A recent independent audit report revealed a significant drop in Ethio-telecom’s after-tax profit for the 2024/25 Ethiopian fiscal year. This marks the first major decline in profit in recent history for one of Ethiopia’s largest and historically most profitable state-owned enterprises (SOEs). While profit dips are not uncommon among African SOEs, this development has sparked widespread surprises and questions, particularly given Ethio-telecom’s longstanding reputation for consistent profitability, even amid economic hardships.The bewilderment stems from Ethio-telecom’s rapid operational expansion, including a growing subscriber base, diversified services and substantial infrastructure investments. Informed but non-economist friends and observers, have questioned how such growth and expansion could coincide with sharply reduced profits. Key doubts center on whether the decline in profit is directly tied to Ethiopia’s groundbreaking shift to a free-floating exchange rate regime since July 2024, potential overexpansion straining resources, and if simple service price (tariff) hikes represent the most effective path to restoring profitability and efficiency of Ethio-telecom.
This article addresses these concerns by examining the underlying economic mechanisms, with a primary focus on the impact of currency devaluation and foreign exchange losses. It provides broader context on SOEs performance in a liberalized forex environment, drawing lessons from successful economies. Rather than endorsing tariff hikes as the sole or primary solution—which risks eroding competitiveness and burdening consumers—the article advocates for comprehensive policy reforms, including tax reductions or moratoriums on profits, exemptions from import duties on critical machinery and technology, and enhanced managerial autonomy in decision-making.
State-Owned Enterprises (SOEs)
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State-Owned Enterprises (SOEs) are business entities fully or partially owned and managed by governments, often incorporating Public-Private Partnerships (PPPs) in successful Asian economies. They deliver essential services in sectors like transport, communications, banking, finance, insurance, water, energy, and wholesale distribution, aiming to maximize socioeconomic benefits. Like private firms, SOEs experience typical business cycles—growth, recession, recovery, and expansion—making profit declines, losses, or bankruptcy common outcomes influenced by multiple factors rather than isolated incidents.
In developing countries, especially in Africa, SOEs confront severe, interrelated challenges. Structural issues arise from weak economic fundamentals, inadequate investments, poor regulation, outdated infrastructure, and flawed policy formulation, including exchange rate management. Governance problems, such as excessive political interference, systemic corruption, inefficiency, and mismanagement, exacerbate persistent losses and occasional bankruptcy. The underlying causes behind all these challenges lie in how economic policies are formulated, sequenced, coordinated and implemented, including exchange rate policies. These challenges- in combination or individually- have undermined the potential of SOEs to foster productive capacities and kick-start the process of structural economic transformation, enhance competitiveness, promote innovation, drive inclusive economic growth and increase gross fixed capital formation.
Despite these difficulties, SOEs remain economically significant globally, contributing about 10 Percent of world output and 5Percentof employment, with wide regional variations. In Asia, their shares range from 23–40Percentof output and 10–20Percentof jobs; in China and Vietnam, they account for 35–40Percentof national output, 15–20Percentof employment, and over 60Percentof market capitalization. In Sub-Saharan Africa (SSA), SOEs serve as economic powerhouses, generating substantial government revenue and foreign currency while providing over one million jobs—contributing an estimated 30–34Percentto GDP, according to studies by the World Bank, IMF, and African Development Bank. They act as key instruments for implementing public policy and enabling direct state intervention in the economy. Moreover, during economic turbulence—whether from financial crises, health shocks, or other disruptions—SOEs play a vital countercyclical role through sustained investments when private sector investment collapses.
However, they also create significant risks. SOEs often generate large debt obligations (frequently guaranteed by governments, forming “hidden external debts”), liquidity crises, substantial financial losses, and inefficient resource allocation, particularly amid political instability or external shocks. Heavy reliance on government subsidies, cash injections, tax relief, and bailouts diverts scarce public resources from critical sectors like transport infrastructure, education, and healthcare, amplifying microeconomic and macroeconomic vulnerabilities.
Why do exchange rate regimes matter?
