Ethiopia has just celebrated the one-year mark since it adopted market-oriented reforms – to be financed by the IMF and World Bank in a four-year implementation period. The principal actors have given their verdict on the progress so far. National Bank of Ethiopia Governor Mamo E. Mihretu maintains that “the results in all macroeconomic contexts have greatly exceeded our expectations.” The IMF concurs, pointing to “macroeconomic indicators that have performed better than expected.” For its part, the World Bank states “the reform agenda has already delivered early gains.” Lastly, the Ethiopian government is enthused by how quickly the economy has seemed to respond to reforms.

So it is natural to ask: Should we be feeling so triumphal, or is there a sting in the tail?

Before answering this question, it is useful to put things in perspective. True, when Prime Minister Abiy Ahmed assumed office back in April 2018, he inherited an economy with a large resource gap, a financial and foreign exchange crunch, official settlements dead end, unsustainable external debt, chronic unemployment, and high inflation. So his government unveiled in August 2019 what it called “Home-grown Economic Reform” as a remedy to cure macroeconomic pathologies. However, before long, the new government was embroiled in a succession of new crises – the Covid-19 pandemic, bloody insurrection, drought, and hostile international climate. But in July 2024, from what appeared to be an economic no man’s land, the government took an adventurous flight to the uncharted world of “comprehensive macroeconomic reforms,” where the shadows of the usual suspects loom large.   

In returning to the original question, though, a cry of caution can be heard from history, which is littered with false hopes and dawns, as well as miserable failures of maladapted reforms. And it is inevitable that our current reform program provokes an uncomfortable sense of déjà vu, of a repeat of the 1980s, with its action items strikingly similar to those listed under the widely discredited “Washington-Consensus” free-market ideology. Oh, and Ethiopia itself had adopted a brainchild of the latter – Structural Adjustment Programs (SAPs) – back in October 1992. OK, the EPRDF regime implemented the neo-liberal policies only selectively and halfheartedly. But no bitter regrets there; SAPs brought nothing but untold suffering even in those African countries that faithfully followed them. Why? The Washington-Consensus rules were treated as the Ten Commandments, disregarding structural, institutional, and cultural contexts.     

But can we take a deeper look at the publicly disclosed data and logic? Yes, we can, even if the quality of our data leaves a lot to be desired. For those who never trust official statistics, the Nobel laureate Paul Krugman offers encouraging words: “All economic data are best viewed as a peculiarly boring genre of science fiction.” That is to say, a lot of educated guesswork is involved, especially with regard to GDP and inflation, as are measurement lags. As a result, these guesstimates are sometimes not very informative, and can thus distort policy decisions. What if the books are cooked? Here, too, one can only engage in even more guesswork, without offering any direct evidence. The point is that we have to work with the available data.

Let us take as final, for the sake of argument, the IMF-reported data for fiscal year 2024/25. Real GDP would grow by 7.2% this past year, defying major headwinds. OK, but this cannot be traced to exports responding to a weaker currency, which requires at least two years for it to be a probable proposition. Neither can fiscal or monetary policies be a plausible explanation, as they were both tightened. But it is sort of a moot point because macroeconomic policy is only one among many internal and external determinants of economic growth, and in any case isolating its causal effect is extremely difficult – even more so in our economy. In addition, it is well known that real variables react to policy changes with long lags. To really understand underlying trends in growth, we need at least five to ten years of data. Remember that the EPRDF regime, untroubled by radical policy departures, had no problem reporting almost “double-digit” average growth rate over a twelve-year period. But, alas! that turned out to be a house built on sand, and our development problems remained a hard nut to crack.  

The IMF numbers then tell us that inflation is estimated to have plunged to 16.6% per annum, slashing some ten percentage points from the previous year. Maybe, but this also belittles the latest macro policy shift as a contributing factor. First, monetary policy tightening typically takes 18 to 24 months to have a significant effect on inflation even in advanced economies. Second, most of the actual and planned fiscal policy actions – like squeezing subsidies, raising/introducing taxes, increasing administered prices, and propelling governmental service fees – are inflationary at least in the short to medium term. Third, the move from managed- to free-floating exchange rate regime has been a driver of both actual and expected inflation.

