For a long time, Kiflu Godefe (PhD) has held a unique perspective on policymaking in Ethiopia, serving in senior positions both under the EPRDF and the current administration.
Holding a postgraduate degree in economics from Stockholm University, Kiflu is among the top researchers at the Policy Studies Institute (PSI), formerly known as the Ethiopian Development Research Institute. He and his colleagues are charged with studying a wide range of topics and forwarding their findings to the government to be used as input for policymaking.
Kiflu led a group of researchers on a collaborative project between PSI and the Ministry of Finance aimed at evaluating the outcomes of the first Homegrown Economic Reform initiative (HGER 1.0), which ended in 2024.
Officials had gambled on the ambitious reform to lead Ethiopia away from a developmental state model and towards a private-sector led economy, with other lofty goals including taming inflation, reducing unemployment, and reducing the country’s reliance on foreign credit and aid.
In this interview with The Reporter’s AshenafiEndale, Kiflu offers a candid evaluation of the reforms and outlines what policy makers can and should learn from its successes and failures. EXCERPTS:
The Reporter: Tell us a little about yourself and your role in HGER 1.0.
KifluGodefe (PhD): I’ve been a researcher at PSI, formerly EDRI, for a long time. Recently, I became a country economist for the International Growth Center [IGC].
My role in the Homegrown Economic Reform was limited to one project. The project was evaluating the implementation of HGER 1.0. The project was done collaboratively by PSI and the Ministry of Finance. I was the coordinator of that project
The overarching aim of the HGER was to shift Ethiopia’s economic growth model from EPRDF’s developmental-state approach towards a private-sector led approach. Looking back in 2025, do you think the reform has met its fundamental target?
Of course. The basic target of the HGER is to correct the mistakes that were made before. It also aims to correct the distortions emanated from that mistake. Of course, we cannot say the developmental state model was totally wrong and a mistake. Any country at the lower growth level obviously deploys a developmental state model. Ethiopia’s adoption of a developmental state was not wrong. It is because of the developmental state model that we have all the progress in infrastructure and public investment that we see today. You can take the dams, roads, power, and many other projects done through public investment as an example.
The problem was how these projects were financed. The private sector should be involved in the investments. For instance, we took huge foreign loans with market interest rates. Then we invested in nearly ten sugar projects, and many other mega projects. However, these projects were not successful. So, Ethiopia is burdened with debt distress, inflation, forex shortages and other macro-complications. It resulted in macro-economic imbalance. All this was a result of the wrong financing model we adopted under the developmental state model, and because the private sector was not brought on board.
The major targets of HGER is not only shifting the approach of Ethiopia’s economic growth model, but also correcting the distortions and problems resulting from the previous model.
We do not have to see the developmental state as the root cause for Ethiopia’s problems. Other countries have registered significant and robust growth by deploying developmental state models. The question should be ‘did we properly implement the developmental state model in Ethiopia?’
Secondly, government-financed development cannot be sustainable. It will get stuck at some point. Ethiopia’s development was led by public investment. It took us to some level. But it could not go further.
Still, we cannot say the current government has withdrawn from public investment. The government is now implementing a hybrid model. The government is still investing, with all the limitations. At the same time, the private sector is getting more space, through liberalization and open-ups.
I believe it is a bit too early to evaluate the impacts of the HGER. Plus, Ethiopia was going through difficult times during the implementation of HGER. COVID-19, the northern Ethiopia conflict, the Ukraine-Russia war, and the Houthi Red Sea conflict disrupted trade and posed other challenges.
These obstacles made HGER 1.0 difficult to achieve. It is also too early to evaluate the macroeconomic reforms Ethiopia introduced last year.
While measures of liberalization have been introduced, the government’s role in the economy has grown in several cases. Who is in the driver’s seat? Is the private sector in Ethiopia really empowered?
The reform is trying to create a conducive environment for the private sector. It takes time. For instance, regarding FDI, they are discouraged due to the instability and security issues across different parts of Ethiopia. Instabilities and conflicts in Oromia, Amhara and other parts of the country are bad for investment. Even existing investors might leave.
The macro reforms introduced last year, like the liberalization of the forex regime and banking sector, are playing a significant role in reigniting FDI inflow to Ethiopia. The currency floating is encouraging for FDI and also domestic investors. But the security issues remain.
