Ethiopia's state-led development model historically relied on a tightly managed and overvalued currency, leading to severe foreign exchange rationing (World Bank, 2024). Ethiopia’s foreign exchange regime has been characterized by stringent administrative controls, fixed exchange rates, and pervasive foreign currency shortages. For over three decades, the National Bank of Ethiopia (NBE) set official exchange rates and tightly regulated foreign currency transactions, resulting in a persistent gap between official and parallel market rates, widespread rationing, and significant distortions in the allocation of foreign exchange (Mesfin Tafesse & Associates, 2024; NBE, 2024). This policy created fundamental macroeconomic imbalances, manifesting as chronic double-digit inflation and a prohibitive divergence between the official exchange rate and the parallel market rate. By the end of the 2023/24 fiscal year, the parallel market premium had surged past 100 percent (IMF, 2025); functioning as an effective tax on legitimate exporters and severely constraining formal trade (World Bank, 2024).

In response to mounting macroeconomic pressures including high inflation, a widening trade deficit, and acute foreign currency shortages, the Ethiopian government embarked on a comprehensive economic reform agenda under the Home-Grown Economic Reform Plan (HGER 2.0). A cornerstone of this agenda was the liberalization of the foreign exchange regime, culminating in the issuance of NBE Directive FXD/01/2024 on July 29, 2024 (NBE, 2024; EY, 2024).

The FXD/01/2024 Directive introduced a managed float exchange rate system, allowing banks and authorized dealers to buy and sell foreign currency at freely negotiated rates, with the NBE intervening only to address disorderly market conditions (NBE, 2024; EY, 2024). The reform also abolished surrender requirements for export proceeds, improved retention rules (allowing exporters to retain 50% of foreign exchange earnings), lifted most import restrictions, and opened the securities market to foreign investors (NBE, 2024; Mesfin Tafesse & Associates, 2024).

The rationale for foreign exchange liberalization was multifaceted: to unify the official and parallel market rates, boost export competitiveness, attract foreign direct investment (FDI), and ensure that foreign exchange earnings were repatriated through formal channels (NBE, 2024; Sahlemichael Mekonnen Demsse, 2025). The reform was expected to benefit a wide range of stakeholders, including farmers, miners, manufacturers, service providers, and remittance recipients, while also supporting macroeconomic stability and private sector development (NBE, 2024; Birr Metrics, 2025).

This study is, therefore, conducted to address the following research questions:

This study is designed to empirically assess the initial efficacy and structural implications of the 2024 foreign exchange liberalization by pursuing the following objectives:

The theoretical basis for the reform's impact lies in the concept of Purchasing Power Parity (PPP), specifically the relative PPP version, which posits that nominal exchange rate changes should result in a real effective exchange rate (REER) depreciation, making a country’s tradable goods cheaper and more competitive internationally (IMF, n.d.-a). Empirical evidence from liberalization efforts in other Sub-Saharan African (SSA) countries supports this link, showing that successful transitions from managed regimes characterized by extensive foreign exchange rationing and sizeable black market premiums led to macroeconomic stabilization and sharply increased per capita real income (IMF, 2013; IMF, 2016).

The choice of exchange rate regime profoundly influences external stability. Analysis within the COMESA region indicates that floating arrangements generally yield superior external stability and lower inflation outturns compared to pegged or heavily managed regimes, provided central banks actively use sterilized intervention to dampen disruptive volatility (COMESA, 2024; COMESA, 2024). Ethiopia’s shift to a managed float is consistent with this regional evidence (NBE, 2024).

Trade performance is typically measured using metrics derived from Ricardian trade theory. Revealed Comparative Advantage (RCA) calculates a country’s export share of a specific product relative to the global share of that product, indicating where competitive strengths are "revealed" following policy shocks (UNCTAD, n.d.). An increase in a sector's RCA post-reform would reveal a policy-induced improvement in its relative international competitive position.

To measure structural resilience, the Herfindahl-Hirschman Index (HHI) for exports is used to quantify the degree of export concentration. A low HHI signifies a diversified export basket, reducing vulnerability to sector-specific external shocks, whereas a high HHI indicates reliance on a narrow base, increasing concentration risk (UNCTAD, n.d.).

The literature confirms that while monetary correction (devaluation) is necessary, structural constraints often pose more formidable barriers to sustained export competitiveness. Ethiopia is known to lag behind peers in global competitiveness rankings due to trade restrictions biased against exports and declining overall Doing Business performance (World Bank, 2014; World Bank, 2024). High logistics costs and poor transport infrastructure significantly raise the cost of doing business, imposing a persistent, non-price penalty on exporters (Capital Ethiopia, 2025).

