1991 and 1992: Old Errors, New Branding, Partial Reform

The EPRDF — the Ethiopian People's Revolutionary Democratic Front, a coalition led by the Tigray People's Liberation Front (TPLF) — took Addis Ababa on 28 May 1991 after a final military offensive that drove Mengistu Haile Mariam into Zi…

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.

A transition with no monetary debate

The EPRDF — the Ethiopian People’s Revolutionary Democratic Front, a coalition led by the Tigray People’s Liberation Front (TPLF) — took Addis Ababa on 28 May 1991 after a final military offensive that drove Mengistu Haile Mariam into Zimbabwean exile.¹ The Derg fell with remarkable speed once the Soviet aid that had sustained it for fifteen years collapsed in 1989–91. The new regime inherited a country with an inflation rate the official statistics did not honestly report, an exchange rate at 2.07 birr/USD that was a fiction by a factor of three or four, a parallel-market premium in triple digits, a state banking system that existed primarily to finance government deficits, a state-enterprise sector that was almost uniformly loss-making, and external debt of over $9 billion against an economy that did not generate enough hard currency to service it.²

What the new regime did not inherit was a public debate about monetary policy. The Transitional Charter of July 1991, the Constitutional Conference of 1993, the 1995 Constitution that founded the Federal Democratic Republic of Ethiopia — none of these documents made monetary policy a question for political contestation. The central-bank statute, the role of state banks, the exchange-rate regime, the use of NBE financing for government deficits: all of these were treated as technocratic matters to be settled by the relevant ministries and the international financial institutions, not as political questions about which the new federal architecture had anything to say.

This article argues that the silence was decisive. The 1991–92 transition was, on every other policy dimension, a real break with the Derg’s commitments — ethnic federalism replaced unitary centralism, a partial market liberalisation replaced state ownership, a multi-party constitution replaced a Workers’ Party monopoly. But on monetary policy, the new regime kept the architecture and the assumptions that the Derg had used. The 1992 devaluation, examined in detail below, accepted the inevitable, but did so as a one-off adjustment rather than as a regime change. The mechanism by which fiscal pressures had been translated into monetary disorder for the previous fifteen years remained in place. The disease had a new patient. The diagnosis stayed the same.

What the EPRDF inherited, in numbers

The technical condition of the Ethiopian economy in mid-1991 was bad in ways that the official statistics partially concealed and partially could not hide. Real GDP, by World Bank reconstructions, had contracted by perhaps 4 percent in 1990–91; per-capita income was below 1974 levels.³ The fiscal deficit, including the off-budget losses of state enterprises, was probably above 12 percent of GDP.⁴ External debt was $9.1 billion at end-1991, against an export base of roughly $300 million — a debt-to-export ratio that placed Ethiopia among the most distressed debtor countries in the world.⁵ Foreign-exchange reserves, after the collapse of Soviet support, were perhaps two weeks of imports.⁶

Inflation, in the period immediately before the transition, had been running at official rates around 18–22 percent, with the parallel rate suggesting underlying inflation closer to 30 percent.⁷ The CBE’s loan book consisted overwhelmingly of credit to state enterprises and to the government, much of it non-performing in any normal accounting sense but never recognised as such on the bank’s books. The NBE’s foreign-currency obligations exceeded its foreign-currency assets.

These are not technical details. They are the framing condition for what came next. A new government in this position had two viable strategic options. The first was stabilisation first: a sharp, comprehensive set of monetary, fiscal, and structural reforms — devaluation to a market-clearing rate, sharp cuts in government expenditure, breakup or recapitalisation of state banks, sale of state enterprises, comprehensive debt restructuring through the Paris Club and HIPC mechanisms — that would impose immediate hardship but reset the macroeconomic foundations within a year or two. The Bolivian model from 1985, Polish model from 1990, and the Ghanaian model from the late 1980s all offered templates for this approach.⁸

The second option was gradualism: partial reforms, sequenced over time, that would attempt to manage the adjustment without imposing an immediate shock. This option preserved more political room for manoeuvre, allowed the new regime to consolidate power before facing serious popular discontent, and was the option favoured by some IMF staff and most domestic policymakers concerned about post-revolutionary stability.

The EPRDF chose the second. The 1992 devaluation, the IMF Structural Adjustment Programme of 1992–96, and the partial trade liberalisation of the period 1992–95 were the visible elements of that choice. What was not part of the choice — and this is the load-bearing observation of this article — was central-bank reform, full liberalisation of the foreign-exchange regime, or a serious commitment to monetary discipline as a binding constraint on fiscal behaviour. The gradualist option was chosen, and within the gradualist option, the monetary leg was the most timid.

The 1992 devaluation

The October 1992 devaluation moved the official birr/USD rate from 2.07 to 5.00, a nominal devaluation of 142 percent that remains the largest single-day exchange-rate adjustment in Ethiopian history.⁹ The accompanying reforms — implemented as part of the IMF-supported Structural Adjustment Programme — included partial trade liberalisation, the elimination of some price controls, and the legalisation of private commercial banks (which had been nationalised in 1975).

In immediate terms, the devaluation worked. The parallel premium narrowed sharply; coffee export volumes rose more than 100 percent year-on-year between 1991 and 1992, as the more favourable rate restored incentives that had been suppressed for years.¹⁰ Inflation, after a brief spike from the import-price pass-through, settled in the high single digits for several years. Foreign aid, freed up by the IMF and World Bank’s willingness to engage with the new regime, began to flow again. By the standard metrics, the 1992 reform was a success.

But the reform was narrow, and its narrowness is the part that matters for this series. Three specific limits are worth naming.