Government investment will continue until the private sector is strong. But at least at the policy level, the government has leveled the playing ground for the private sector. The private sector will take over in the future. But for now, the government’s role remains in place since Ethiopia is implementing a hybrid model for now.
The banking sector is open to foreign investment. Do you think foreign banks are as eager to come to Ethiopia as the government anticipates? The government’s high investment levels and ballooning budget are also crowding out the domestic private sector. Is the flow of credit from domestic banks to the private sector increasing?
In nominal terms, the volume of loans disbursed to the private sector by domestic banks has surged. The government is reducing the huge financing it used to take from domestic sources like T-bills. This is also to tame inflation.
Regarding foreign banks’ entry, they are evaluating Ethiopia’s open-up reforms before making the decision to come. They are taking time. But they will come because this is a new market.
You stated the government’s role in the economy and public investment is still significant. However, when you break down the budgeting, you find the share allotted to capital expenditures is shrinking despite the overall budget ballooning. Most of the federal budget goes towards recurrent expenditures like salaries, administrative expenses, and non-productive sectors like parks and the corridor project. Real economic sectors and critical projects that would have been the backbone of the economy are not getting sufficient attention. Do you think the government is wisely utilizing its resources?
It is true that the government’s budgeting expenses are going more towards covering recurrent expenditures. The recurrent budget is increasing significantly. This will have a substantially negative impact on the economy. Capital investment is crucial for economic development, as well as private sector investments.
The problem is, the government has no sufficient fiscal space to increase capital investments. Unlike before, there is not much foreign aid coming to Ethiopia. We have also ceased taking concessional loans. So we are relying mostly on domestic resources.
To manage the shrinking fiscal space, the government is prioritizing its resources to cover only the ‘must be covered’ expenses. Debt service, civil servant salary, and others are the priorities. But above all, the recurrent budget ballooned mainly due to the cost of conflicts and war in the past few years. If the government wanted to expand the capital budget as much as the recurrent, it would mean a huge budget deficit. And to cover such a deficit, the government would have to levy huge tax burdens. Or it would have to take additional loans. But we can’t do that because we are already under debt distress.
Another source would be a direct loan from the central bank, which is printing money. That also has the negative consequence of fueling inflation.
So, the government’s decision is allocating a capital budget just sufficient to execute existing capital projects, but not adding new ones. This is why the recurrent budget surged, but that will not continue for long. It will reverse, once things get better. I believe the government understands the problem, but the shrinking fiscal has handicapped the government.
Taming inflation, reducing the unemployment rate, and reducing debt were also among the targets of the HGER episodes. Did the macro reform resolve these challenges?
Yes, resolving the forex shortage and bridging the wide gap between official and black market exchange rates were also among the targets.
Before the floating last year, the margin between official and parallel markets was more than 100 percent. Since the floating, the margin has shrunk to 10 percent. Very recently the margin regained slight momentum to 15 percent. The margin has significantly improved since the float. So the currency unification has achieved its target, though some work remains. We need to study the reason behind the resurgence of the margin lately. This indicates the currency exchange distortion in Ethiopia still hasn’t gotten a fundamental solution.
Foreign currency availability also improved since the reform. Before the currency floating, NBE [National Bank of Ethiopia] forex reserves covered less than one month of import bills. But that has since increased substantially. Importers don’t have to wait six months to access forex now, unlike before. I’m not saying accessing forex for imports is hassle-free now.
Inflation was above 30 percent before the reform. Now it is below 20 percent. There are still price surges, but inflation has dropped. There is no magic bullet to cut out inflation.
The reform, in fact, was not only the result of a domestic policy drive. It is not because Ethiopia embraced it wholeheartedly. There was also external pressure to adopt the reform. Ethiopia’s international creditors, development partners and the IMF were pushing the government. They were saying Ethiopia will default on its external loans unless Ethiopia adopts this reform. Other pressures include the widening forex imbalance, trade deficit, and inflation. Ethiopia’s reserves were at a low point. In general, Ethiopia was under immense pressure to adopt the reform.
Me and my fellow colleagues were bracing for the worst. But compared to what we were fearing, what we see today in Ethiopia’s economy is very encouraging. Inflation is tamed, and forex reserves are improving. The exchange rate depreciation rate is also precise.