A more fundamental barrier identified is the critically low domestic demand sophistication. Ethiopia scored 12.06 on the African Export Competitiveness Index (AECI) for this measure (African Export Competitiveness Report, 2024). Sophisticated domestic demand is crucial because it compels local firms to innovate and develop high-quality; complex products, thereby acquiring the necessary skills to compete in advanced international markets (African Export Competitiveness Report, 2024).

Finally, the potential for a commodity windfall, like the gold surge observed post-reform, introduces the critical risk of Dutch Disease (IMF, 2024a). If the foreign exchange inflow is not rigorously sterilized, it can trigger a real exchange rate appreciation, eroding the price competitiveness gained by non-resource tradable sectors (e.g., manufacturing) (IMF, 2024a; IMF, 2025a).

Empirical evidence from sub-Saharan Africa and other developing economies suggests that exchange rate liberalization, when accompanied by supportive macroeconomic policies, can enhance export performance, reduce foreign exchange shortages, and stimulate economic growth (Maehle et al., 2013; Eshetu & Eshetu, 2023). However, the benefits are not automatic; successful outcomes depend on the sequencing of reforms, institutional readiness, and the capacity to manage inflationary pressures and external shocks (Maehle et al., 2013; Okot et al., 2022).

In Ethiopia’s context, previous devaluations and partial liberalization measures yielded mixed results, with persistent trade imbalances and limited export diversification (Gofe et al., 2023; Eshetu, 2024). The 2024 reform represents the most comprehensive shift to date, warranting a rigorous assessment of its impact on export competitiveness across sectors.

The empirical evaluation integrates time series data spanning the pre-reform (2018–2023) and post-reform (2024) periods. This study utilizes multiple secondary data sources to ensure a robust and comprehensive analysis:

The RCA index, originally proposed by (Balassa, 1965), measures a country’s relative export performance in a given product or sector compared to the world average. The RCA for country c in product p is defined as:

An RCA value greater than 1 indicates a revealed comparative advantage (specialization), while a value less than 1 indicates a comparative disadvantage (Jones & Bethmann, 2023; UNCTAD, 2025).

The HHI is a widely used measure of market concentration, adapted here to assess the concentration of Ethiopia’s export portfolio (Investopedia, 2025; Gofe et al., 2023). It is calculated as:

Where Si is the market share (percentage) of export sector i in total exports, expressed as a whole number (not a decimal). The HHI ranges from near zero (highly diversified) to 10,000 (monopoly). In trade analysis:

Trade Map indicators are used to contextualize Ethiopia’s export performance, including:

The reform achieved its primary objective of price correction swiftly (IMF, 2025; World Bank, 2024). The massive parallel market premium, elevated above 100 percent (IMF, 2025; IMF, 2024b), narrowed rapidly to under 10 percent (World Bank, 2024).

Source: Computed based on data from ITC, 2025

The macroeconomic impact was immediate and substantial. Ethiopia’s aggregate export revenue surged by 117 percent (year-on-year), in the first quarter of the 2025/26 fiscal year (MoTRI, 2025). This momentum, coupled with "over performance in the accumulation of net international reserves," confirms the policy’s success in unlocking foreign exchange capacity (IMF, 2025b).

Source: Figs. 1 is generated using Microsoft Copilot (Microsoft, 2025) based on the data obtained from ITC, 2025

The analysis of Revealed Comparative Advantage (RCA) across Ethiopia’s top ten export categories from 2018 to 2024 reveals three distinct trends: established dominance, volatility, and post-reform manufacturing reversal. An RCA value greater than 1 indicates a competitive export advantage.

Ethiopia's enduring competitive advantage lies in agricultural and horticultural products. Coffee, tea, maté and spices (Category 1) exhibit an extraordinarily high and robust RCA, consistently exceeding 100 throughout the entire period, peaking at 179.221 in 2022. The 2024 RCA of 141.632 confirms its status as the structurally dominant export, benefitting from the devaluation and contributing significantly to export revenues (NBE, 2024b; ECTA, 2025). Similarly, live trees, cut flowers and ornamental foliage (Category 4) demonstrates continuous competitive growth, with its RCA steadily increasing from 73.546 in 2018 to its highest level of 85.640 in 2024.

