IMF Warns Ethiopia Reform Risks Amid Aid Decline, Security Challenges

The International Monetary Fund (IMF) has issued warnings about Ethiopia's economic reform agenda under a $3.4 billion loan deal, highlighting significant challenges from declining donor support, fragile security conditions, and a persistent parallel foreign exchange market. Despite Ethiopia's implementation of subsidy cuts, tax reforms, monetary tightening, and partial liberalization of the foreign exchange market, structural issues such as a central bank commission on FX sales, limited interbank liquidity, and a dominant state-owned bank continue to sustain a parallel currency market with a premium around 15-17 percent. The IMF praised Ethiopia's progress in meeting key program targets but emphasized that risks remain elevated, including delays in privatization, weaker foreign direct investment, and underperforming exports, all complicating debt restructuring efforts and efforts to rebuild reserves. Foreign aid has dropped from 12% of GDP a decade ago to under 4%, with further reductions expected, raising concerns about humanitarian impacts as one in five Ethiopians requires food or assistance. The IMF also urged Ethiopia to accelerate its transition to a modern monetary policy framework to improve credibility and to address structural financial sector issues that impede currency risk management and capital mobilization. Ethiopian officials are reportedly in the final phase of negotiating additional debt relief agreements with creditors as the country seeks to manage its default status and economic challenges.