Abiy Ahmed was recognised for starting peace talks with Eritrea and establishing a peace agreement to end the long stalemate between the two countries.
"When Abiy Ahmed reached out his hand, President Isaias Afwerki grasped it and helped to formalise the peace process between the two countries," said Berit Reiss-Andersen, chair of the Nobel Peace Prize Committee.
"In Ethiopia, even if much work remains, Abiy Ahmed has initiated important reforms that give many citizens hope for a better life and a brighter future.
In winning this year’s Nobel Peace Prize, Mr. Ahmed joins past winners such as Nelson Mandela and Mikhail Gorbachev. The prize comes with a 9-million kronor, or $916,000, cash award.
In all, 301 candidates were nominated for the peace prize this year, the fourth-highest number on record.
The office of the Ethiopian prime minister said: "We are proud as a nation" for winning the prestigious award.