The Edible vegetables and certain roots and tubers (Category 2) sector shows significant volatility. While maintaining a high RCA (over 49) through 2022, its RCA experienced a dramatic collapse in 2024 to 13.304. This rapid loss of comparative advantage suggests a sector highly sensitive to external shocks, climate issues, or internal trade disruptions, which overwhelmed any gains from the exchange rate reform. The Oil seeds (Category 3) sector shows a competitive edge but remains highly volatile, declining slightly in 2024 to 20.833.

The most significant finding regarding the FX reform’s intended impact on non-traditional sectors is observed in Apparel. Both Articles of apparel, not knitted (Category 7) and Articles of apparel, knitted or crocheted (Category 8) experienced substantial, immediate competitive gains in 2024.

This sharp, synchronous increase, reversing a period of decline and stagnation, provides empirical evidence that the exchange rate liberalization succeeded in translating the real depreciation into immediate price competitiveness for Ethiopia’s nascent, job-intensive manufacturing sector. Similarly, Raw hides and skins (Category 6) stabilized its RCA at 11.323 in 2024, reversing a five-year declining trend, indicating a positive short-term effect on semi-processed goods.

Conversely, Footwear (Category 9) and Electrical machinery (Category 10) RCAs remain negligible (0.270 and 0.022, respectively). This suggests that for highly complex or technologically intensive sectors, the exchange rate correction is entirely insufficient to create a competitive advantage, reinforcing the notion that deeper structural constraints prevail (African Export Competitiveness Report, 2024).

The Herfindahl-Hirschman Index (HHI) for Ethiopia's exports, calculated based on the annual market shares of the top ten export categories over the 2018–2024 period, reveals a market structure characterized by consistent and high concentration, punctuated by extreme volatility driven by primary commodity performance.

The HHI calculation below confirms that for the majority of the period under review, Ethiopia's export base exceeded the threshold of 1,800, classifying it as Highly Concentrated. The HHI calculation uses the share of each of the ten categories in the annual Total Ethiopia Exports.

The disproportionate growth of gold and the continued high RCA values of traditional cash crops (Coffee and Live Trees) relative to the manufacturing base imply a short-term increase in export concentration. While the sharp RCA gains in apparel suggest a positive development, the overall magnitude of the commodity boom m eans the export basket is temporarily less diversified (African Export Competitiveness Report, 2024). The policy success of price correction has yielded immediate, largest returns in sectors with existing capacity (commodities), potentially delaying the crucial structural shift toward higher value-added manufacturing.

High-frequency reports attribute the aggregate 117% export surge largely to gold exports, which grew by an unprecedented 735.2% (NBE, 2024b; MoTRI, 2025; Addis Fortune, 2024). This is overwhelmingly a result of formalization bias: the exchange rate convergence made it economically irrational to smuggle gold, successfully channeling previously illicit output into formal banking reserves (Ministry of Mines, 2025). This massive, one-time flow provided stabilization relief but did not structurally alter the country's productive capacity.

The HHI data's failure to drop significantly in 2024 is explained by the RCA-Value Paradox: while the RCA increased substantially due to improved price competitiveness, the absolute export value for both knitted apparel ('61) and non-knitted apparel ('62) declined by 14% and 5%, respectively, between 2023 and 2024. This indicates that the monetary correction provided by the FX reform is insufficient to overcome deep-seated non-price barriers. Manufacturers are still constrained by structural friction such as high logistics costs, bureaucratic inefficiencies, and supply chain disruptions which prevent them from translating their newfound price advantage into higher export volumes (Capital Ethiopia, 2025).

The detailed RCA analysis is contextualized by the massive growth figures, particularly the gold exports (not listed in the top 10 categories above, but a primary contributor to the aggregate surge). Gold exports, benefiting immensely from the exchange rate convergence, surged by 735.2 percent year-on-year (NBE, 2024b; Addis Fortune, 2024). Official reports confirm that this performance is overwhelmingly driven by the formalization of trade redirecting output from previously illicit artisanal trade (which accounted for 95% of production) into official channels (Ministry of Mines, 2025). This massive, one-time stock adjustment means that the aggregate export success is heavily reliant on a formalization bias rather than organic, structural capacity expansion (Ministry of Mines, 2025).

The weak absolute growth (0.7% for textiles in QIV 2023/24) (NBE, 2024b) and the negligible RCA of complex goods (Footwear, Machinery) confirm that the FX reform is being overwhelmed by non-price structural constraints: