EIH Cannot Substitute for True Sovereign Wealth Fund, Says AfDB Report

Bank projects Ethiopia’s 2026/27 growth at 8.7pct

A comprehensive report issued by the African Development Bank (AfDB) warns that Ethiopian Investment Holdings (EIH) cannot serve as a substitute for a true sovereign wealth fund (SWF) due to Ethiopia’s ongoing macro-fiscal vulnerabilities.

The AfDB’s Ethiopia Country Focus Report 2026, titled “Mobilizing Ethiopia’s Development Financing at Scale in a Fractured World,” notes that classic sovereign wealth funds require sustained fiscal or external account surpluses.

With Ethiopia contending with debt distress, a recent sovereign default, and foreign exchange reserves that remain below comfortable levels, diverting public funds into a traditional savings or stabilization SWF would risk starving critical social spending, public investment, and debt reduction programs.

Instead, the report frames EIH as a pragmatic, second-best vehicle tailored to Ethiopia’s current realities.

“Its strategic developmental role lies not in managing surplus wealth, but in optimizing state-owned enterprise portfolios, strengthening corporate governance, imposing commercial discipline, and crowding in private and foreign co-investment. EIH can also support capital-market development by acting as an anchor investor in domestic debt and equity markets, helping diversify funding sources away from banks,” reads the report.

EIH was established in late 2021 as the strategic investment arm and sovereign wealth fund of Ethiopia and has since seen its portfolio grow to include the likes of Ethiopian Airlines, Commercial Bank of Ethiopia, and Ethio telecom. Its seven-member board, chaired by Deputy PM Temesgen Tiruneh, includes three ministers and the governor of the central bank.

The AfDB report notes that because EIH is funded largely through SOE assets and privatization proceeds rather than excess savings, it cannot substitute for a true SWF.

“Its effectiveness depends on transparent governance, strict separation from fiscal financing needs, and hard budget constraints for SOEs,” reads the report, advising Ethiopian officials to keep EIH’s focus on asset management and development catalysis rather than intergenerational wealth preservation or fiscal stabilization.

The report highlights an immense financing hurdle facing the country. To achieve the United Nations Sustainable Development Goals (SDGs) and reach a target tax-to-GDP ratio of 15 percent, Ethiopia must mobilize USD 608 billion by 2030, AfDB forecasts.

In addition, implementing the Long-term Low Emissions Development Strategy (LT-LEDS) will require approximately five billion dollars annually between 2025 and 2050, alongside supplemental yearly financing equivalent to 13.2 percent of GDP to drive structural economic transformation.

AfDB’s report notes the hefty financial requirements are made even more daunting by bottlenecks and shortcomings in Ethiopia’s tax system. It highlights that while digitalization, e-tax systems, and administrative streamlining through the National Medium Term Revenue Strategy raised average tax collection by 24.8 percent over three years, the tax base remains narrow.

Revenue generation depends heavily on border surcharges, customs duties, and indirect taxes. Meanwhile, personal income tax, which caps out at 35 percent, and business profits contribute disproportionately little. Recent revenue gains, which elevated the tax-to-GDP ratio from 6.8 percent in FY2023/24 to 7.8 percent in FY2024/25, relied heavily on import surcharges and telecom excise fees rather than structural tax base expansion, according to AfDB.

The report underlines that attempts to formalize the shadow economy face deep-seated hurdles beyond basic business registration, while land tenure informality leaves many urban and peri-urban enterprises vulnerable to eviction, making formal tax registration risky. Moreover, informal business operations are often sustained by local political networks and entrenched social structures that provide cheaper, trust-based financing and dispute resolution than formal state mechanisms.

“Fragmented taxpayer registries, weak risk based audits, and uneven subnational capacity persist. Broader base broadening measures, stronger natural resource rent capture, and improved macroeconomic stability are needed to deliver durable domestic resource mobilization,” reads the report.

AfDB’s report also covers the Ethiopian investment landscape and the successes and failures of the government’s Public-Private Partnership (PPP) endeavor.

“Ethiopia’s PPP framework is legally sound, but execution remains constrained by bankability challenges. The centralized model under the Ministry of Finance has helped screen projects and ring-fenced fiscal risks, yet it has slowed delivery. Although many projects, mainly in energy and transport, entered the pipeline, only a few reached financial close, reinforcing concerns over implementation capacity,” it reads.

Foreign exchange risk remains a binding constraint for foreign investors. Directives from the National Bank of Ethiopia allowing strategic PPPs to open offshore accounts and access convertibility guarantees have improved bankability, as demonstrated by the ACWA Power 250 MW solar projects priced at 2.526 U.S. cents per kilowatt-hour.

Domestic capital mobilization is similarly hampered by shallow institutional investment. Assets held by the Private Organizations Employees Social Security Agency (POESSA) remain small relative to economic output and lack transparent public reporting. Regulatory conservatism forces these pension assets into low-yielding government debt and state bank deposits, exposing funds to inflation risks rather than channeling capital into high-return infrastructure.

“This concentration exposes funds to inflation and fiscal risks, delivers persistently low real returns, and reinforces the sovereign–bank nexus rather than supporting long-term, productive investment,” reads the report.

On the international front, regional payment integration through the Pan-African Payment and Settlement System (PAPSS) under the AfCFTA and COMESA’s Digital Retail Payments Platform has eased local-currency settlement costs, according to AfDB. Nevertheless, strict foreign exchange controls and administrative constraints continue to limit cross-border payments for imports, logistics, and regional supply chains.

Despite these structural hurdles, Ethiopia’s macroeconomic growth outlook remains solid. The AfDB projects real GDP growth at seven percent for the 2025/26 fiscal year, accelerating to 8.5 percent in 2026/27 as foreign financing resumes and economic reforms gain traction. Inflation is expected to decelerate from 14.7 percent in 2025/26 to 8.7 percent in 2026/27, guided by prudent monetary stance.

The national fiscal deficit is forecasted to adjust to 2.5 percent of GDP in 2025/26 before easing to 2.1 percent in 2026/27, assisted by debt relief under the G20 Common Framework and tax collection improvements.

However, the report cautions that serious downside risks threaten this recovery. Internal security challenges in the Amhara and Oromia regions, political frictions, climate shocks, and global commodity price volatility linked to international conflicts could disrupt economic stability if structural reforms and debt restructurings are not decisively executed.