Although diverse factors influence performances, exchange rate policies are vital macroeconomic policy tools that directly impact key economic actors such as SOEs and key economic activities such as consumption, production, and distribution. They influence investment decisions and impact trade (exports and imports), inflation, the competitiveness of firms, and the allocation of scarce resources. Therefore, they are key in ensuring economic and financial stability, as well as in causing systemic instability and volatility. Macroeconomic theory teaches us that, in general, a weaker currency, if supported by nationally owned structural reforms, boosts exports but raises import costs, while a stronger currency does the opposite. As with all economic policies, the objectives of exchange rate policies are to contribute to inclusive and sustained economic growth; ensure macroeconomic stability; promote exports and industrialization; and facilitate structural economic transformation while maximizing societal welfare and accelerating capital accumulation.
A range of interrelated factors determines the choice of a particular currency regime-fixed, flexible, or free-floating. While there is no “one-size-fits-all” approach in exchange rate regimes, country-specific macroeconomic conditions, economic structures, institutional features, and policy objectives are key in determining the choice of a given exchange rate policy. It is important to underline that there is no such thing as a “good or bad” exchange rate policy, as each system involves trade-offs. What economists conveniently consider as “good” exchange rate policy is one that supports exports, ensures macroeconomic stability, and accelerates economic growth in line with the overall development policies and strategies. Conversely, exchange rate policies that lead to persistent misalignment, undermine growth prospects, increase unemployment, and cause chronic inflation or financial crisis are considered bad exchange rate policies. Whatever the case or the consequence may be, the best way to approach specific currency policies is to carefully weigh the trade-offs by examining the opportunity costs of maintaining SOEs along with maximizing socioeconomic gains based on cost-benefit analysis before embarking on a particular currency regime or policy. For instance, a fixed exchange rate regime offers stability, while free-floating rates offer flexibility with a high degree of instability or volatility. On the other hand, a managed float strikes a balance between flexibility and stability while facilitating economic growth.
Usually, governments that are under severe macroeconomic instability, heavy external debt, and acute shortage of international reserves are often forced to revamp their macroeconomic policies, including exchange rate policies. In poorer countries such as those in sub-Saharan Africa, externally imposed policy prescriptions carry policy conditionality and implicit injunctions against fixed or managed-floating exchange rate policies in favour of free-floating. These policy prescriptions are often justified due to the perceived risks of corruption, insider trading, information asymmetry, large gaps between official and parallel markets, persistent inflation, and overall institutional and regulatory weaknesses in effectively managing exchange rate policies under flexible or managed floating systems. For instance, periodic auctions of foreign currency under managed float or rationing under flexible or fixed exchange rate regimes are known for entraining corruption, insider-trading, and inefficient allocation of productive resources such as hard currency. Hence, market forces (demand and supply) should assume a free ride to allocate exchange rates and other productive inputs efficiently and free from systemic bias. The problem, as many argued repeatedly, is that market forces alone are too weak to assume such a vital role in structurally weak and vulnerable economies such as those in SSA, where institutional and regulatory frameworks are yet to be fully developed to correct market failures and the resulting distortions.
SOEs under free- floatingexchange rate regime
While there are neither inherently bad nor good exchange rate regimes, empirical evidence suggests that sudden changes in such policy tools can have disruptive impacts, causing economic instabilities, risks and chaos, particularly in the short-to-medium term. Similarly, as hinted above, although the choice of a given exchange rate regime is determined by a complex set of factors, generally, managed floating provides the necessary balance between stability and volatility. Therefore, it is argued that such a regime is critically important for developing countries as it provides room for policy interventions to ensure macroeconomic stability and achieve inclusive growth and sustainable development. Consequently, most successful developing economies, particularly in the Asian region (including China), embrace managed floating as a key macroeconomic tool to accelerate exports, foster competitiveness, boost investments, and augment capital accumulation. Managed floating combined with robust state-led interventions is also key to boosting SOEs’ profitability and ensuring operational stability, while facilitating the growth and expansion of the domestic private sector and SOEs that combine private and public ownership, whose economic importance has become robust in recent years and is continuously growing, particularly in the Asian economies.
