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 ground

The 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 experience

Government 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:

• Keeping savings in dollars rather than Birr

• Moving capital abroad through formal and informal channels

• Investing in foreign real estate, bank accounts, or businesses

• Delaying local

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 depreciating

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

• High import dependence

• Low export diversification

• High interest rates that discourage borrowing and investment

• Conflict-related disruptions

• Weak private sector capacity

• Declining real purchasing power

• Dollar scarcity

• Slow business dynamism

Foreign exchange injections offer temporary relief, but they cannot overcome structural imbalances. As long as the demand for dollars far exceeds supply, the market will continue to push the Birr downward.

The global dollar system still shapes local realities

A common question arises: if the U.S. dollar is not particularly strong globally, why does the Birr still fall?

Because Ethiopia’s challenge is not the dollar’s global strength, it is access to dollars. The country must pay for essential imports in USD regardless of the dollar’s relative value against the Euro or Yen. Global uncertainty has also pushed investors toward safer markets, reducing capital flows to emerging economies. In short: Ethiopia is competing for scarce dollars in a global system where periphery countries pay the highest risk premium. Weak global demand for risk only makes this worse.

The high-interest rate trap

Interest rates around 20% may help fight inflation, but they also restrict credit to productive sectors. Few businesses can borrow at such cost. Without affordable finance, investment slows, exports stagnate, and the foreign exchange constraint deepens. High interest rates become part of a loop:

high interest → low investment → low productivity → fewer exports → weaker Birr.

The Birr reflects a deeper economic strain

A currency is not just a medium of exchange. It is a measure of institutional credibility, economic health, and public confidence. When these weaken, the currency follows. Ethiopia’s current challenge is therefore not a simple exchange-rate issue, but a structural one rooted in:

• productivity

• governance

• political stability

• energy and logistics

• private sector vitality

• trust and expectations

Currency depreciation is the visible symptom of these hidden pressures.

The path toward stability must be structural, not cosmetic

Stabilizing the Birr requires stabilizing the real economy that underpins it. That means:

• Strengthening local productive capacity

• Reducing dependence on imports

• Supporting SMEs rather than overtaxing them

• Improving institutional trust

• Developing energy resilience

• Building regional value chains under the AfCFTA

• Encouraging genuine competition and reducing monopolies

• Diversifying exports

• Prioritizing credit for producers rather than penalizing them

Ethiopia has the human capital, geographic advantage, and entrepreneurial energy to pursue this path. But without structural transformation, periodic devaluations and temporary dollar injections will only delay the inevitable.

Conclusion

The Birr is not falling because of speculation, conspiracy, or temporary shocks. It is falling because the economy beneath it is struggling to support its value. Long-term stability will require more than managing the exchange rate; it will require tackling the structural challenges that have held back productivity, exports, and public confidence. Economic reforms succeed when the real economy grows. Without that growth, a currency, any currency, will continue to slide, no matter how many times it is defended.