ortage of housing is the most severe issue in Ethiopian urban centers. Despite bulldozing measures of the government, many people are engaging in squatter settlement as a means for residential deficit and sky rocketing house rent. Cognizant of such a fact, this study investigated the political economy of squatter settlement taking the peri-urban area of Bahir Dar city as an illustrative case. Hence, mixed research approach was employed to address intended research objectives. In doing so, both primary and secondary data gathered through questionnaire, interview, document analysis and simple observation. A total of 108 respondents were taken to address survey question items using convenient sampling strategy. Besides, purposive and snowball sampling strategies were used to gather qualitative data from interviewees. The data were analyzed and interpreted through concurrent approach by using SPSS software for quantitative data and textual interpretation for the qualitative one. The finding of the study revealed that the extent of squatter settlement is relatively low due to serious measure of the city administration. However, shortage of residential houses, governments’ failures to provide urban house and land, complex bureaucratic procedures, rampant corruption and low provision of loan for low-income residents are among the major factors behind squatter settlement. Property destruction, demolition of houses, killing, financial punishment, expropriation and imprisonment are measures taken by the city administration to curb squatter settlement. As a result, squatter settlement strained the relationship between the people and government by creating political insecurity. The study also elucidated that squatter settlement is increasing alarmingly regardless of governments’ measure because of chronic housing problem. The main conclusion drawn from the finding is that government bulldozing measure on squatter settlements is not implementing vis-à-vis with providing formal housing options to evicted lowincome squatters. Finally, the researcher recommends the government should take the leading position and create participatory urban housing and land management system to relieve the existing housing problem.