In the case of Ethiopia, indeed, the shift to a market-determined (free-floating) exchange rate regime has profoundly impacted all economic sectors, including SOEs. In the face of a sluggish export sector and growing protectionism globally, the Ethiopian birr depreciated sharply following the reform. In an official market, it precipitously declined from around 58birr per USD pre-float to over 100birr by late 2024, and further to rates exceeding 150birr per USD by mid-2025. This has led to a cumulative depreciation of over 165Percent in just 15 months and created significant headwinds for import-dependent entities, including SOEs.As can be seen from the below graph, only between January-December 2025, it depreciated from 125birr to a dollar to over 155birr at official (auction) market.
USD-Ethiopian Birr Rate January-December 2025
Source: National Bank of Ethiopia: Indicative (Official) Exchange Rates, Based on Weighted Averages
One of the primary channels of impact on SOEs is through foreign exchange losses on imports resulting from devaluation, which also increases external payment obligations and liabilities. SOEs like Ethio-telecom rely heavily on imported machinery, equipment, software licenses, network hardware, and new technologies (both hardware and software) from abroad. These imports are typically denominated in foreign currencies (mainly USD). While a large portion of the revenue is generated in local birr from domestic subscribers and services, the costs of these imports surged sharply in birr terms due to the depreciation of the local currency following the decision to free-floating the birr.
According to official reports, this effect was particularly pronounced during the 2024/25 fiscal year (July 2024–June 2025). Despite strong operational growth—revenue surging by 72.9Percentyear-on-year to 162-billion-birr, a fast-growing subscriber base (expanding to 83.2 million), and continued network expansion—the company suffered massive foreign exchange losses. Forex losses ballooned from around 3 billion birr to over 42 billion birr, leading to a nearly 70Percentplunge in profit after tax to just 5.8 billion birr (compared to around 21.7 billion birr in the preceding year). This sharp deterioration was directly attributed to the currency float and resulting depreciation, revaluing foreign-denominated liabilities and import costs.Bycontrast, SOEs that heavily invest in foreign currencies and generate a large chunk of their revenue in such currencies (e.g., the Ethiopian Airlines), the impact of exchange rate reforms can have little or no impact on their profitability, investment, financial solvency or liquidity.
The case of the Ethio-telecom is not unique. Other SOEs that heavily rely on imports of intermediate goods and machinery but largely produce goods and services for domestic consumption will most likely suffer similar consequences. SOEs in banking and financial sectors that hold significant foreign currency denominated liabilities such as commercial banks can also incur losses. Such phenomena are not unique to Ethiopia, either. During the implementation of Structural Adjustment Programs (SAPs) in Africa in the 1980s and 1990s, many SOEs incurred significant losses. These were largely due to externally prescribed competitive currency devaluation under the “stabilization and liberalization” programmes. Of course, excessive political interference in the management of SOEs, mismanagement of resources, rampant corruption, unplanned expansion of services, and overall operational inefficiencies also contributed their shares to economic stagnation, decline, and substantial financial losses of SOEs. Besides exchange rate policies under stabilization and liberalization policies, revaluation of external debts owed by SOEs led to insolvency and eventual collapse or bankruptcy. For instance, Air Afrique (in 2002), Ghana Airways (2004) and South African Airways (2019) went bankrupt, due to operational difficulty, huge financial losses, unsustainable external debt and inability to pay back. Liberalization, stabilization and privatization policies pursued as part of SAPs, which removed subsidies and changed pricing policies, including currency policies, are directly responsible for the demise of such a vital sub-sector as air transport. Similarly, during external economic shocks, Kenya Railways Corporation (KRC) has consistently posted significant losses, struggling to service loans and meet financial obligations due to insufficient revenue generation, weaker shillings, and poor management. In the utilities sector, a classic example is the case of the Nigerian Electric Power Authority (NEPA), which could not recover from operational difficulties and financial losses resulting from SAPs era and the resulting severe economic malfunctioning (including job losses, economic instability, high inflation, and the depreciation of Niara). In the Asian region, the recent economic crisis and currency devaluation led to identical outcomes. In Sri Lanka, for example, currency collapse contributed to economy-wide stagnation with the island’s Petroleum Corporation incurringsignificant financial losses. Similarly, in Indonesia, the sharp depreciation of the Rupiaduring the 1998 Asian Financial crisis exposed SOEs to heightenedexternal vulnerabilities, significantfinancial losses, and inability to repay debt obligations.
