Ethiopia’s reform-driven economic momentum is facing its sternest test as foreign aid dwindles and debt servicing costs hit new highs, the World Bank warned in its January 2026 Global Economic Prospects and Sub‑Saharan Africa Outlook reports. The institution said the country’s policy gains remain fragile, even as growth is projected at about 7.2 percent for the year.
After more than a year of sweeping macroeconomic changes, the government has dismantled long-standing controls over the foreign exchange market, moved monetary policy toward an interest-rate based system and curtailed direct central bank financing of the budget. These shifts, backed by financing from the World Bank and the International Monetary Fund, have eased dollar shortages, stabilised prices and improved foreign exchange inflows, while gold and electricity exports have begun to generate fresh hard currency.
But the external environment supporting those reforms is weakening. Global growth is expected to slow to about 2.6 percent this year as trade momentum fades and tariff barriers rise. For low-income economies, the slowdown is being compounded by a steady fall in official development assistance, reducing the pool of concessional financing that has long helped countries like Ethiopia manage budget gaps and balance-of-payments pressures.
Across Sub-Saharan Africa, growth is forecast to pick up to around 4.3 percent, but most governments are tightening budgets as donor funding shrinks. The World Bank has warned that fiscal consolidation is spreading even as unemployment remains high and social needs continue to rise.
Ethiopia remains particularly exposed. Despite progress on exchange rate liberalisation, financial sector reform and state-owned enterprise restructuring, the country is still classified as being in debt distress. Negotiations with creditors continue, while sovereign borrowing costs remain elevated.
Debt servicing costs are expected to peak in 2026 as earlier concessional loans are replaced by more expensive commercial financing and as global interest rates stay high. To contain the pressure, the government is targeting primary fiscal surpluses, meaning it plans to collect more in revenue than it spends before interest payments. That strategy is intended to stabilise debt dynamics but risks squeezing public investment and social spending at a sensitive stage of the reform programme.
The World Bank says Ethiopia could still lift growth toward about 7.7 percent in 2027 if reforms hold and productivity rises in sectors such as mining, energy and exports. But it cautions that the loss of cheap foreign money and a harsher global financial climate mean the margin for policy missteps has narrowed sharply.