The simultaneousness of solid growth and plunging inflation also poses a particular problem for the NBE in claiming credit for the latter. True, there is a plausible credit channel for monetary policy in Ethiopia. But monetary tightening is supposed to reduce inflation by slowing down the economy, and yet we appear to have the best of both worlds. Add in the relatively small formal financial sector and the NBE’s still work-in-progress monetary policy framework, and it almost beggars belief that activist monetary policy could cause monumental disinflation so quickly and painlessly.

We also recall that the main point of our currency regime change was to get the overrated birr to come to terms with its real worth. The IMF reckons it now has, after losing more than 100% of its value against the US dollar. However, the parallel market has reportedly been trading at a premium of around 15% over the last five months. Indeed, it was premature – both in real time and hindsight – for the NBE to express feelings of vindication when the parallel-market premium initially fell to nearly zero. And if the reemerging threats or crackdowns on black market traders are anything to go by, things may even turn full circle. The truth is that flexible exchange-rate policy is no guarantee of elimination of the parallel-market spread. Even if the exchange rates are unified, the parallel market for US dollars can still persist for various reasons.

The IMF’s July country report then shows that merchandise export revenues have more than doubled, due mainly to strong receipts for coffee and gold. Great, but the pertinent question is how much of this is in response to exchange rate realignment. Focusing on our main export item, coffee, it is true that exchange rate affects participants across the supply chain, including our coffee producers who get paid in birr. However, the current bonanza is mostly due to an unprecedented rise in global coffee prices, which doubled over the past two years. And any observed volume growth is best explained by pre-existing “green legacy” initiatives and quality-improving efforts by the government to divert production from domestic to export markets. The thing is, primary export commodities like coffee are vulnerable to wild price swings, and their export supply and world demand are not that price responsive – at least in a structural sense. To imagine that a more competitive real exchange rate will materially expand them to solve our hard-currency or balance-of-payments conundrums is really stretching it. Even if our commodity export boom were here to stay, that in itself, while welcome, runs the risk at least of pushing industrialization to the back burner, if not locking us in the primary sector.     

The IMF also eulogized an “over-performance in the accumulation of international reserves,” which would now cover around 1.7 months of prospective imports, up from less than one month the previous year. But wait, it turns out that the main reason for the current leap in official reserve holdings in general and in foreign-currency reserves in particular is, first, the financial injection by none other than the IMF/World Bank to execute the reform program and, second, the same exceptional price increase for our export commodities, including gold which has gained around three-quarters of its value over the past five years, leading overall to a net currency inflow (a surplus) on our balance of payments account. But if the multilateral program funding ceased and the current commodity boom was reversed, would anyone want to bet against a further weakening of the birr or a rapid reserve loss?

So the effects of reforms are not clearly visible in these data, at least yet. Identification is complicated further by inconsistencies among multiple policy objectives and/or targets. For example, removal (even if phased) of state subsidies and dishing out taxes left, right, and center (cases in point are a VAT on fuel and a 2.5% tax on loss-making businesses) are in conflict with the objectives of controlling inflation, motivating private investment, and enhancing social protection. And how can one reconcile cutting federal spending and escalating taxes – all in the name of “fiscal adjustment” (read austerity) – with the need to boost economic growth and fight disturbing unemployment (about which the IMF report is deafeningly silent)? Yet another telling example is the levy of a 10% tax on interest income from bank deposits, when the latter’s return was already low and highly negative in real terms, just flying in the face of “getting prices right.” In fact, this aggravates financial repression, crippling mobilization of private domestic savings and their allocation to productive investment, with a domino effect on the balance of trade.

The bottom line: Reported numbers would have us believe that almost everything is hunky-dory in our economy one year into a major policy shift, but there is more to these numbers than meets the eye. And annual changes are too noisy to take an unequivocal position over the beneficial effects of macroeconomic policy reforms, whose workings are extraordinarily complex and unpredictable. The added incompatibilities of some reform measures and goals do not help. But to really talk about the success and failure of economic reforms, we would ideally like to wait until the implementation period has come to pass.

So what should the authorities do? We do not want to be too harsh on them, for a government, almost by definition, craves for or seizes on favorable economic statistics. But they should be more cautious in their claims about the virtues of free-market reforms and humble enough to recognize that not all economic problems will be market-reformed away – and some can even get worse.

Economic and Business Analyst based in Addis Ababa. He can be reached at matias.assefa@gmail.com