The Ethiopian government has dramatically exceeded its planned fuel subsidy for the 2025/26 budget year, spending 272 billion birr instead of the targeted 100 billion birr. This overspending raises concerns that escalating tensions in the Persian Gulf may jeopardize the country’s broader macroeconomic reform agenda.
The 172 percent overrun was revealed by Kassahun Gofe, Minister of Trade and Regional Integration (MoTRI), in a recent social media post. This situation highlights the increasing pressure on public finances, just months into a four-year reform program supported by international partners.
Under the reform framework initiated in the previous budget year, the government had committed to gradually reducing fuel subsidies as part of efforts to modernize public spending and shift towards a fully market-driven economy.
For the 2025/26 fiscal year, which ends on July 7, 2026, the subsidy was capped at 0.6 percent of gross domestic product (GDP), equivalent to a maximum of 100 billion birr.
However, actual subsidy payments have significantly exceeded this limit. According to the Ministry of Finance (MoF), the 0.6 percent allocation was intended to provide temporary liquidity support to the Ethiopian Petroleum Supply Enterprise (EPSE) and alleviate short-term cash flow issues during the transition to full cost-recovery fuel pricing and the reinstatement of statutory fuel taxes.
Under this arrangement, the MoF transfers funds monthly to EPSE to cover cash shortfalls related to foreign exchange liabilities.
In a document published by international partners in late January, the MoF noted that favorable global oil prices had allowed EPSE to reduce its fuel import-related credit liabilities, shorten the average maturity of outstanding letters of credit, and build liquidity buffers. However, that positive outlook has since changed.
The macroeconomic reform, launched in July 2024, aimed to eliminate real exchange rate overvaluation through foreign exchange liberalization. This initiative lifted implicit taxes on exporters—who were previously required to surrender foreign currency at below-market rates—along with implicit subsidies on fuel and fertilizers imported at the official rate.
As part of this overhaul, fuel subsidies were integrated into the federal budget. Fuel taxes totaling 0.8 percent of GDP, previously managed by EPSE and the Road Fund, are now directed to the central budget. The 2025/26 budget includes a temporary fuel subsidy of 0.5 percent of GDP and a permanent Road Fund allocation of 0.1 percent of GDP.
Experts now caution that the government may need to allocate additional budget resources to address unexpected price increases for petroleum products, driven by escalating conflict near the Strait of Hormuz—a crucial transit route for global oil shipments and a key source of Ethiopia’s imports.
Earlier this week, MoTRI confirmed that approximately 180,000 metric tons of petroleum products destined for Ethiopia have been halted due to the conflict in the Gulf.
Ethiopia primarily imports fuel from Kuwait under a special settlement arrangement. However, analysts warn that this disruption may force the government to turn to more expensive spot-market supplies, which could require upfront payments for this critical commodity.
Experts familiar with the reform process noted, “The change in payment method, combined with the price hike, would place an additional burden on the country’s foreign currency position.”
They suggested that this situation might prompt policymakers to reconsider foreign currency sourcing options previously abandoned at the start of economic reforms.
Additionally, experts indicated that the National Bank of Ethiopia (NBE) may suspend its biweekly foreign exchange auction, a mechanism designed to provide dollars to commercial banks and stabilize the market.
“The NBE has not published a forex auction schedule for the fourth quarter of the budget year. An auction was supposed to be held this week, but it did not take place,” they pointed out.
These latest challenges draw parallels with previous disruptions to Ethiopia’s reform trajectory. The original reform program, launched at the end of 2019, was derailed first by the COVID-19 pandemic and later by the conflict in northern Ethiopia.
The government had anticipated that the current phase of reform would succeed by mid-2028, laying the groundwork for a modernized Ethiopian economy.
At the time of publication, efforts to obtain comments from Minister of Finance Ahmed Shide and Minister Kassahun Gofe were unsuccessful.
