High debt, inflation, governance challenges threaten economic stability, new report warns

Ethiopia’s economy is grappling with significant challenges including soaring public debt, persistent inflation, and weakening governance, according to the latest comprehensive report by the Ethiopian Economic Association (EEA).The “Report on the Ethiopia Economy 2025,” released on 22 May, offers a detailed analysis of economic trends from 2001 to 2023, highlighting the urgent need for policy reforms to address structural weaknesses and fiscal imbalances.The report reveals that despite Ethiopia’s public income growing by over 200% annually between 2002 and 2022, inflation has severely eroded the real value of government budgets. This, coupled with a widening budget deficit relative to East African and Sub-Saharan peers, signals growing risks to financial sustainability.Ethiopia’s public debt remains high and increasingly unsustainable. According to the Ministry of Finance’s Public Sector Debt Portfolio Analysis (June 2024), total public debt stood at nearly US$69 billion, about 32.9% of GDP, up from US$63 billion (38.8% of GDP) in June 2023. The EEA report notes weaknesses in debt management frameworks and declining debt policy performance since 2020, falling below the sub-Saharan Africa average.Persistent inflation has deteriorated living standards and contributed to widening macroeconomic inequality. The report highlights a decline in gross fixed investment and government spending since 2016, which has weakened economic activity and limited Ethiopia’s capacity to sustain social progress.Professor Mengistu Ketema, one of the report’s lead authors, emphasized that Ethiopia’s abundant natural resources and private sector remain underutilized. The growing gap between supply and demand is the primary driver of inflation, underscoring the urgent need for a robust return to economic growth.The agricultural sector, historically a backbone of Ethiopia’s economy, now accounts for only about one-third of GDP, down significantly since 2004/05. This shift is largely due to the expanding dominance of the service sector.While fertilizer use has improved, Ethiopia’s application rate remains below the global average, reflecting ongoing challenges in agricultural productivity. Access to finance for agriculture is critically low, with the sector receiving just 7.8% of total loans over the past two decades and less than 5% of new loans in 2021/22.The report documents a decline in consumer spending for most households between 2018/19 and 2021/22, with the poorest experiencing the steepest drop in living standards. Domestic conflict and political instability are identified as key factors undermining production potential, fueling inflation, and exacerbating poverty.The EEA calls for urgent, coordinated reforms including inflation-adjusted budget allocations, tax base expansion, improved revenue collection, balanced expenditures, export growth, and strengthened debt management institutions.The association urges the government to develop targeted poverty alleviation strategies, especially in regions where poverty has worsened. The 2025 report, spanning over 400 pages, builds on previous editions and provides a two-decade assessment of Ethiopia’s economic trajectory.