By Kebour Ghenna



Ethiopia is living through one of the most complex economic transitions in decades. The country has adopted an IMF-supported reform program, introduced new taxes, cut public spending, devalued its currency, and tightened monetary policy. Official statements describe this trajectory as a path toward macroeconomic stability. Yet the lived reality paints a different picture. Prices continue to rise, businesses slow down, and the Birr keeps depreciating despite the National Bank’s efforts to inject foreign currency into the banking system.



Why is this happening? The answer lies not in the currency markets alone, but in the deeper structure of the economy itself.



Reforms on Paper, Realities on the GroundThe IMF’s stabilization model assumes that currency devaluation boosts exports, fiscal tightening rebuilds confidence, and higher taxes strengthen revenue. In economies with strong production bases, these measures can work. In Ethiopia’s case, however, the foundation is fragile.



The country remains heavily import-dependent. Fuel, fertilizers, pharmaceuticals, machinery, spare parts, wheat, and many industrial inputs all require foreign currency. When a nation imports more than it exports, a sharp devaluation does not improve competitiveness, it simply raises the cost of living and doing business.The result is inflation in essential goods, even if headline inflation figures show improvement.



A Tough Tax Environment and a Slowing Marketplace



This year’s push for higher tax collection reflects a legitimate need to increase government revenue. But taxing a slow-moving economy brings its own risks. Small businesses, traders, informal operators, and wage earners, the backbone of local commerce, are feeling the pressure most.



When taxes rise without corresponding economic growth, consumer spending falls. When spending falls, domestic demand contracts. When demand contracts, businesses scale back, imports decline, and foreign exchange inflows weaken. Every part of this chain reinforces downward pressure on the Birr.



Revenue mobilization is essential, but overburdening an already strained private sector weakens the very engine needed for recovery.



Austerity for Public Services, Expansion for Security Spending



Budget cuts have affected many civilian sectors, from local administrations to public services. At the same time, military and security expenditures continue to rise. Whether these choices are justified or not, the public perception is clear: austerity is not being shared equally.



This perception affects confidence, and confidence is a crucial but often overlooked component of currency stability. When households and businesses lose faith in the economic direction of the country, they naturally seek safety in foreign currencies, accelerating the Birr’s depreciation.



Inflation: The Official Numbers vs. Daily ExperienceGovernment data indicates a decline in annual inflation. Yet households experience rising costs in rent, food, transportation, utilities, and school fees. The inflation that matters to ordinary citizens, the cost of survival, remains high.



This gap between official data and household experience erodes trust in institutions and strengthens the incentive to hold foreign currency as a hedge against uncertainty.



The Untold Driver: Quiet Capital Flight and Wealthy Disinvestment



A critical but often unspoken factor behind the Birr’s continued fall is domestic capital flight.Many wealthy Ethiopians, entrepreneurs, high-income professionals, and asset owners, no longer trust the Birr as a store of value. For them, holding local currency has become a risky proposition. They respond by:



When the most financially informed segment of society refuses to keep wealth in its national currency, the signal is unmistakable: the Birr no longer inspires confidence.



This quiet disinvestment reduces the domestic supply of foreign currency, increases pressure on the exchange rate, and weakens the ability of banks to mobilize deposits in Birr.



A currency cannot be strong when its own wealthy citizens treat it as a liability.



Why the Birr Keeps DepreciatingAt its root, the Birr continues to weaken because Ethiopia’s economic fundamentals have not improved enough to support a stronger currency. Key constraints persist: