Ethiopia's prime minister created a new "Ministry of Peace" in sweeping cabinet reshuffle on Tuesday as he sought to tackle a wave of ethnic violence.

Abiy Ahmed - who has turned the region's politics on its head with a string of reforms since being appointed in April - named new finance and defence ministers in an overhaul that kept only four of the former post holders in their jobs.

The 42-year-old merged ministries to cut the cabinet to 20 from 28 and for the first time handed half of the top jobs to women.

"The main problem in this country is the lack of peace. This (peace) ministry will be working hard to ensure it prevails," Abiy told lawmakers.

About 2.2-million people out of a population of 100-million have been displaced since clashes broke out last year, many of them between rival ethnic groups.

The new peace ministry will be led by former parliament speaker Muferiat Kamil, and will oversee the intelligence and security agencies, the government said.

Since his appointment, Abiy has made peace with neighbour Eritrea and presided over the partial privatisation of key economic sectors such as telecommunications.

He has also extended an olive branch to several rebel groups and promised to rein in the powerful security agencies. Yet the changes have not stopped ethnically-charged violence, some of which escalated since he was named premier.

Former construction minister Aisha Mohammed was named defence minister - the first woman to hold that position in the country.

Ahmed Shide, who has previously served as a deputy minister of finance and a government spokesman, replaced Abraham Tekeste as finance minister.

The economy has grown by nearly 10 percent on average for the past decade, official data shows, but the recent unrest has led to concerns over its long-term stability.

The prime minister also named new ministers of agriculture, culture and tourism, education, labour, mines, planning and development, revenue, science, trade, transport, urban development, and women's affairs - a mixture of new names and reshuffled ministers.

He kept Workneh Gebeyehu as foreign minister, Amir Aman as health minister and Seleshi Bekele as water and electricity minister, as well as Berhanu Tsegaye as attorney general.