A 15.3 percent inflation rate in July landed alongside another blow: the birr hit a record low against the dollar in August. Businesses above a new turnover threshold must also pay minimum tax, even when they make no profit. Headline growth alone cannot show whether reform is working for ordinary people.
The official figures look striking. Economic growth reached 9.2 percent last fiscal year and is forecast at 10.2 percent this year. Foreign-exchange reserves are heading towards US$5.9 billion, and a stock exchange is now trading. The International Monetary Fund has welcomed the direction of travel.
Ethiopia’s July 2024 foreign-exchange reform shifted the country away from administrative currency allocation and a tightly managed rate toward a more market-based regime. The birr moved from roughly 43–47 per US dollar to above 82 within a month, and later approached 160.
Currency pressure is feeding inflation
After falling for much of 2025, annual inflation has risen for four consecutive months. Ethiopia recorded the sharpest increase among Africa’s ten largest economies in the first half of the year. Food inflation edged up. Non-food inflation more than doubled, from 7 percent in March to 14.8 percent in July.
That pattern points beyond harvest conditions. A weaker currency and higher fuel costs are adding pressure to rents and transport fares. Tax increases are pushing up the cost of services, too.
Over the 11 months preceding its report, the National Bank of Ethiopia held 14 foreign-exchange auctions totaling US$2.5 billion. Yet commercial banks estimated the accumulated foreign-currency shortage at about US$1.4 billion at the end of April 2026.
The auctions have not cleared the market. The shortage has become a queue.
In July, the National Bank raised its policy rate to 16 percent and removed its 24 percent cap on credit growth. The bank said the change concerned the policy instrument, not its stance. With official inflation at 15.3 percent, the real policy rate is below one percentage point.
Bank credit was growing at an annual rate of 45 percent by February, while broad money was expanding at almost 33 percent. Those figures complicate the case that monetary conditions are firmly restrictive.
Tax collection cannot come at the cost of viable firms
The 2026/27 budget totals 2.34 trillion birr against projected revenue of 1.8 trillion, leaving a gap of more than 500 billion birr. Raising the tax-to-GDP ratio, expected to reach only 10.1 percent this year, may be a reasonable objective. But since July 2025, firms with turnover above two million birr have faced a 2.5 percent minimum tax even when they are unprofitable.
When prices are rising, a tax on turnover can squeeze businesses already operating on thin margins. For 2026/27, the government has set a tax-to-GDP target of 9.62 percent. Its measures include broader excise use and stronger VAT enforcement. The plan also calls for digital transaction monitoring. The longer-term aim is 15–17 percent. The Reporter’s account of the government’s tax strategy targets emphasizes broadening the tax base.
The uncertainty reaches beyond tax policy. In March, a group of independent economists argued that underlying inflation might be closer to 30 percent, roughly twice the official rate. They may be wrong. The fact that many Ethiopians find the estimate plausible points to a credibility problem the statistics service must address.
Make reform measurable in daily life
The government should set a policy rate clearly above inflation. It should use its authority to impose additional reserve requirements on banks lending too aggressively. Regular foreign-exchange auctions should expand, while banks should have more freedom to set prices between themselves. The National Bank should publish daily auction volumes and set a dated path for removing the current 30 percent export-surrender requirement.
Making formal remittances cheaper than the parallel market would give senders a practical reason to use official channels.
The minimum tax needs a redesign. Firms should be allowed to offset payments against future profit tax, with start-ups exempt for three years and the threshold adjusted for inflation. For credit, the National Bank should publish monthly lending data by sector and firm size. That would show whether removing the cap is financing manufacturers and small businesses or concentrating funds elsewhere. A functioning movable-collateral registry and a credit guarantee for small firms could widen access.
Independent statistics and a quarterly real-wage index would give the public a way to judge progress. The government should set targets for real wages and track firm openings and closures. Targets for jobs for young people would make its claims easier to test.
Ethiopia’s reforms broke with a model built around a fixed currency and rationed dollars, under a state that held sweeping control. Hardship alone does not prove success. Growth forecasts cannot stand in for better wages. Jobs and access to credit need their own measures.
The government has shown it can take difficult decisions. Its next task is to show that those decisions improve life beyond the spreadsheet. Until households and viable firms feel that change, reform will remain a paper tiger.
None of these measures can substitute for peace. Disrupted supply routes cannot be repaired by an interest-rate decision.
