As Ethiopia embarks on ambitious economic reforms with the support of the International Monetary Fund (IMF), it faces the delicate task of balancing reform with stability. It should do so by drawing lessons from the unrest in neighbouring Kenya and Sudan, where IMF-backed reforms have sparked widespread protests, writes Dawit Ayele Haylemariam.
People work in a textile factory at Hawassa Industrial Park in Hawassa, Ethiopia, on Oct.12, 2021
© picture alliance / Xinhua News Agency | Michael Tewelde
The IMF has recently intensified its engagement in East Africa, a region grappling with significant economic challenges and political fragility. The IMF often provides financial assistance to countries experiencing economic distress, typically requiring structural reforms. However, the implementation of these reforms often come with severe social costs, triggering unrest and public opposition. Ethiopia’s recent engagement with the IMF serves as a critical case study to assess these risks, drawing valuable lessons from neighbouring countries such as Kenya and Sudan, where IMF-backed reforms have led to widespread social unrest and political upheaval.
IMF programs have a controversial history, particularly in developing countries, where they often spark social unrest, commonly known as "IMF riots". Research highlights four common triggers: the removal of subsidies on essential goods, currency devaluations that cause inflation, fiscal austerity measures, and the privatization of state-owned enterprises. Currency devaluations drive inflation, eroding wages and purchasing power, while austerity measures cut social services, exacerbating poverty. The removal of subsidies disproportionately affects the poor, leading to protests. On the other hand, privatization leads to job losses, especially in countries where the public sector is a major employer, further fuelling social discontent as citizens demand better conditions.
The recent experiences from Ethiopia’s neighbours in the region, namely Kenya and Sudan, provide cautionary lessons that are worthy of note. In Kenya, the implementation of the Finance Bill 2024 introduced new taxes on basic goods and services in accordance with an IMF agreement in January, 2024. The public outrage over rising living costs and the perception of IMF-imposed austerity measures sparked widespread demonstrations, resulting in numerous casualties and significant economic disruption. The protests were driven by concerns regarding the impact of the new taxes on the cost of living, particularly for the poor and other vulnerable people. The bill was ultimately withdrawn following considerable public pressure, but not before it resulted in the deaths of 50 citizens and injuries to hundreds more.
Sudan offers another cautionary tale. In 2021, hundreds of protesters gathered in Sudan's capital, Khartoum, calling for the resignation of the transitional government due to contentious economic policies. The government implemented IMF-recommended reforms, including the elimination of subsidies on essential food items and the devaluation of the Sudanese pound. These measures, while aimed at stabilizing the economy, led to a sharp increase in living costs and sparked widespread protests. Both the Kenyan and Sudanese experiences underscore the dangers of implementing IMF reforms without adequate social protections and political stability.
Ethiopia’s recent economic reforms represent a transformative shift in the country’s approach to growth and development. They mark a significant departure from a historically restrictive economic model towards a more open, market-oriented one. The Homegrown Economic Reform Agenda (HGER) and its subsequent phase, HGER 2.0, are designed to address longstanding inefficiencies, including chronic foreign currency shortages that have stunted growth. HGER 2.0 builds on previous efforts and focuses on stabilizing public finance, addressing debt, controlling inflation, and managing the currency supply to lay the groundwork for sustainable growth. The recent monetary policy statement by the National Bank of Ethiopia outlined key interventions aimed at fostering private sector investment, enhancing trade performance, and supporting small and medium enterprises as drivers of economic expansion. Key sectors, such as agriculture, manufacturing, mining, tourism, and the digital economy, are prioritized. The reform aims to position the private sector as a pivotal leader in shaping the economic landscape, while the state will act as a catalyst for innovation and growth. Furthermore, HGER 2.0 emphasizes the importance of controlling inflation, promoting entrepreneurship, and optimizing international trade and investment to create jobs and improve living standards for all Ethiopians.
By implementing a series of reforms, Ethiopia seeks deeper integration into the global market, with the objective of stimulating competition and enhancing productivity across key sectors. However, the reform introduces a number of risks, including inflation, exchange rate volatility, and challenges for sectors that have previously been sheltered from competition. It is imperative that the Government of Ethiopia exercises caution and diligence in the implementation of these reforms, ensuring that the benefits are equitably distributed while the associated adjustment costs are duly addressed.
For Ethiopia, the risk of social unrest under the current IMF program, a four-year USD 3.4 billion program approved in July 2024, is heightened by several factors consistent with the conditions that have historically led to "IMF riots". The country’s fragile political landscape, ongoing regional tensions, and an already high inflation rate create a volatile environment in which economic reforms could easily be misinterpreted and/or rejected by the public. Ethiopia has been progressively reducing subsidies over the past few years and has proposed new increases in public utility fees. Both are likely to raise the cost of essential goods, directly affecting the poorest segments of the population and potentially sparking social unrest similar to that seen in Kenya and Sudan. Ethiopia’s fragile political landscape further heightens these risks, as regional tensions and political fragmentation could exacerbate public resistance to externally imposed reforms.
In the case of Ethiopia, the IMF has made concessions to account for the need for temporary flexibility in cushioning the impact of reforms. In a departure from typical IMF programs, the Government of Ethiopia has been given space to expand its budget deficit to stabilize key commodity prices and enhance social security programs. The government announced USD 5 billion in additional budget to ensure price stability and expand social security. For instance, despite the devaluation of the Birr, fuel prices have remained unchanged. Further, the government announced increased salaries for low-income civil servants and an expansion of social protection programs under the Productive Safety Net Program. These measures, together with financial support from the IMF and the World Bank to maintain foreign currency reserves, have helped mitigate some immediate risks.
However, further action is needed to prevent unrest and ensure that the benefits of reforms are broadly shared. These actions include ensuring stability and peace across the country to attract additional investments and creating opportunities for entrepreneurship to empower young people to build businesses.
In conclusion, Ethiopia must continue to strengthen social safety nets, support local enterprises, and engage with stakeholders in dialogues to manage the complex challenges of economic liberalization. By learning from the experiences of its neighbours and carefully balancing liberalization with the protection of vulnerable groups, Ethiopia can navigate these challenges and position itself for sustainable, inclusive growth, avoiding the social unrest that has plagued neighbouring countries facing similar reforms.
Dawit Ayele Haylemariam is the Managing Partner of Growth Capital Analytics in Addis Ababa/ Ethiopia and can be reached at dawit.ayele@growthcapitalanalytics.com.
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doi:10.18449/2023MTA-PB15
