.), in addition to negotiations on public debt restructuring. This should stimulate exports and boost investment – both domestic and foreign – in most sectors, although progress is needed in areas such as financial oversight and economic statistics, among others.

As the main pillar of the Ethiopian economy – accounting for 33% of GDP and 60% of employment – agriculture is expected to continue gaining in productivity thanks to advances in mechanisation and irrigation. As a result, coffee production – the country’s leading export – is projected to increase by nearly 5% during the 2026-2027 crop year. However, the sector will remain vulnerable to El Niño-induced drought risks and fertiliser supply shortages – exacerbated by the blockade of the Strait of Hormuz – for as long as construction continues on the USD 4 billion Dangote plant, which is expected to meet the country’s nitrogen fertilizer needs by 2029. The mining sector’s growth is being reinforced by the 2026 opening of the Kurmuk and Tulu Kapi gold mines, representing an increase in annual production capacity of nearly 400,000 ounces. Addis Ababa has also just relaunched the Danakil project (USD 2.3 billion) to mine potash from Ethiopia’s subsoil. The inauguration of the Grand Ethiopian Renaissance Dam (GERD) in September 2025 – Africa’s largest hydroelectric power plant (5,150 MW) – will support the country’s economic development. The dam also represents a significant source of revenue through the export of surplus power to Sudan, Kenya and Djibouti. The transportation sector will also remain a key driver of growth, supported by the performance of Ethiopian Airlines, the national carrier. It will continue to attract substantial investment, particularly in connection with the construction of the new Bishoftu Airport, a USD 12.5 billion project scheduled to open by 2030.

Following a resurgence of inflationary pressures in 2026 against a backdrop of rising oil prices and the depreciation of the birr (following the liberalization of the foreign exchange market), inflation is expected to return to a level consistently below 10%, starting in 2027. This decline is driven by the tightening of monetary policy by the National Bank of Ethiopia (NBE), which since July 2024 has relied on steering a key interest rate – a rate the central bank raised by 100 basis points for the first time in July 2026, bringing it to 16%. Monetary policy has been even more effective since the NBE liberalised lending and deposit rates in January 2026, strengthening the transmission to the real economy – although it is still far from optimal.

Final stretch for the restructuring of external public debt

In line with the commitments made under the IMF program, the budget deficit is expected to decline in fiscal year 2026-2027. This consolidation effort stems primarily from an increase in tax revenues (9.5% of GDP in 2025-2026), resulting from the broadening of the tax base, increases in VAT, income tax, and excise taxes, as well as the introduction of a property tax. At the same time, the share of expenditures (14%) is expected to decline as the government gradually phases out subsidies on fuel and for state-owned enterprises, and prioritises poverty reduction and infrastructure investments. Overall, the budget approved for 2026-2027 totals 2,300 billion birr (USD 15 billion), representing a nominal increase of 21% compared to the previous fiscal year, driven primarily by the depreciation of the birr over the period (approximately 15% against the dollar).

Now that the central bank is no longer monetising the deficit, the latter is expected to be financed through the issuance of domestic bonds and budgetary support from the IMF and the World Bank. Ethiopia has, in fact, remained largely excluded from international capital markets since its default in December 2023, triggered by the failure to pay a USD 33 million coupon on its sole USD 1 billion Eurobond. In July 2025, a Memorandum of Understanding reached with bilateral creditors enabled USD 8.4 billion in debt to be restructured, and was accompanied by USD 2.5 billion in debt relief over the entire duration of the IMF program (through 2028). In June 2026, the country also reached a preliminary agreement with an ad hoc committee of private creditors representing 45% of the outstanding Eurobond. The bondholders would agree to exchange their securities for a new USD 880 million bond (representing a 12% discount) maturing in 2029 and bearing a 6.15% coupon, in addition to the payment of approximately USD 100 million in interest arrears. The agreement is expected to be finalised by the end of 2026, subject to approval by public creditors. Bilateral and commercial foreign debt – the only debt eligible for restructuring – still accounts for nearly 30% of the total outstanding debt.

Ethiopia’s external position is expected to improve in 2026-2027 following the deterioration observed in the previous fiscal year due to the conflict in the Middle East. Exports of goods are expected to benefit from the depreciation of the birr, high gold and coffee prices, and increased electricity sales, while exports of services will continue to be supported by Ethiopian Airlines’ operations. The trade deficit (10% of GDP in 2025) is nevertheless expected to persist as import needs for fertilisers, fuel and capital goods for infrastructure projects (airports, hydroelectric power, etc.) will continue to be substantial will only be partially offset by remittances from the diaspora (6% of GDP in 2025-2026). The current account deficit would then be financed by foreign investment and concessional multilateral financing (the IMF and the World Bank). Combined with debt restructuring, all of this should make it possible to gradually rebuild foreign exchange reserves, which will amount to just over two months of imports by mid-2026.

Consolidation of power, domestic security challenges and regional ambitions

The Prosperity Party of outgoing Prime Minister Abiy Ahmed emerged as the clear winner of the June 2026 legislative elections, securing 438 of the 486 contested seats (out of a total of 547) in the House of People’s Representatives. Reelected to lead the country for another five-year term, the head of state has scored several significant achievements that have secured him the support of the population, such as continued economic liberalisation, infrastructure development and progress on food security. However, these successes fail to offset the deteriorating security situation, as several regions had only limited – or even no – access to the election. In Tigray, in the north of the country, internal rivalries, the unresolved dispute over Western Tigray (occupied by the Amhara rebel group Fano) and the nagging issue of the return of displaced people are undermining the peace process launched in 2022. Another cause for concern is that the Amhara and Oromia regions – the two main current hotbeds of instability – are engaged in an armed struggle against the federal government, further undermining national cohesion.

Ethiopia seeks to assert itself as the leading power in the Horn of Africa. Access to the sea – which the country has been deprived of since Eritrea’s independence – is a key issue that shapes Ethiopia’s regional policy. While tensions with Somalia have now eased, bilateral relations remain marked by Ethiopia’s past attempt to recognise the self-proclaimed Republic of Somaliland in 2024 in exchange for a portion of Somalia’s coastline. The same issue is also a source of tension with neighbouring Eritrea, as Ethiopia has its sights set on Eritrea’s port of Assab on the Red Sea. Relations are all the more strained because Asmara views the Tigrayan authorities with suspicion and maintains an ambiguous military presence along the border with the region, which irritates the federal government. Relations with Egypt are barely any better and continue to be marked by the dispute over the sharing of the Nile’s waters – a dispute that also involves Sudan – due to the construction of the GERD.

Outside the region, relations with the West – which had deteriorated during the war in Tigray – continue to improve in the wake of the agreement reached with the IMF in July 2024. Ethiopia, which joined the BRICS in January 2024 and benefits from financing from the New Development Bank, is also strengthening its ties with China (its leading trading partner, investor, and bilateral donor) and the United Arab Emirates, which is playing an increasingly important security role in the region and is developing the port of Berbera in Somaliland, on which the country relies. The country also intends to join the World Trade Organization before the end of 2026.

Last updated:August 2026