On December 17, 2024, Ethiopia’s parliament enacted a new law that permits foreign banks to enter the previously restricted financial sector. This legislation, known as the Banking Business Proclamation, allows foreign banks to establish subsidiaries, open branches or representative offices, and acquire shares in local banks.
The ongoing liberalization of the financial sector, which includes the introduction of a stock market, is part of the Abiy Ahmed administration’s broader efforts to privatize and deregulate key segments of the Ethiopian economy.
As an aspect of its Homegrown Economic Reform Agenda—managed and funded by the International Monetary Fund (IMF) and the World Bank—the Abiy government has adopted several bold economic strategies, shifting Ethiopia’s economic model from a developmental state that prioritized manufacturing and industrial growth toward more neoliberal policies.
This shift accelerates the country’s economic liberalization and the privatization of vital sectors while reallocating limited foreign exchange revenues towards tourism and mining.
Presently, the agenda of the Abiy administration includes telecommunications, banking, energy, logistics, and transportation. Ongoing discussions revolve around divesting shares in Ethiopian Airlines, the most profitable state-owned enterprise. Additionally, following a new IMF structural adjustment program signed in July 2024, the Abiy government overhauled the exchange rate system and floated the Ethiopian birr, resulting in a dramatic 170% depreciation of the currency, escalating poverty levels, and sparking a cost-of-living crisis. Meanwhile, recent months have witnessed the liberalization of the banking, retail, and real estate sectors.
The drive for liberalization and privatization is fueled by an ambition to attract foreign direct investment (FDI). Since Abiy assumed office in 2018, FDI inflows have significantly decreased due to poor economic management, escalating conflict, and Ethiopia’s exclusion from the US’s tariff-free African Growth and Opportunity Act (AGOA)—resulting in a marked decline in both the total FDI and its GDP share, primarily due to a dramatic drop in manufacturing FDI.
GDP Growth (Annual %) (2017-2022)
Interestingly, the notable increase in FDI during 2021-22 was primarily attributed to the sale of Ethio telecom to Safaricom as part of the ongoing privatization initiatives (see the graph above). Economic growth has also substantially declined since Abiy took power—dropping from 9.6% in 2017 to 5.3% in 2022, according to World Bank data.
Perhaps more concerning than the overarching privatization and liberalization strategy is the manner in which policies are being implemented. Neoliberal policies are being executed through shock therapy using a “big bang” approach. The experiences of Russia and Eastern European countries have demonstrated that such shock therapy can result in inflation, wage-price dynamics, austerity measures, de-industrialization, corruption, and rising poverty and inequality—all of which are current realities in Ethiopia.
Government Obfuscation
While the Abiy government’s clear embrace of neoliberalism is evident, officials are sending mixed signals. In a recent interview with African Business, Brook Taye, CEO of the government-owned Ethiopian Investment Holdings, asserted:
“Liberalizing the market does not mean selling off state assets. The government does not have a privatization strategy; instead, we have a strategy for reforming state-owned enterprises.”
This assertion is not only misleading but also contradicts the official economic policy objectives as outlined by the Abiy regime in the so-called “Homegrown Economic Reform Agenda: A Pathway to Prosperity.”
The official document states that the government aims to “strengthen public finances, including through enhancing the efficiency of state-owned enterprises and privatization.”
Furthermore, as emphasized in the “Ten Year Development Plan: A Pathway to Prosperity,” a key aim of this plan is: “expediting the privatization of large state-owned enterprises and liberalization of priority sectors.”
In essence, the agenda entails liberalizing and privatizing the economy, including state-owned enterprises through shock therapy—a policy framework aligning with the mandates of international financial institutions that are overseeing and supporting the Abiy government’s economic policies, specifically the so-called “reform agenda.”
This obfuscation from government representatives merely highlights incompetence and promotes confusion, ultimately undermining the policy certainty essential to reassure the private sector and attract foreign investment.
Gradual and Sequenced Market-Oriented Reforms are Needed
In contrast to the shock therapy approach of the Abiy administration, a gradual and sequenced strategy for market-oriented reforms would better serve the Ethiopian economy. Such reforms would bolster local firms’ competitiveness against foreign competitors while addressing challenges such as regulatory complexities, the destabilization of banking, retail, and real estate markets, and the risks associated with market fluctuations and financial contagion. This gradual and sequenced approach to reform is a critical lesson learned from the Chinese development experience and the rapid economic growth observed in eight East Asian countries between 1965 and 1990.
At the same time, economic priorities should focus on attracting FDI that capitalizes on the country’s inherent comparative advantages, aiming primarily at enhancing manufacturing productivity and industrial capacity, creating jobs, and raising wage levels. This should be complemented by initiatives aimed at bolstering human capital, facilitating technology transfer, and strengthening connections between foreign and local enterprises. Unfortunately, these priorities are being dismissed in favor of superficial projects in the tourism sector, such as building resorts, lodges, and extravagant structures.
Regrettably, instead of genuinely advancing the Ethiopian economy, Abiy appears more focused on divesting state assets while “developing corridors” through mere installations of decorative lighting, bike paths, and ornamental water features.
