The Recurring Disease: A Framework for Reading Ethiopia's Monetary History

If you read Ethiopian economic history one regime at a time, what you see is a sequence of distinct crises. The Derg's printing-press inflation.

An argument by Zef Telahun

This is an editorial perspective — signed opinion, not the site's neutral analysis. Factual claims are footnoted; the synthesis, emphasis, and judgement are the author's.

The disease, not the symptom

If you read Ethiopian economic history one regime at a time, what you see is a sequence of distinct crises. The Derg’s printing-press inflation. The EPRDF’s chronic dollar shortage. Abiy Ahmed’s 2024 currency collapse. Different leaders, different ideologies, different decades — different problems. That, at least, is how it usually gets told.

This series argues that this telling misses the disease. The Ethiopian state has, across three radically different ruling coalitions, produced the same family of monetary outcomes: high and volatile inflation that taxes the poor; an exchange rate fixed at a fiction the parallel market keeps honest; a banking system bent toward financing the state rather than its citizens; and a chronic shortage of foreign exchange that no amount of administrative rationing has cured. The names of the rulers change. The institutional disease does not.

The claim is not that the three regimes are morally equivalent. They are not. The Derg’s command economy killed people in a way the EPRDF’s developmental state did not, and the post-2018 government’s record is its own. The claim is narrower and more specific: that the monetary architecture each regime chose — central-bank-financed deficits, suppressed prices, an administered exchange rate — was sufficiently similar that the monetary outcomes were sufficiently similar, and that this similarity is not a coincidence but a pattern that deserves a name. This series gives it one. It calls the pattern fiscal dominance disguised as a development strategy, and it argues that the cure for it is known, has been known for at least four decades, and has been deliberately not chosen.

That last claim is the load-bearing one. It is also the one most likely to provoke disagreement, and rightly so. Twenty-seven more articles will work through it. This one explains the lens.

Three thinkers, one question

The intellectual scaffolding of the series rests on three twentieth-century economists who agreed on almost nothing politically but converged on a single question: what does money do in an economy, and what happens when the state interferes with it? Their answers, taken together, give us a diagnostic framework precise enough to apply to a particular country’s history without becoming a slogan.

Milton Friedman argued, on the basis of more than a century of monetary data from a dozen countries, that “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”¹ The claim is empirical, not ideological. It says that when prices rise persistently and broadly across an economy, the cause is — has always been, in every documented case — too much money chasing too few goods. Not greed. Not speculation. Not foreign conspiracy. Not exclusively war or drought. Monetary expansion. The implication for Ethiopia is direct: if inflation is persistent, look at the central bank’s accounts and the government’s deficit. The two are connected, and the connection is the diagnosis.

Friedrich Hayek, in the 1945 essay that remains the cleanest statement of the case, argued that the price system performs a function no central planner can replicate: it transmits, in a compressed and decentralised form, information about the relative scarcity of every good and resource in an economy.² When prices are free to move, they tell producers what to produce and consumers what to economise on; when they are fixed by decree, they go silent, and the dispersed knowledge they would have conveyed simply does not enter anyone’s decision. Hayek’s point is not that markets are morally superior. It is that the alternative — central direction of an economy without the price signal — is operating blind. Apply this to Ethiopia’s 1984 grain procurement, its 1990s exchange controls, or its 2010s forex rationing committees, and the pattern is the same: the state suppresses the price, then is surprised when the underlying scarcity does not go away.

Thomas Sowell has spent fifty years making one point, in book after book, with the patience of a man who knows the point is unwelcome: that the question is never whether a policy sounds good, but what comparative consequences it produces relative to its alternatives, weighed in the costs they impose on whom.³ His characteristic move is to ask of any policy that suppresses a market: what was the actual scarcity the price was reflecting, and where did it go when you suppressed the signal? The shortage, in Sowell’s framing, is rarely created by the high price. The high price is the messenger. Shoot the messenger and the scarcity is still there, only now invisible to anyone trying to manage around it.

These three lenses together are the diagnostic toolkit this series uses. Friedman tells us where to look when inflation is persistent (the money supply, which means the state’s deficit). Hayek tells us what is lost when prices are administered (the dispersed information they would have transmitted). Sowell asks the political-economy question (what was the actual scarcity, and where did it go?). The application to Ethiopia is not a stretch. It is what these thinkers wrote about.

A note on what this framework is not. It is not a defence of laissez-faire as a universal prescription. Friedman supported negative income taxes; Hayek supported a basic income; Sowell has spent decades writing about the limits of pure markets in education and healthcare. The framework’s claim is narrower: that monetary policy — the supply of money and the determination of its price (the interest rate and the exchange rate) — is the part of economic policy where suppression of market signals does the most damage for the least benefit, because money’s job is precisely to be a signal, and a suppressed signal is no signal at all. A state can defensibly intervene in many things. Doing so by debasing its currency is the worst of the available methods.

The four recurring symptoms

If the framework is right, four monetary symptoms should appear and reappear across Ethiopian history, regardless of which ideology is in power. They do.

The first is inflation that runs persistently above what its trading partners experience, with periodic explosive spikes during fiscal or military emergencies. Ethiopian inflation averaged in the high single digits under the imperial regime, jumped to twenty and thirty percent under the Derg during the wars and famine of the 1980s, settled around 8–15 percent through most of the EPRDF period with chronic episodes above twenty, hit thirty-three percent in mid-2022, and as of mid-2026 has resurged to 13.4 percent after a brief dip into single digits.⁴ By comparison, Kenya, Ethiopia’s principal regional peer, has averaged 5–7 percent over the same period.⁵ The Ethiopian average is not the global average. It is the local pattern, and it has the signature of monetary financing.

