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Ethiopia’s Growth Momentum Holds Strong Amid Inflation and Forex Strains

Ethiopia continues to defy regional headwinds, with the IMF projecting the economy to grow by 7.2% in 2025 nearly double the Sub-Saharan African average. While major economies like Nigeria and South Africa struggle to regain momentum, Ethiopia’s mix of infrastructure expansion, financial reforms, and agricultural recovery is cementing its position as one of the continent’s fastest-growing markets.

Gemechu Birehanu
3 min read
Ethiopia’s Growth Momentum Holds Strong Amid Inflation and Forex Strains

While much of Sub-Saharan Africa grapples with slower growth, Ethiopia continues to stand out as one of the region’s fastest-growing economies. According to the latest IMF regional outlook, Ethiopia’s economy is projected to expand by 7.2% in 2025 and 7.1% in 2026, far outpacing the Sub-Saharan Africa average of 4.1%. This positions Ethiopia as a major driver of growth among low-income countries, second only to Uganda in 2026 projections and well above the continental heavyweights Nigeria (3.9%) and South Africa (1.2%).

Ethiopia Defies the Odds

Ethiopia’s growth resilience comes despite persistent macroeconomic headwinds ranging from foreign exchange shortages and inflationary pressures to fiscal consolidation efforts under the government’s Homegrown Economic Reform Agenda. The IMF attributes the strong outlook to agriculture recovery, infrastructure expansion, and early benefits from capital market liberalization. The launch of the Ethiopian Securities Exchange (ESX) and regulatory reforms are expected to attract private investment and gradually deepen financial intermediation. Moreover, large public investment projects particularly in energy, logistics, and infrastructures are expected to sustain medium-term momentum.

Despite inflationary constraints, Ethiopia’s growth profile remains among the highest globally. The gradual opening of the financial sector and renewed private capital inflows could sustain the momentum into the medium term, the IMF report noted.

Regional Divergence Widens

Sub-Saharan Africa’s overall growth is projected at 4.1% in 2025, improving slightly from 2024 but still weighed down by weak performances in oil-exporting economies such as Angola (2.1%) and Gabon (2.6%). The divergence between resource-dependent and diversified economies is widening. Oil exporters are struggling to recover from price volatility and production declines, while low-income countries like Ethiopia, Uganda, and Tanzania driven by Agriculture, manufacturing, construction, and services continue to post robust numbers. Middle-income economies such as Kenya (4.8%) and Côte d’Ivoire (6.4%) are also expected to maintain strong trajectories, underscoring East and West Africa’s role as regional growth hubs.

Challenges Beneath the Momentum

Despite Ethiopia’s high headline growth, the quality and sustainability of this expansion remain under scrutiny. Inflation continues to hover in the mid-teens, the foreign exchange market remains fragmented, and external debt servicing pressures are mounting. The IMF’s optimism hinges on policy continuity specifically, progress in macroeconomic stabilization, financial liberalization, and resolution of structural bottlenecks. “Without a credible medium-term fiscal and external framework, growth could decelerate sharply if domestic imbalances persist,” the IMF cautioned. Additionally, the transition from public-led to private-sector-driven growth is proving complex. While the government has made strides in privatization and financial reform, delays in forex liberalization and external shocks such as commodity price fluctuations could constrain private investment.

The Bottom Line

Ethiopia’s economic story remains a paradox of resilience and fragility. The IMF’s 7% growth forecast reflects a nation still powered by investment and reform but vulnerable to inflation, forex shortages, and global financial tightening. If the government sustains reform momentum, deepens capital market development, and manages macroeconomic risks effectively, Ethiopia could remain one of Africa’s few bright spots a frontier economy on the cusp of transformation.