Ethiopia’s slowing growth traces directly to an inability to generate the sufficient foreign exchange to sustain its growth process, which has led to a series of increasingly severe macroeconomic imbalances. Without the ability to generate or borrow sufficient foreign exchange to pay for the imports that the economy demands, Ethiopia has been forced to ration imports, which has slowed growth and made the economy increasingly inefficient. Under existing macroeconomic policies, this has led to several critical vicious cycles, including a weakening of tax revenues, worsening (external) debt sustainability, and high and increasing inflation. In recent years, the Government of Ethiopia has launched multi-faceted macroeconomic reforms, yet these have struggled to address interacting macroeconomic distortions especially in the face of severe economic shocks, which have weakened foreign exchange generation and demanded government spending. The syndrome explanation has implications for government policy and strategy as well as lessons for more effective international support in the aftermath of conflict.

The project’s research compendium includes a growth diagnostic, macroeconomic diagnostic, collected analysis to inform diversification strategy, and a detailed review of the Government of Ethiopia’s Homegrown Economic Reform Program that was conducted in 2021 in coordination with the Ministry of Finance. Resolving the fundamental constraint of foreign exchange in the short-term is possible but requires international support alongside better sequenced macroeconomic reforms. Meanwhile, achieving inclusive growth in the medium-term will require accelerating diversification of Ethiopia’s exports such that the economy generates sufficient foreign exchange on its own. Project research has introduced novel inputs for accelerating Ethiopia’s diversification based on its current and potential comparative advantages. This, unlike macroeconomic improvements, will be a necessarily long process.