In the world of economic policy, few decisions are as consequential—or as fraught with risk—as the devaluation of a national currency. Ethiopia’s move to float the birr and allow its value to be determined by market forces was heralded by some as a necessary step toward correcting long-standing imbalances and unlocking international support. Yet, for anyone familiar with the country’s economic structure and the lessons of history, the consequences now unfolding were not only foreseeable but virtually inevitable. The question that must be asked is: what did the government expect would happen, and why does it seem surprised by the pain now being felt by ordinary Ethiopians?
The rationale behind devaluation is, in theory, straightforward. By weakening the birr, Ethiopian exports become cheaper and more attractive to foreign buyers, potentially boosting export revenues and narrowing the trade deficit. The move also aligns the official exchange rate with the realities of the parallel market, a step long demanded by international lenders such as the IMF and World Bank as a precondition for financial support and debt relief. In a country where foreign currency shortages have crippled businesses and stifled growth, the hope was that a market-based exchange rate would attract investment, improve competitiveness, and set the stage for a more sustainable economic model.
But the costs of devaluation are immediate and severe, especially for a country like Ethiopia. With a large stock of foreign-denominated debt and a heavy reliance on imported goods, the impact of a weaker birr is felt across every sector of the economy. The most direct and painful consequence is the sharp increase in the local currency cost of servicing external debt. Even if the total amount owed in dollars remains unchanged, the government must now find far more birr to make each payment. This is not a technicality—it is a budgetary crisis in the making. As the finance ministry itself has acknowledged, debt service in local currency terms could soon consume more than half of the regular government budget, crowding out spending on health, education, infrastructure, and social protection.
For ordinary Ethiopians, the effects are even more immediate. The price of imported goods—fuel, food, medicine, and industrial inputs—has soared since the devaluation. Inflation, already a persistent problem, has accelerated, eroding the purchasing power of wages and savings. For those on fixed incomes, such as public sector workers, pensioners, and the urban poor, the squeeze is relentless. The cost of living rises daily, while incomes lag far behind. The government may point to the long-term benefits of a more competitive exchange rate, but for millions of families struggling to afford basic necessities, those promises ring hollow.
It is important to recognize that these outcomes were not only predictable—they were predicted. Economists, financial analysts, and even some within the government warned that devaluation would bring a wave of inflation and a surge in the local currency cost of debt service. The experience of other countries that have undertaken similar reforms is clear: currency devaluation almost always leads to a spike in prices, especially in economies that import most of their essential goods. The poorest and most vulnerable segments of society bear the brunt of the adjustment, as prices rise faster than incomes and social safety nets are stretched to the breaking point.
The government’s decision to devalue the birr was made under significant external and internal pressures. Years of state-led development, financed by heavy borrowing and an overvalued currency, had left Ethiopia with a mountain of debt and a chronic shortage of foreign exchange. The old model was no longer sustainable, and international partners made it clear that further support would depend on meaningful reforms. In this context, the move to a market-based exchange rate was perhaps unavoidable. But it is disingenuous to suggest that the pain now being felt by ordinary Ethiopians was somehow unforeseen or could have been avoided with better timing or implementation.
What is most troubling is the apparent lack of preparation for the social and economic fallout. While the government has taken steps to secure debt restructuring agreements and negotiate with creditors, there has been little evidence of a comprehensive plan to protect the most vulnerable from the shock of devaluation. Social protection programs remain underfunded, and efforts to cushion the impact of rising prices have been piecemeal at best. The result is a growing sense of frustration and disillusionment among the public, who see their living standards eroded while the promised benefits of reform remain distant and uncertain.
The exclusion of Ethiopia from the World Bank’s income classification for 2026 is a further sign of the country’s economic volatility and the challenges ahead. While the reasons for this exclusion are complex, it reflects the reality that Ethiopia’s economic trajectory is now marked by uncertainty, data gaps, and the unpredictable effects of rapid policy shifts. For investors and development partners, this sends a worrying signal about the country’s stability and prospects for recovery.
In the end, the lesson is clear: currency devaluation is not a quick fix, and its costs are borne most heavily by those least able to afford them. The government’s expectation that the benefits of reform would quickly outweigh the costs was always unrealistic, given Ethiopia’s economic fundamentals. The pain of adjustment was not only inevitable—it was the price of years of unsustainable borrowing, delayed reforms, and a reluctance to confront hard truths.
It is essential that policymakers acknowledge the human cost of their decisions and take concrete steps to mitigate the impact on ordinary citizens. This means prioritizing social protection, strengthening domestic revenue mobilization, and maintaining transparency in economic management. Above all, it requires a willingness to listen to the voices of those most affected and to recognize that economic stability cannot be achieved at the expense of social justice.
The current hardship facing Ethiopians is not an unexpected crisis—it is the logical outcome of choices made over the past decade and the necessary, if painful, reforms now underway. The only way forward is through prudent management, open communication, and a clear-eyed understanding of the challenges ahead. Anything less is not only unrealistic—it is a disservice to the people who bear the brunt of economic change.
