Ethiopia's new deal with the International Monetary Fund paves the way for crucial external support, and will also facilitate the country's debt restructuring and improve its investment climate in the long term. But the Ethiopian birr's depreciation against the U.S. dollar portends rising socioeconomic grievances in the short-to-medium term, which ethnic insurgencies could leverage for recruitment purposes. On July 29, the International Monetary Fund (IMF) approved a four-year $3.4 billion support package to Ethiopia, with $1 billion disbursed immediately. The next day, the World Bank approved $1.5 billion in financing to the East African country, thereafter pledging a total $16.6 billion in financial support over the next three years. These announcements came after Ethiopian Prime Minister Abiy Ahmed unveiled plans for major economic reforms on July 28, including shifting to an interest rate-based monetary policy, reviewing the country's subsidy regime, and reforming state-owned enterprises. Most notably, Ethiopia's central bank, the National Bank of Ethiopia (NBE), allowed the birr to float freely on July 29, which saw the national currency rapidly depreciate by around 30% against the U.S. dollar. But the Ethiopian government has stressed currency reforms were crucial in securing the $20 billion in external financial support and will help address the country's macroeconomic imbalances. 

• On July 9, the NBE announced that it would update the country's monetary policy framework. Prior to Abiy's announcements, the NBE primarily relied on increasing and reducing the country's money supply to control inflation. 
• Abiy's newly announced reforms will include a targeted support program to shield low-income households, including through temporary fuel and fertilizer subsidies, as well as wage subsidies for low-income government workers. Reports indicate that these measures are set to soon be enacted through a $5.9 billion mini-budget, of which 40% is due to be allocated to social spending measures. 

The IMF's program comes as Ethiopia has struggled to recover from the Tigray war amid persisting ethnic insurgencies, which saw the country default on a Eurobond coupon payment in December 2023. Abiy first secured IMF support in 2019 as part of his efforts to liberalize the Ethiopian economy, but the program was abandoned following the eruption of armed clashes in Ethiopia's northern region of Tigray in late 2020. The war depleted the country's finances, and while hostilities between the federal government and the Tigray People's Liberation Front ended in November 2022 with the signing of a peace treaty, Ethiopia has faced difficulties securing a rebound in foreign investments amid persisting ethnic insurgencies in the country, especially in its Amhara and Oromia regions. Strained foreign investments, together with Ethiopia's steep trade deficit, have contributed to a pronounced current account deficit and have left the country's foreign exchange reserves heavily strained, which ultimately forced the government to default on a Eurobond coupon payment in December 2023. While Abiy has sought to restructure the country's external debt since early 2021, the process has faced major delays. In 2023, the Ethiopian government secured the suspension of debt payments with China and Paris Club countries. However, the Paris Club's standstill agreement was contingent on Addis Ababa reaching a deal with the IMF, thus leaving Abiy little choice but to strike an agreement with the multilateral lender or risk defaulting on large parts of Ethiopia's official external debt and triggering a financial crisis. 

• According to the World Bank, Ethiopia's trade deficit stood at $12.09 billion in 2023, around 7.4% of the country's GDP. This large trade deficit has been the primary contributor to the country's current account deficit, which stood at $4.79 billion in 2023.
• Ethiopia's foreign exchange reserves stood at an estimated $700 million in 2023, covering less than a month of imports, compared with around $3 billion in 2020.
• As of fiscal year 2024/2025, Ethiopia's public debt-to-GDP ratio stands at 42.9%, with external debt representing around 29% of GDP. In 2021, 51.6% of the country's external debt was owed to multilateral lenders, while 28.6% was owed to bilateral donors, 11.8% to commercial lenders and 3.5% to Eurobond holders. 

Early signals sent by bilateral creditors suggest that Ethiopia's debt restructuring could progress at pace, but the birr's depreciation portends rising inflation and socioeconomic grievances, which ethnic militias could capitalize on to recruit more fighters. Earlier in July, members of one of Ethiopia's creditor groups issued financing assurances, signaling their willingness to restructure Ethiopian debt in line with the IMF program. This suggests that Ethiopia's debt restructuring process could progress faster than in Zambia and Ghana, where debt-restructuring negotiations with bilateral and private creditors have taken years. The scale of Chinese investments in the country and Ethiopia's recent adhesion to BRICS will also likely enable Addis Ababa to secure China's goodwill in the process, though this will likely involve rescheduling debt payments rather than Chinese entities taking a nominal haircut. Abiy's ability to rapidly restructure Ethiopia's external debt will likely help Ethiopia maintain compliance with the IMF program and secure future disbursements from the fund. However, this will also require Ethiopia's government to press ahead with fiscal consolidation measures — possibly through an expansion of the tax base — and structural economic reforms, such as adjusting electricity tariffs. Together with the likely rise in inflation resulting from the birr's depreciation, these measures will risk heightening socioeconomic grievances and could pave the way for anti-government protests. The latter is unlikely to evolve into a nationwide protest movement akin to the one recently seen in neighboring Kenya, as Ethiopia's comparatively weaker civil society and steeper inter-ethnic tensions are important obstacles to country-wide mobilization. However, different ethnic groups may organize their own protest movements, which could still destabilize the Ethiopian government. Moreover, ethnic militias, such as Fano in Amhara, would likely seek to capitalize on anti-government sentiment to expand recruitment, portending sustained security challenges in the short-to-medium term. Such challenges may notably involve a further rise in kidnappings — which have recently surged in Oromia — as well as continued or expanded Fano and Oromo Liberation Army (OLA) attacks on Ethiopian security forces and other ethnic groups. 

• Ethiopia's debt to China is owed to only a few entities, primarily the Export-Import Bank of China, which will further ease the restructuring process. Conversely, Zambia's debt to China was split between 18 Chinese creditors. 
• Ethiopia officially became a member of BRICS in January 2024, after being formally invited to join the group — which is named after its original five members: Brazil, Russia, India, China and South Africa — at the 15th BRICS summit held in Johannesburg in August 2023.

Abiy's economic reforms will eventually help improve Ethiopia's investment climate, but persisting security challenges in large parts of the country will continue to deter many foreign investors in the short-to-medium term. Despite being Africa's best-performing economy over the past decade — with an average growth rate of 8.3% between 2013 and 2023 — Ethiopia's investment environment for private sector firms has remained challenging. The country's public investment-led growth model has expanded infrastructure across its rugged terrain over the past two decades, but difficulties in accessing credit and foreign exchange shortages have stifled private investments, thereby fueling the country's current account deficit. Abiy's newly announced economic reforms are set to tackle these challenges, notably through free-floating the birr, which in the medium term will improve foreign currency liquidity in the country and make Ethiopian exports more competitive. While this will add inflationary pressure in the short term, the NBE's monetary policy reforms are expected to bring down inflation in the medium term, which will likely provide space for the central bank to cut interest rates, which will likely help boost private sector growth. But while Abiy's reforms will help put Ethiopia's economy on a sounder footing and improve the country's investment climate, a significant increase in private foreign investments appears unlikely in the short term, chiefly due to the country's volatile security environment. For Abiy, addressing these security threats will likely prove challenging given zero-sum game politics between different ethnic groups and the decentralized structure of guerilla groups. Ethiopia's ongoing difficulties in securing fresh foreign investments will thus likely keep the country's current accounts under pressure, leaving the country reliant on multilateral donor support in the coming years. 

• Additional reforms that will improve Ethiopia's investment climate include planned enhancements to the country's fiscal transparency, as the country's budget does not currently capture allocations to and earnings from state-owned enterprises.