Policy responses and way forward
From the above brief analysis, one can reasonably conclude that the profit declines in previously profitable SOEs like Ethio-telecom, other African or Asian SOEs are closely tied to the exchange rate polices, macroeconomic instabilities, and other unforeseen economic or political shocks primarily through amplified import costs and forex losses as well as unsustainable external debts. These shocks, in a broader macroeconomic reform package, were externally imposed on vulnerable economies under the guise of resolving chronic forex shortages and fostering sustainable growth, have failed to deliver promises of stability and growth. In the case of Ethio-telecom, while the cost of investments in operational expansions continues to drive revenue upside, the near-term profitability hit illustrates the challenges of such bold reforms in an import-reliant economy. Over time, as the economy adjusts, these pressures may ease, especially if firm productivity and profitability increase and exports strengthen as intended, although these structural rigidities are less likely to ease or improve in the short term.
Drawing on the diverse policy experiences of successful developing countries, it is evident that there are no magic bullets for improving the liquidity and solvency of SOEs. Governments need to tailor policy interventions to their respective countries’ specific conditions, institutional and regulatory frameworks, and the overall microeconomic and macroeconomic environments. Asian countries successfully navigated various storms imposed by exogenous and endogenous shocks to their economies and their SOEs that were struggling due to currency shifts and debt accumulation. While they do not see privatisation as the only solution to SOEs’ crises, these countries pursued wide-ranging reforms and provided targeted and time-bound incentives to their struggling SOEs. Successful Asian economies do not see price increases or adjustments of tariffs as the only sustainable solutions to address investment gaps, restore profitability or cover rising costs. While tariff adjustments may be necessary in specific cases to reflect true economic costs, excessive or frequent reliance on them can erode public confidence (or trust), reduce affordability for citizens, harm competitiveness and discourage long-term investments in essential services and expanded operations
Policy responses in advanced developing countries, such as those in Asia, involve state-led market-based interventions such as corporatisation and governance reforms. These include (but are not limited to) setting clear mandates and Key Performance Indicators (KPIs), ensuring management independence and enforcing accountability and transparency in the financial and operational realms of SOEs. They have also introduced effective and efficient strategic and goal-oriented institutional and policy coordination mechanisms, including merging large and strong SOEs, while privatising or selling inefficient and small ones. Further policy interventions include the provision of carefully targeted fiscal incentives through time-bound bailouts/credit schemes, challenging them to deliver results, and effectively managing exchange rate policies. Firms and SOEs that innovate, add value, export, and generate employment were given priority in the provision of government support (incentives). Beyond the implementation of well-sequenced overall development policies guided by the “Developmental State” model, Asian success stories include revamping their SOEs and fostering their beneficial integration into the regional and global value chains, as well as facilitating FDI flows in parallel with incentivising the growth and expansion of their respective domestic private sector.
In short, policies that improve management and facilitate prudent investment decisions can serve as foundational pillars. Further policy approaches, including a reduction or moratorium on taxes on profits and removing duties on imports of machinery and technology components, as well as management independence in corporate decision-making processes, are key to addressing investment and profitability gaps. In the context of Ethio-telecom, these approaches, more than upward price adjustment of service delivery, focus on maximising operational efficiency, enhancing growth prospects and minimising unnecessary costs, thereby improving productivity, competitiveness and overall resilience. The management of Ethio-telecom should also consider undertaking a serious and rigorous cost-benefit analysis before embarking onambitious programme of expanding services beyond traditional communication services. According to the “Beyond 2028 Vision” document, Ethio-telecom plans to enter Fintech, e-commerce, cloud services and sector-specific digital solutions for healthcare, education and agriculture. Such unfettered expansion may gradually reposition the SOE as an unparalleled monopoly with excessively dominant position in the market, which could lead to operational inefficiency, financial losses, disinvestment and overall stagnation.
Editor’s Note:This piece was written before Ethio Telecom released its latest profit report. The views expressed are the author’s own and do not necessarily represent those of the magazine or the author’s affiliated organization.
