Reform Rhetoric, Monetary Continuity: Abiy's First Phase, 2018–2020

The reform that did not reform the money

Abiy Ahmed took office as Prime Minister of Ethiopia on 2 April 2018, in what was, by any measure, an unusual political moment. He was 41 years old, the first Oromo to hold the office in modern Ethiopian history, and he had been elevated through the EPRDF’s internal selection process explicitly to manage the political crisis that the 2015–18 protest mobilisations had produced.¹ His first two years in office were, in domestic and international perception, a reform period: political prisoners were released, exiled opposition parties were allowed to return, the state of emergency was lifted, restrictive media and civil-society laws were repealed, peace was made with Eritrea, the Nobel Peace Prize was awarded.²

This article argues that the monetary reform did not happen. While the political opening was real, the underlying monetary architecture of the EPRDF-era developmental state was, with one major exception, preserved through Abiy’s first two years in office. The NBE statute was not substantively reformed. The exchange-rate regime remained the same managed system the EPRDF had operated. The forex rationing committees continued. The state-bank dominance of the financial sector continued. The financial-repression machinery, including the 27 percent rule, continued. The reform rhetoric was, on the monetary side, mostly rhetoric.

This is, the series argues, the central feature of the Abiy first phase that explains what followed. The political opening generated, predictably, increased political activity — much of it heated, some of it violent. The economic vulnerabilities that the GTP-era model had accumulated were not addressed, and remained available to be exploited by any shock that came along. When the shock came, in the form of the Tigray war (article 20), it found an economic architecture that was still operating on the assumptions the previous decade had built up. The 2024 float would, eventually, acknowledge what the previous six years had not. The cost of the delay is the subject of the next several articles.

The Homegrown Economic Reform Agenda

The Abiy government’s economic vision was articulated in the Homegrown Economic Reform Agenda (HGER), published in September 2019.³ The HGER was a substantial document — running to several hundred pages, organised around macroeconomic, structural, and sectoral reform tracks. It identified the right diagnostic problems: forex shortages, debt distress, low private-sector credit, low export performance, governance weaknesses in state-owned enterprises. It proposed the right general remedies: liberalisation of forex, privatisation of major state assets, financial-sector deepening, telecoms liberalisation, regulatory reform.

What the HGER did not do, in its initial version, was commit to the specific monetary reforms that the diagnosis implied. The exchange-rate regime was characterised as a target for “gradual” reform without specifying the destination. The role of the NBE in financing government deficits was not explicitly addressed. The financial-repression instruments were flagged as targets for reform but without binding timelines. The privatisation programme was announced but unsequenced, with the largest state assets (Ethiopian Airlines, Ethio Telecom, the Commercial Bank of Ethiopia) treated as targets for partial privatisation at unspecified future dates.

The HGER was, in this sense, a diagnostic document with a deferred prescription. It identified what needed to change without committing to when or how. This was, perhaps, politically necessary in 2019 — a major macroeconomic reform programme would have been difficult to execute alongside the political opening, and the IMF programme that would eventually structure the reform was not yet in place. But the cost of the deferral was that the reforms did not happen on a schedule that could outrun the deteriorating macroeconomic conditions. By the time the IMF programme was finally negotiated in 2024, the conditions were substantially worse than they would have been if the reforms had begun earlier.

What was reformed

In fairness, some things did change in the 2018–20 period. The 27 percent rule was modified and then eliminated in 2019, reducing the implicit tax on private banks.⁴ The Ethio Telecom monopoly was opened to competition with the licensing of Safaricom Ethiopia in 2021 (a process that was started in this period). Telecoms reform was, on its own terms, substantial. The Ethiopian Investment Holdings was reorganised in 2022 as a sovereign-wealth-style structure (though the consolidation of state assets it represented was not, in itself, a privatisation).⁵

The forex regime was modestly liberalised. Surrender requirements on exporters were reduced. Some categories of imports were moved to less restrictive priority lists. The parallel premium remained substantial through the period, but its growth was, briefly, arrested.