The second is a persistent gap between the official exchange rate and the parallel market rate, with the gap widening whenever the underlying disorder accelerates. The gap was modest under the empire, large under the Derg, large again under the EPRDF, briefly enormous in 2022–24 when the parallel rate reached more than twice the official rate, and only meaningfully narrowed in 2024–25 by the float that conceded reality to the parallel market.⁶ A parallel market is not, in the framing of this series, a moral failing of the population. It is the price system finding the price the state would not admit to.

The third is financial repression: a banking system in which the state directs credit to itself and its priorities, savers earn negative real interest rates, and private borrowers face rationing rather than market-clearing prices.⁷ The mechanisms have changed across regimes — outright bank nationalisation under the Derg, the 27-percent forced-bond rule on private banks under the EPRDF, central-bank advances to government across all three — but the function is constant: a hidden tax on savers that funds state priorities without going through any budget that anyone gets to vote on.

The fourth is the chronic foreign-exchange shortage, treated by every regime as a structural problem requiring administrative rationing rather than as the predictable consequence of pricing dollars too low. This series will argue, at length, that there is no such thing as a dollar shortage. There is only a price at which more dollars are demanded than are supplied, and a willingness to maintain that price by administrative means rather than let it move. Ethiopia has done this for fifty years.

These four symptoms are linked. A government that runs deficits financed by the central bank creates inflation; inflation eats into the real value of the official exchange rate; an overvalued exchange rate produces a chronic shortage of foreign currency; the shortage is then “managed” through rationing and capital controls that drive the parallel market premium higher. The disease is one disease. The four symptoms are how it shows up.

The honest objections

A serious case must answer the serious objections, which is the difference between argument and assertion. Three deserve flagging at the outset; the series will return to them.

First: drought, war, and external shocks are real, and Ethiopia has had more than its share. Three famines, two interstate wars, multiple insurgencies, two oil shocks, two food-price shocks, a pandemic, and a credit cycle that swept up much of the developing world all happened during the period this series covers. None of these is a monetary phenomenon. Anyone who tries to explain Ethiopian inflation purely as a policy choice, ignoring the droughts, is being dishonest about the data. The series’s answer is the multi-causal test: separate the part of the outcome that comes from policy from the part that comes from external shock, weight each honestly, and resist the temptation to collapse one into the other. A drought is not a monetary event. A government that responds to a drought by printing money to fund grain imports is producing a monetary event downstream of the drought. Both are true; the series will keep them distinct.

Second: the data are bad. Ethiopian official statistics on GDP, inflation, reserves, and money supply are contested, sometimes seriously. The IMF and the World Bank have flagged data quality concerns repeatedly in their staff reports.⁸ Independent observers including the Addis-based Reporter and Addis Standard have questioned whether the recent return to single-digit inflation reflects underlying reality or basket reweighting.⁹ The series’s answer is to triangulate — to cross-check official series against the parallel exchange rate (which is unfalsifiable), against household-survey evidence of food prices, and against the cumulative consistency of the official numbers across time. Where a figure is contested, this series will say so.

Third — and this is the steelmanned developmental-state objection: the state has done things in Ethiopia that markets alone would not have done, from rural electrification to the GERD to the doubling of the road network. Real infrastructure was built. Real growth occurred, even if the official rates were inflated. The 2024 Eurobond default and the post-float inflation are real costs, but they have to be weighed against the real assets the borrowing financed. The series will engage this case at length, principally in articles 11, 18, and 26. The short answer here is that the case for state-led infrastructure investment, even taken at its strongest, does not require monetary mismanagement. South Korea built infrastructure without debasing the won; Botswana built infrastructure without inflating the pula. Ethiopia’s choice to finance state-led development through the central bank was a choice, not a necessity, and the cost of that choice is a separable line item from the benefit of the infrastructure.

What the series will and will not do

This series will argue a position. It is editorial, signed, and openly committed to a view about what Ethiopia’s monetary history shows. It will not pretend to a neutrality it does not hold.

It will, however, be disciplined in three ways. First, every load-bearing causal claim will be sourced. Where a figure is uncertain or contested, it will be flagged. Second, the strongest opposing readings — the developmental-state case, the multi-causal case, the war-and-drought case, the late-developer case — will be stated in their strongest form before being engaged. Third, the series will distinguish between the empirical claim (which is what the data show) and the normative claim (which is what should be done), and not let the second smuggle itself in disguised as the first.

The twenty-seven articles that follow are organised in six parts. Part I (articles 2–4) establishes the deep monetary history Ethiopia inherited. Part II (5–8) covers the Derg’s command economy and the 1984–85 famine as policy failure. Part III (9–14) covers the EPRDF’s developmental state at its full length, including a chapter that takes Meles Zenawi’s own case for it as seriously as it deserves to be taken. Part IV (15–18) traces the chronic monetary disorder — forex rationing, the parallel economy, the Chinese-debt build-up, and the war-finance pattern that links Derg to EPRDF to Abiy. Part V (19–22) covers the post-2018 reckoning: continuity under reform rhetoric, the Tigray war’s monetary consequences, the 2024 float, and the unfinished architecture that followed it. Part VI (23–28) measures the human cost, places Ethiopia in comparative context, takes the steelmanned statist case head-on, and ends with a prescription.

The series is long because the disease is long. It is one disease. The point of writing twenty-eight articles is to show that.