The sweeping changes saw 10 of the 20 positions going to women.
It included the appointment of Aisha Mohammed as defence minister-the first woman to hold that position in the country.
"Our women ministers will disprove the old adage that women can't lead," Mr Ahmed told the country's parliament as he outlined his choices. "This decision is the first in the history of Ethiopia and probably in Africa."
Muferiat Kamil, who had previously served as House speaker, was also named Ministry of Peace. The newly created role involved overseeing the powerful National Intelligence and Security Service, the Information Network Security Agency, the Federal Police Commission and the Finance Security and Information Center.
"The main problem in this country is the lack of peace. This (peace) ministry will be working hard to ensure it prevails,” he told politicians.
His fellow politicians unanimously approved the nominations Mr Ahmed put forward because women were "less corrupt than men".
The move towards a more inclusive and “gender-balanced" government will be seen as a progressive step for women's rights for the patriarchal society.
“This is to show respect to the women for all the contribution they have made to the country,” Mr Ahmed said. “The new cabinet is expected to reform their respective ministries, remove the walls of bureaucracy, and bring innovation and technology to provide services efficiently.”
After taking office in April, the 42-year-old leader has sought to tackle the ethnically-charged violence facing the country.
He also pledged that elections would be free and fair in Africa's second most populous country. About 2.2 million people have been displaced by violence since last year.
In July, Mr Ahmed and long-time Eritrean president, Isaias Afwerki, celebrated the end to one of the continent’s longest-running conflicts.
The politician also extended an olive branch to several rebel groups and vowed to follow a policy of reconciliation and rein in the powerful security agencies.
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