In September 2024, Ethiopia floated its currency, the Birr, in line with an agreement with the International Monetary Fund (IMF) to secure over $3 billion USD in loans aimed at improving the country’s balance of payments. This dramatic shift took the exchange rate from 1 USD = 56 Birr to 1 USD = 115 Birr overnight, representing a massive devaluation of the local currency. While this move is praised by orthodox economists and the international financial community as a step toward market liberalization, few argue that the country has chosen a more complex and potentially perilous path.

The Real Cost of Devaluation: Inflation and Social Strain

The immediate impact of the Birr’s devaluation is a surge in inflation that disproportionately affects the working poor and the already struggling informal sector. By floating the Birr, Ethiopia has embraced a more market-determined exchange rate, which, while theoretically improving competitiveness, has led to skyrocketing costs for essential goods, especially those reliant on imports.

Ethiopia’s total budget of 971.2 billion Birr, which would have amounted to approximately $17.34 billion USD before devaluation, now sits at just $8.45 billion USD. This currency collapse has effectively halved Ethiopia’s purchasing power on the international market, creating a situation where the state’s capacity to fund critical imports—including food, medicine, fuel, and industrial inputs—has been decimated.

The orthodoxy of “correcting” currency overvaluation to address balance of payments issues misses a key insight: the real economy, especially in a country like Ethiopia with its high poverty levels and low per capita income, does not adjust smoothly. Inflation, driven by the rising cost of imports, is hitting food prices especially hard, in a country where 15 million people already rely on food aid. The World Bank and IMF have long championed the floating of currencies as a way to boost exports and attract foreign investment. However, this orthodoxy underestimates the severe social costs of devaluation in an economy where the informal sector dominates and basic goods are mostly imported.

Public Debt: A Neo-Colonial Trap?

A critical element of this devaluation is Ethiopia’s growing public debt, which requires 139.3 billion Birr (now $1.21 billion USD) in debt servicing for 2017. The $3 billion IMF loan is meant to ease this burden by boosting foreign reserves and stabilizing the economy. However, this influx of external financing raises concerns about deepening Ethiopia’s dependence on external debt and international financial institutions, trapping the country in a cycle of borrowing that constrains its fiscal sovereignty.

With the value of the Birr halved, Ethiopia’s foreign-denominated debt has effectively doubled in local currency terms. This worsens the fiscal outlook and forces the government into a corner, having to allocate more of its budget to debt repayment while cutting social services. The IMF loan may provide short-term relief, but the structural adjustment policies accompanying it will likely impose austerity measures that undermine Ethiopia’s social safety nets.

The floating of the Birr is part of a larger set of neoliberal reforms aimed at shifting Ethiopia away from its historically state-led economic model. Yet, without addressing deeper structural issues like agricultural productivity, domestic industrialization, and equitable wealth distribution, these reforms could end up reinforcing dependency on external capital, leaving Ethiopia more vulnerable to future shocks.

Military Spending vs. Social Spending: A Stark Trade-Off

Ethiopia’s budget allocates 65.7 billion Birr (about $571 million USD) to national defense—a massive figure in the context of a sharply devalued currency and pressing social needs. The prioritization of defense over social services reflects a dangerous imbalance in national priorities. While security is indeed a concern, especially with ongoing instability in Amharaand other regions, such a large allocation to military spending is a short-term reaction to long-standing governance failures.

Meanwhile, critical sectors like education and health – which receive 79.8 billion Birr ($694 million USD) and 33.9 billion Birr ($295 million USD) respectively – are severely underfunded, especially when viewed through the lens of the deteriorating social conditions in the country. Ethiopia’s Human Capital Index of 0.38 and its 90% learning poverty rate demand far greater investment in education and healthcare, particularly in a context where rising inflation is making basic services more expensive.

Orthodox economic frameworks often justify military spending in unstable regions to safeguard economic growth. Yet, this overlooks how poverty and inequality, exacerbated by underinvestment in social services, are root causes of instability. The government should be reallocating resources from defense to the long-term building blocks of peace—namely, education, healthcare, and jobs.

Infrastructure Development: A Double-Edged Sword?

The government’s continued commitment to infrastructure investment, with 283.2 billion Birr (approximately $2.46 billion USD) allocated for capital projects, is in line with Ethiopia’s traditional development strategy. Infrastructure—especially in urban development, water, and energy—has long been a pillar of Ethiopia’s economic growth, which reached an average of nearly 10% annually between 2004 and 2018.

However, in the context of a devalued currency and rising inflation, these investments may no longer yield the same returns. With the cost of imported construction materials and energy equipment surging, many infrastructure projects are likely to face cost overruns or delays. From a heterodox perspective, infrastructure investment in such a volatile macroeconomic environment could deepen Ethiopia’s debt burden without producing the expected developmental outcomes.

Moreover, infrastructure development alone cannot address Ethiopia’s structural issues. Without concerted efforts to develop the domestic industrial base, improve agricultural productivity, and create jobs for the 2 million people entering the labor force each year, Ethiopia risks falling into the trap of infrastructure-led growth without social inclusion.

Regional Subsidies and the Need for Equity

The budget allocates 236.7 billion Birr (~ $2.06 billion USD) for subsidies to regional governments, a critical lifeline for Ethiopia’s poorest and most conflict-affected areas. However, these funds, already stretched thin by the devaluation, may not be enough to address the deepening social crises in regions like Afar, Amhara, Benshangul, Oromia, and Tigray, where millions have been displaced and infrastructure has been destroyed.

It’s important to stress the importance of equitable development across regions as a foundation for long-term stability. Rather than focusing solely on national-level growth figures, the government must prioritize resource redistribution and regional development to ensure that the benefits of economic growth are shared. Failing to do so risks entrenching inequality, which in turn fuels further conflict and instability.

Conclusion: A Call for Alternative Approaches

The floating of the Birr and the accompanying reforms mark a decisive shift in Ethiopia’s economic trajectory. However, this shift carries significant risks. Devaluation, while boosting export competitiveness in theory, has imposed immediate costs in the form of higher inflation, lower real incomes, and increased debt burdens. The government’s prioritization of defense spending and infrastructure investment, while understandable, may prove short-sighted in the face of deepening social crises.

What Ethiopia needs is a more balanced approach that focuses on inclusive growth, equity, and social justice. Instead of relying on IMF loans and neoliberal reforms, the country should prioritize domestic resource mobilization, industrial policy, and public investment in education, healthcare, and food security. The challenge is not simply to “fix” the balance of payments but to reimagine Ethiopia’s economic model in a way that centers the needs of its people over the demands of global financial markets.