First, the devaluation was treated as a level adjustment, not as a transition to a flexible exchange-rate regime. After the move from 2.07 to 5.00, the NBE held the rate fixed at 5.00 for several years, then conducted periodic discrete devaluations: to 6.32 in 1995, to 7.94 in 1997, with further small adjustments through the early 2000s.¹¹ Each was an acknowledgment that the previous rate had drifted away from underlying conditions, and each created an opportunity for a parallel premium to redevelop. The pattern was: fix the rate, watch the premium grow, devalue to close the premium, fix the new rate, watch the premium grow. This is the pattern of a country that has accepted devaluation as an occasional crisis-management tool while refusing to make the price of foreign currency a market-determined variable. It is, recognisably, the Derg pattern in slightly improved form.

Second, the liberalisation of private banking established by the 1994 Monetary and Banking Proclamation allowed private banks to operate but left the financial sector dominated by state institutions. Awash Bank, Dashen Bank, Bank of Abyssinia, and others were founded in the mid-1990s, but the Commercial Bank of Ethiopia retained the majority of deposits and the lion’s share of lending to state-favoured projects. More important, the central-bank statute was not changed in any meaningful way: the NBE remained an organ of the government, its governor an executive appointee, its statutory limits on lending to the Treasury unchanged in substance from the 1963 framework.¹² The 1975 architecture was preserved with one wing repainted.

Third, the fiscal-monetary linkage — the mechanism by which government deficits became NBE advances became money-supply expansion — was not addressed at all. The new regime ran lower deficits than the Derg through the 1990s, but it ran them through the same institutional pipes. When the EPRDF’s fiscal stance later loosened, in the GTP years from 2010 onward (articles 14 and 17), the architecture for monetary financing was sitting there ready to be used. It had not been disabled. It had only been temporarily unused.

The intellectual environment

It is worth pausing to ask why the monetary reform was so cautious, because the answer is intellectually revealing. The EPRDF leadership of the early 1990s was not unaware of the macroeconomic critique of the Derg model. Meles Zenawi in particular had reportedly absorbed substantial economic reading during his guerrilla years in the Tigrayan hills, and the 1992 Structural Adjustment Programme was negotiated by an Ethiopian team that included technically competent economists.¹³

But the EPRDF leadership had also absorbed an alternative reading of the 1980s African experience — one that emphasised the failures of structural adjustment in Ghana, Tanzania, and elsewhere, the social costs of rapid liberalisation, and the (correct) observation that the East Asian “miracle” economies had not followed the IMF-World Bank prescription. The intellectual frame Meles would later articulate explicitly — the “developmental state” — was already shaping the EPRDF’s instincts in 1991–92, even before it had been given that name. The instinct was: take the parts of the structural adjustment package that were genuinely necessary (devaluation, partial liberalisation, debt rescheduling) and resist the parts that would surrender the state’s role in economic direction (privatisation of major state enterprises, full capital-account liberalisation, central-bank independence).

The instinct was not foolish. It was based on a real diagnosis — that pure market liberalisation had not, in fact, produced rapid growth in Africa — and on a real positive model, the East Asian developmental states. Article 11 takes Meles’s full case at its strongest and engages it on its own terms. The narrower point this article is making is that the 1992 reform was deliberately incomplete on the monetary side, and the incompleteness was an intellectual choice made by people who knew what they were choosing. They were not blundering. They were trying to preserve maximum policy space for the state.

The cost of that choice would arrive later. It would arrive, principally, in the form of the chronic dollar shortage that became the defining feature of Ethiopian economic life through the EPRDF period — the queue economy of import licenses, surrender requirements, and forex rationing committees that articles 11 through 15 will examine. It would arrive in the form of the financial repression that funded state-favoured projects at the cost of private-sector credit. It would arrive in the form of the gradual rebuild of the parallel exchange premium through the 2000s and 2010s. And it would arrive, ultimately, in the form of the 2023 Eurobond default and the 2024 float that this series’s later articles examine.

The counter-argument

The strongest version of the EPRDF’s defence of its 1991–92 choices is this: a comprehensive shock therapy in 1992 would have destabilised a regime that was, in those first years, far from politically secure. The 1990s saw insurgencies in Oromia, lingering Eritrean tensions that would erupt into war in 1998, and the unfinished business of consolidating a constitutional order. To pursue maximal economic reform in this environment was politically irresponsible. Gradualism preserved the regime; the regime preserved the country from worse outcomes; therefore gradualism was right.

The argument is serious, and the series takes it seriously. The reply has two components.

First, the choice between shock and gradualism is not the only relevant choice. Within gradualism, the EPRDF could have done the monetary side and not done the privatisation side, or vice versa, or done some combination. Comparable transitions — Vietnam from 1986, Mozambique from the early 1990s — combined fiscal and monetary discipline with a measured pace of liberalisation in other areas. The EPRDF did not have to choose between full shock therapy and the slow drift that occurred. It chose, specifically, to be timid on monetary reform while being relatively bold on trade liberalisation and ethnic federalism. The series’s point is that this specific combination was a choice with specific costs.

Second, the political-stability argument cuts both ways. Yes, rapid reform might have destabilised the regime in 1992. But the failure to reform produced, over the next thirty years, a cumulative monetary mess that itself contributed to political instability — the inflation that radicalised urban populations in 2005 and 2018, the forex shortages that constrained the regime’s options across the GTP years, the eventual sovereign-debt crisis. The political-stability case for gradualism counts only the short-term costs of reform, not the long-term costs of non-reform. Honest accounting includes both.

The next article turns to a moment where the monetary architecture of the EPRDF transition met an external shock it had not been designed for — the introduction of the Eritrean nakfa in November 1997, and the war it helped to cause.