The first peace with Eritrea — the Jeddah Agreement of July 2018 — produced an immediate political dividend and some economic openings, though the bilateral relationship would deteriorate again over the following years as the political dynamics shifted.⁶

These are not trivial reforms. They represented, particularly in the telecoms case, a serious break with the EPRDF-era pattern of preserving state monopolies in major sectors. The series’s argument is not that the first phase produced nothing; it is that the monetary reform — which the diagnostics of the period correctly identified as essential — was deferred in a way that proved costly.

What was not reformed

The list of monetary continuities is what defines the period.

The NBE statute, including the provisions allowing central-bank lending to the government, was not substantively revised through this period. The actual practice of central-bank lending continued, with NBE advances to the federal government continuing to fund a portion of the fiscal deficit.

The official exchange rate remained on the managed-depreciation track. The official birr/USD rate moved from approximately 27.43 at the start of 2018 to approximately 35 by end-2020 — a steady but modest depreciation that did not close the gap with the parallel rate.⁷ The parallel premium, which had been roughly 25–30 percent in early 2018, was approximately 50–60 percent by end-2020.⁸ The gap was widening, not closing.

The state-bank dominance of the financial sector continued. The Commercial Bank of Ethiopia retained the dominant share of deposits and lending. The Development Bank of Ethiopia continued its directed-lending mandate, with non-performing loans continuing to accumulate.⁹ The privatisation of state-owned enterprises that the HGER had announced was, by end-2020, unfinished — Ethiopian Airlines remained fully state-owned, Ethio Telecom’s privatisation was pending, the CBE’s commercialisation was on an indefinite timeline.

The forex rationing system, while modified at the margins, remained the principal mechanism by which foreign currency was allocated. Importers continued to queue for LCs. Manufacturers continued to face input shortages. The chronic dollar shortage that article 15 described continued.

Why the monetary leg was deferred

It is worth asking why the reform that the diagnostics correctly identified as essential was, in fact, deferred. The answer is, the series argues, a combination of political-economy factors that explain why monetary reform is structurally difficult in regimes whose previous coalition has been built on the developmental-state model.

First, the constituencies who benefited from the existing monetary regime were the same constituencies whose political support Abiy was attempting to consolidate. The state-owned enterprises receiving cheap credit, the politically-connected private firms receiving priority forex allocations, the urban consumers receiving the implicit subsidies that the financial-repression machinery delivered — these were the constituencies the post-EPRDF coalition needed to keep aligned with the new government. Major monetary reform would have antagonised them at exactly the moment when their political support was most needed.

Second, the political opening generated its own destabilising pressures. The release of political prisoners, the return of exiled groups, the lifting of restrictions on political activity — all of these were politically generous moves whose consequences included substantial political turbulence. Each major reform decision was being made under simultaneous pressure from multiple political constituencies, with the result that any single decision had cascading political consequences. Monetary reform, which would have imposed visible costs on identifiable groups, was a particularly risky decision to take in this environment.

Third, the IMF programme that eventually structured the reform required preconditions that were not in place in 2018–19. A successful IMF programme requires a coherent macroeconomic strategy, a sufficient buffer of foreign-exchange reserves to absorb the initial shock of liberalisation, and an external creditor environment willing to provide bridge financing. In 2018–19, the IMF and the major Western creditors had limited appetite for engagement with Ethiopia, particularly given the political uncertainties of the post-EPRDF transition. The conditions for a major IMF-supported reform programme would not coalesce until 2023–24, after the Tigray war, the Eurobond default, and the broader macroeconomic deterioration had concentrated all parties’ minds.

Each of these factors is intelligible. Together, they explain why the deferred-prescription approach was adopted. The series’s reply is that the deferred approach had its own costs — that delay was itself a policy choice, and that the choice cost Ethiopia substantially because the macroeconomic conditions that made reform more difficult continued to deteriorate during the delay.