In a bid to improve unemployment, the private sector must step up. I do not think unemployment has fallen significantly. Structural transformation in the economy takes time and depends on liberalization efforts.
Government data indicates inflation has halved since the reform. But what is really exercised in the markets, and what independent reports indicate is otherwise. Did inflation really drop, or is the data fabricated?
This is difficult. For a society whose income remains stagnant, it is difficult to cope with inflation. As long as there is no institution that can provide independent data, we have to accept government data. The government did not say ‘there are no price increments.’ It rather indicated that inflation is declining. Prices are increasing, but the government has controlled the rate of increase.
I am very thankful about the current state of inflation. When the forex regime was liberalized last year, my expectation and that of many other experts was that inflation would be out of control. We must be grateful that did not happen.
If the government did not impose tight monetary policy, the floating would have resulted in huge inflation increments. If the government continued injecting money arbitrarily like before, inflation would have gone up exponentially by now. The government took lessons from the previous government, and took tight monetary policy measurements. As a result, inflation did not surge as much as expected.
Another major aim of the floating reform was to reboot exports substantially, and substitute or discourage imports. A year on, the government reports substantial growth in export revenue, mainly from gold, coffee, and other primary commodities. Experts attribute this to market factors and argue that floating can boost exports only when there is a production surplus in the domestic market. But Ethiopia is still struggling with supply side constraints. Did the floating really contribute to the surge in exports?
I say the floating has resulted in increased export performance. It is difficult to produce fake figures when it comes to export data. It might be simple to add some figures to other parameters like GDP, and make the GDP look robust. But that cannot be done on exports. NBE stated export revenue doubled to USD eight billion since the floating. I accept that as correct.
Production might not have increased since the floating. However, commodities that were being smuggled out illegally before are being exported legally following the floating, increasing revenue. For instance, gold was largely being smuggled out. It is now being exported legally, due to the floating and the incentive margins.
The Birr was highly overvalued before. Since the floating, the value of the Birr against the Dollar has halved. So exporters are getting double the money without additional costs. That is a huge incentive. The fixed exchange rate regime was not favorable for exporters; it was favorable for selling domestically rather than exporting.
Many argue that Ethiopia’s exports are not elastic because we export primary products. Many argue that, even though export commodities like coffee, sesame, and others could get cheaper, foreign buyers would not tend to consume a higher volume of these commodities. This argument is partly true. But this sees only one side of the equation. When it comes to demand, these primary commodities might be inelastic. The floating might encourage foreign consumers to buy more of our products. However, the floating might encourage Ethiopian growers to produce more of these commodities.
Presumably, the floating also discourages imports by making them too expensive. However, there are commodities we cannot stop importing, even if they get much more expensive. We cannot stop importing fuel and fertilizer but we can substitute most of the imported items that fill our supermarket shelves. This improves the current account.
Why is the gap between official and black market exchange rates expanding again?
There are different reasons. Though it is diminished, a parallel market still exists. That is because the underground and illegal economy still persists. Many still transact in the black market, to evade tax and also to launder money. Some still prefer to buy dollars for 160 Birr in the black market, while they could buy it at 140 Birr at banks and forex bureaus.
The way banks finance foreign trade is also another reason. Banks are requesting a 100-percent deposit in Birr to disburse forex to importers who requested an LC [letter of credit]. Banks are doing this because they are facing a liquidity crunch. This also pushes traders to go to the parallel market to access forex.
In my view, banks should not require a 100-percent deposit. The LC approval process takes time. If an importer requests a 100 million dollar LC, it means the importer has to deposit the equivalent in Birr at the bank. Then until the LC is approved, the bank uses the deposit, while the importer has to sit and wait. This is unfair. Putting this much money idle in the bank is not good for the private sector. Banks should reduce their deposit requirement.
Capital flight is also contributing to the surge in black market. When there are security and instability issues, investors tend to sell their properties, exchange their Birr for dollars, and take the dollars outside Ethiopia and keep them abroad. They do so out of safety concerns.
Government policy also might contribute to the black market premium surge lately. The government introduced a proclamation that would allow it to seize and expropriate capital and assets gained through unverifiable sources. The proclamation applies for up to 10 years [retroactively]. Many investors and individuals might panic and start moving out their assets.
