More than two years after Ethiopia launched a sweeping phase of economic reforms, economists warn that lasting progress will depend on predictable policies, stronger institutions and efforts to improve the competitiveness of domestic businesses.
The country has made progress towards liberalising its economy and addressing long-standing macroeconomic imbalances. However, analysts say policy adjustments alone will not resolve the structural constraints that limit productivity, investment and job creation.
Economists estimate that the current reform agenda could take five to ten years to deliver comprehensive structural transformation. Its success will depend on consistent implementation, effective institutional reforms and the private sector’s ability to adapt to greater domestic and international competition.
The reforms introduced in July 2024 marked a significant shift away from a state-led growth model that had shaped economic activity for about two decades. That model relied heavily on a tightly managed exchange rate, restricted financial markets and extensive government borrowing to finance public infrastructure.
Although the approach supported rapid GDP growth for several years, it also contributed to financial pressures and external imbalances. Ethiopia’s default on its Eurobond obligations in late 2023 highlighted the urgency of addressing those vulnerabilities.
Supported by the International Monetary Fund (IMF) and the World Bank, the reform programme aims to build a more market-oriented economy. Its measures include moving towards a market-determined exchange rate, introducing an interest-rate-based monetary framework, reducing direct central-bank financing of government deficits, and reforming trade and taxation systems.
The government has also expanded social-protection programmes intended to cushion vulnerable households against the immediate costs of economic adjustment.
The central question, economists say, is whether these changes will translate into higher productivity, more employment and measurable improvements in living standards.
Opening previously protected sectors to private and foreign investment is a central element of the reform strategy. The aim is to attract capital, introduce technology and improve efficiency.
Speaking to Capital, Berhanu Denu, an economist at Addis Ababa University, said domestic businesses should view greater competition not only as a threat, but also as an incentive to improve performance.
“Many domestic industries operated under state protection for a long time, facing minimal competition and lacking sufficient incentives to enhance productivity,” Berhanu said.
He argued that competition can encourage businesses to improve efficiency, raise product quality and respond more effectively to consumer demand. Foreign investors can also bring capital, manufacturing technology, management expertise and access to export markets.
However, the transition presents challenges for domestic firms accustomed to protected markets. Local manufacturers often struggle to match multinational companies’ production costs, economies of scale and supply-chain efficiency.
Berhanu said long-term competitiveness cannot be achieved by shielding domestic businesses indefinitely. Instead, firms need to modernise equipment, strengthen corporate governance, develop workforce skills and produce goods that meet market requirements.
He added that government assistance should be targeted and balanced against wider development needs. While some sectors may require temporary support, public resources are also needed for education, healthcare, roads, water and electricity.
“Continuously redirecting limited public resources to subsidize inefficient private enterprises diverts capital away from broader national development priorities,” he said.
Despite progress towards macroeconomic stabilisation, economists say the transition to a market-driven economy requires institutional changes and more efficient allocation of capital and resources.
World Bank diagnostic analyses identify several constraints on private-sector expansion and poverty reduction. These include the large presence of state-owned enterprises, underdeveloped financial markets and complex regulatory, licensing and business-registration procedures.
Low agricultural productivity also remains a constraint, with limited changes in the sector’s productivity and employment patterns over the past two decades.
Berhanu noted that major businesses in banking, aviation and telecommunications remain under state ownership, including through Ethiopian Investment Holdings. However, he cautioned against treating privatisation as an automatic solution to inefficiency.
“Some past privatizations failed to deliver tangible gains in technology, productivity, or fresh capital investment,” he said.
He argued that privatisation should be judged by improvements in efficiency, technology and productivity, rather than changes in ownership alone. Effective competition, sound corporate governance and independent regulation are needed to ensure that ownership changes produce economic benefits.
Foreign-exchange reform remains one of the most sensitive elements of the transition.
Before the reforms, the gap between official and parallel-market exchange rates exceeded 100 per cent. Although it narrowed considerably, a spread of roughly 15 per cent remained in early 2026.
The commercial banking system also faced an outstanding foreign-exchange request backlog estimated at US$1.4 billion in late April 2026. The birr has continued to adjust under the market-oriented framework, with official banking rates cited at approximately 163 birr per US dollar.
These pressures highlight the difficulties businesses continue to face in securing foreign currency to import raw materials, machinery and other production inputs.
Economists say sustainable reform requires more than exchange-rate adjustments. Improved access to finance, industrial diversification and more efficient resource allocation are equally important.
Education and training must also respond more closely to labour-market demand. Vocational institutions and universities need to equip workers with the skills required by expanding manufacturing and service industries.
For investors, access to finance and skilled workers must be supported by a predictable regulatory environment.
Berhanu warned that frequent and unexpected policy changes could undermine confidence, complicate long-term planning and discourage businesses from investing in expansion.
He said predictability does not mean policies must remain unchanged indefinitely. Rather, adjustments should be supported by evidence, communicated clearly and implemented through established institutional procedures.
Structural transformation requires sustained commitment over five to ten years, although progress will differ between sectors. Initial improvements in efficiency and output may emerge within five to seven years, while building a globally competitive economy requires longer-term investment in productive capacity, skills and infrastructure.
Drawing on the development experiences of China, Japan, Germany and India, Berhanu said economic transformation involves more than deregulation. It requires strong institutions, technological upgrading and an environment in which domestic businesses can grow and compete.