The COVID-19 shock

The arrival of the COVID-19 pandemic in early 2020 added a major external shock to a system that was already approaching its limits. The immediate effects were the standard pandemic effects: collapse of international travel revenue (a major hit to Ethiopian Airlines, the country’s largest export-earner), reduction in remittance flows (as diaspora workers lost employment), disruption of import supply chains, increases in food prices.

The fiscal response was, by necessity, expansionary. The Abiy government announced a series of emergency measures: tax deferrals, expanded health expenditure, increased transfers to vulnerable households. The IMF provided emergency financing through the Rapid Financing Instrument in May 2020 ($411 million).¹⁰ World Bank IDA and bilateral support were also expanded.

The monetary consequences were predictable. Money supply growth accelerated through 2020 as the central bank financed elements of the emergency response. Inflation, which had been gradually rising through 2018–19, accelerated through 2020 and into 2021. The macroeconomic position that had been deteriorating slowly was now deteriorating faster.

The cumulative effect by the end of 2020 was an economy in which the underlying monetary disorder had compounded substantially while the formal reform programme was still in preparation. The Tigray war, which began in November 2020, would arrive in this context.

The Sowellian lesson

The general lesson the first-phase Abiy period offers is one that Sowell has made many times: that political reforms and economic reforms operate on different time horizons, and the sequencing between them matters. The political opening that Abiy’s first phase delivered was, on its own terms, real and consequential. The economic reform that the same period needed to deliver was, however, structurally more difficult, requiring conditions (IMF engagement, fiscal space, political room for absorbing reform shocks) that the political opening was simultaneously consuming.

The argument is not that the political opening was wrong. It was, by the series’s editorial position, broadly right. The argument is that the combination of political opening without economic reform was inherently unstable, and that the instability would, predictably, be exposed by any major shock that came along. The Tigray war was the shock. The next article examines it. But the conditions that made the war so monetarily consequential were, in significant part, the conditions of accumulated economic vulnerability that the first-phase reforms had not addressed.

A reform programme that had begun in 2018 with serious monetary content — exchange-rate liberalisation, NBE independence, fiscal-discipline commitments, financial-sector restructuring — would have been politically difficult in that moment. It would also have left the country less vulnerable to the shocks that arrived. The 2024 float and the IMF ECF programme that finally arrived represent, in this framing, the postponed reform finally being undertaken under conditions much worse than they would have been if the reform had begun earlier. The cost of the postponement is one of the bills the series’s later articles will try to add up.

The next article turns to the war that exposed the underlying disorder.

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Footnotes

1. Tom Gardner, The Abiy Project: God, Power and War in the New Ethiopia (Hurst, 2024); Awol Allo, “The Politics of Abiy Ahmed,” Journal of Eastern African Studies 13, no. 4 (2019): 645–663. ↩

2. For the political opening, see Gardner, The Abiy Project, chapters 4–7. ↩

3. Ministry of Finance, Federal Democratic Republic of Ethiopia, A Homegrown Economic Reform Agenda: A Pathway to Prosperity (MoF, September 2019). ↩

4. National Bank of Ethiopia, Directives amending and eventually removing the 27 percent rule, 2019. Discussed in IMF Country Report 20/29 (January 2020). ↩

5. Ethiopian Investment Holdings, founding documents; IMF Country Report 25/188 (July 2025). ↩

6. For the Jeddah Agreement, see Awet Tewelde Weldemichael, “Ethiopia and Eritrea: A Year After the Peace Deal,” African Affairs 119, no. 474 (2020). ↩

7. NBE exchange-rate history, https://nbe.gov.et/exchange/. ↩

8. Alemayehu Geda, “Ethiopia’s Macroeconomic Performance Under the Reform Period 2018–2022,” Ethiopian Journal of Economics 31, no. 1 (2022). ↩

9. IMF Country Report 20/29 (January 2020); World Bank, Ethiopia Financial Sector Development Report (2019). ↩

10. International Monetary Fund, “Ethiopia: Disbursement under the Rapid Financing Instrument,” IMF Press Release 20/214 (May 2020). ↩