The evangelical PM facilitated a peace agreement with neighbouring Eritrea three months after taking up office, to help resolve a 20-year border conflict in the region.
The 100th Nobel Peace Prize was awarded to Ahmed for his "decisive initiative", at an Olso ceremony in December.
The Norwegian Nobel Committee stated: "Abiy Ahmed has initiated important reforms that give many citizens hope for a better life and a brighter future."
Following the announcement, Ahmed said he was "humbled and thrilled".
In a post on Twitter, he said: "My deepest gratitude to all committed and working for peace. This award is for Ethiopia and the African continent. We shall prosper in peace!"
I am humbled by the decision of the Norwegian Nobel Committee. My deepest gratitude to all committed and working for peace. This award is for Ethiopia and the African continent. We shall prosper in peace!— Abiy Ahmed Ali (@AbiyAhmedAli) October 11, 2019
In addition to signing the peace deal, Ahmed who became Prime Minister in 2018, introduced liberalising reforms, addressed government corruption, and pledged to strengthen democracy.
This is not the first time Ahmed has been recognised for his peace efforts, in 2018 he was given a special "peace and reconciliation" award by the Ethiopian Church for helping to reconcile two branches of the Ethiopian Orthodox Church, which split in 1991 for political reasons.
A member of the Full Gospel Believers' Church, Ahmed told followers after taking office, "We have a country that is endowed with great bounty and wealth, but is starving for love."
Last year, the Nobel Peace Prize was awarded in part to a Christian doctor, Denis Mukwege for his work in the Democratic Republic of Congo healing victims of rape.
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