Explaining his decision in a speech to Parliament, Mr Abiy said women were “less corrupt than men” and would help restore peace and stability.
Ethiopia is now the only African state after Rwanda to have equal gender representation in the cabinet.
Mr Abiy also cut the number of ministerial jobs from 28 to 20.
He has ended two decades of conflict with neighbouring Eritrea, released thousands of political prisoners and loosened the state’s tight grip on parts of the economy.
Aisha Mohammed was named as Ethiopia’s first female defence minister. She is from the country’s Afar region in the north-east and had served as construction minister.
Muferiat Kamil, the former speaker of parliament, became the country’s first Minister of Peace. She will be overseeing the country’s intelligence and security apparatus, including the federal police.
Image Copyright @HailuMahlet@HAILUMAHLET
Mr Abiy said that his reform process needed to continue to address the structural and strategic problems that pushed the country into chaos.
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Image captionAbiy Ahmed has made huge changes in the six months he has been in office
The 42-year-old became prime minister in April after the unexpected resignation of Hailemariam Desalegn.
Mr Abiy is Oromo himself, but his appeal for trust and unity to “heal our wounds… and work together to develop our country” has received a cautious welcome from many within Ethiopia