Before the floating last year, many businesses, individuals and the diaspora were forced to use the black market because the fixed official rate was so discouraging. Hence, many people gained property, money and assets through the informal rate. That was because of the faulty fixed exchange policy at the time. But now, the government introduced a legislation that could lead to the expropriation of such property and assets. What is the alternative for those people? They try to repatriate their assets, and the government takes it over. This also might be behind the black market slightly regaining momentum.
It is puzzling that the black market premium is increasing while banks are calling for businesses to open LCs.
Why does currency unification remain daunting?
It is difficult to get rid of the underground economy completely. Some margin will always remain. If the government continues raising the official rate to catch up to the black market rate, it will only keep rising. The only way to minimize the black market margin is by formalizing the underground economy.
Another reason, which is probably accurate, is how the banks have been behaving since the floating. In setting the daily forex rate, banks always calculate their benefits. They always prioritize their balance sheet. Hence, banks are probably not depreciating the Birr as much as forex supply and demand dictates. They might be holding back the depreciation, to give some space for the black market premium to thrive. This should be considered.
But the major reason is because there are businesses and individuals who do not want to get forex via official channels, relying instead on the black market.
Is forex supply really in a surplus, as the government claims? If so, why is price discovery proving so difficult?
The central bank said export revenue and other sources of forex have substantially surged since last year. I do not think there is a supply problem. Under such circumstances, there should be growing demand for forex in the black market.
Unless there is growing interest for money laundering, tax evasion and unofficial importing; the black market premium cannot reemerge. Studies are a must to ascertain this. Governor Mamo [Mihretu] said importers can notify the central bank if any bank is requesting an LC deposit of 100 percent.
Several new tax instruments and rates have been introduced over the past year. Tax collection has surged significantly, but Ethiopia’s tax-to-GDP ratio has halved to six percent over the past six years. What is your take on this?
It is a contradictory topic. Actual tax collection grew, but tax-to-GDP ratio dropped below peer economies. The ratio drop is telling the government that more potential tax in the economy is not being collected. But the taxpayer is complaining.
A potential explanation is that because government tax collection capacity is limited, the government is squeezing taxpayers in the tax net, while more businesses are still outside of the net doing informal business. The government should focus on informal businesses.
The government is serious about focusing on domestic resource mobilization since we can no more rely on foreign financing sources. Raising more taxes is crucial for the reforms to succeed. I believe the government comprehends the saying, ‘one should not kill the chicken that lays golden eggs.’
Others argue the tax-to-GDP dropped because our GDP calculating method is wrong. When GDP is unnecessarily inflated, then it is normal for tax-to-GDP to shrink. The government should collect taxes but should not pressure registered taxpayers.
Do you think the government is properly utilizing the resources collected from taxes?
I believe the government should put the available money in top priority areas that benefit the public and the economy. The government should not invest in unnecessary areas.
The government should focus on economic sectors that have a return on the real economy. Supporting low income citizens is also crucial. If the government complains that it cannot increase the salary of the civil servants and professionals, but at the same time spends money on unnecessary projects, that is contradicting and should be corrected. This leads to citizens to blame the reform.
Many claim that government officials and networks are behind the underground economy in Ethiopia and beyond. What is your take on this?
I have no sufficient information on this. In general, corruption has been on the rise. We all face it. The government should take serious measures because it will affect the reform. Instead of blaming the private sector for being an obstacle to the reform, the government needs to first take action against corruption. Once it grows, it is difficult to get rid of state corruption.
The IMF recently stated that Ethiopia’s reforms could be veering off-track. Will this statement also cast a shadow over Ethiopia’s expectations from the ongoing debt restructuring process with international creditors?
I have a different view on this. The IMF said the reform is resulting in good progress and also appreciated the government’s commitment to the reform. However, the media is distorting this.
The IMF said that, unless the peace and stability situation in Ethiopia improves, the reform cannot be successful. So the IMF urged Ethiopia to improve its peace and stability. That is the correct conclusion and recommendation. The IMF also urged development partners to support Ethiopia.
In general, the IMF statement is not damaging to the reform. The statement also does not affect the debt restructuring. Despite all the concerns over the security and conflict in Ethiopia, the IMF in general has a very good outlook on Ethiopia’s reforms.
