The International Monetary Fund has acknowledged Ethiopia’s progress in economic reforms but warned that the momentum faces risks due to declining foreign aid and ongoing internal challenges.

In its latest country report, the IMF praised Ethiopia’s sharp drop in inflation from nearly 34% in 2021/22 to about 17% in 2024/25, surpassing expectations. The fund also highlighted progress in correcting exchange rate distortions, which has boosted exports of gold and coffee, and noted that international reserves have climbed to $3.8 billion, well above the projection of US$3.1 billion at its second review.

Fiscal discipline is evident as tax revenue surged by 76% year-on-year in the third quarter of 2024/25, supported by VAT and excise reforms. The government has phased out fuel subsidies, bringing pump prices in line with market costs after multiple hikes in 2025. The primary fiscal deficit is projected to narrow to 0.5% of GDP this fiscal year.

Debt sustainability has seen a critical breakthrough with Ethiopia reaching an agreement in principle under the G20 Common Framework to restructure $3.4 billion in IMF-supported debt. Public debt is forecast to decline from nearly 50% of GDP in 2024/25 to about 35% by 2028/29.

Despite these achievements, the IMF expressed concern over persistent pressures in the foreign exchange market. The parallel exchange rate premium remains elevated at around 15 percent, although measures such as enhanced transparency and regular FX auctions are in place to narrow the gap. The report also flagged the sharp drop in official development assistance, which now accounts for just 4% of GDP, posing risks to humanitarian programs and reform financing.

Security challenges in the Amhara and Oromia regions, coupled with drought conditions, threaten to disrupt growth, which the IMF projects at 7.2% for the current fiscal year.

The IMF also pointed to structural weaknesses in the financial sector. The Commercial Bank of Ethiopia controls nearly half of banking assets, while market depth remains limited. Capital controls covering an estimated 70% to 80% of financial flows have driven businesses and households into informal channels, fueling volatility in the parallel market.

“Importers remain highly exposed to exchange rate risk due to weak institutional frameworks and a lack of hedging instruments,” the report noted.

The IMF recommended maintaining tight monetary policy to contain inflation and warned that interest rate hikes may be needed if price pressures resurface. It urged the government to liberalize the financial sector, ease capital controls, and attract more foreign direct investment, which remains below 2% of GDP.