Monetary policy regime change in Ethiopia: A critical review of inflation dynamics, fiscal dominance, and the 2024 interest-rate-based reform

Monetary policy reform is a pivotal transition for low-income economies, and Ethiopia offers a critical case study of the shift from administratively controlled quantity-based frameworks to market-oriented interest-rate-based systems. This review synthesizes Ethiopia’s monetary policy evolution from the imperial era, through the socialist Derg period and the developmental-state EPRDF regime, to the current Homegrown Economic Reform, focusing on the July 2024 shift to a National Bank Rate-centered framework with market-oriented exchange-rate management. Drawing on official reports from the National Bank of Ethiopia, Central Statistics Agency, Ministry of Finance, and international analyses, the review reveals that historical reliance on reserve-money targeting and directed credit allocation generated persistent inflationary pressures, weak monetary transmission, exchange-rate misalignment, and foreign exchange shortages. Broad money expansion, fiscal dominance, and structural bottlenecks have consistently undermined price stability. Reform success depends critically on credibility, fiscal discipline, financial deepening, and policy coordination. Evidence from Ghana, Kenya, and Rwanda suggests gradual structural transformation yields more sustainable outcomes than abrupt liberalization. The review highlights macroprudential regulation, exchange-rate flexibility, transparent communication, and central bank independence. This study provides a coherent synthesis of Ethiopia’s monetary transformation, integrating institutional and empirical evidence, and offers policy recommendations emphasizing fiscal-monetary coordination, financial deepening, and institutional capacity.