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Ethiopia

Ethiopia

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Key Facts

  • Capital: Addis Ababa
  • Region: East Africa
  • Official language: Amharic
  • Independence Day: May 5, 1941
  • Area: 1,110,400 sq km
  • Population (2018): 109 million
  • REC membership: COMESA, IGAD
  • WTO membership: Observer
  • GDP (2018): US$ 84.356 billion
  • GNI per capita (2018): US$ 790
  • Currency: Birr

Economic overview

Real GDP growth slowed to an estimated 7.4% in 2019 from 7.7% in 2018, caused by social unrest and fiscal consolidation to stabilize the public debt. On the supply side, industry and services continued to lead growth in 2019. Industry was driven by construction, notably for industrial parks and infrastructure investments. Structural transformation is under way but needs to accelerate. While agriculture’s share in GDP has fallen, the sector still employs more than 70% of Ethiopia’s workforce. Manufacturing accounts for less than 10% of GDP. On the demand side, private consumption and domestic investment were the primary growth drivers in 2019, but domestic investment slowed, reflecting fiscal consolidation.

Monetary policy was tight. But inflation remained in double digits in 2019 and above the 8% central bank target because of central bank advances to finance the fiscal deficit. Ethiopia’s managed float exchange rate foresees a 5%-6% annual depreciation to adjust for inflation differentials with trading partners. High inflation has, however, contributed to overvaluation of the Ethiopian birr despite the 15% devaluation in 2017, necessitating a gradual shift to a more competitive exchange rate. Fiscal consolidation has ensured low and stable fiscal deficits, despite a low tax-GDP ratio, averaging 11% during 2016-19. Tax reforms are under way to boost revenue mobilization, but deficit financing through central bank advances has fueled inflation and reduced monetary policy effectiveness.

Current account deficits have stabilized because of the phased reduction of import-intensive capital projects – in line with the government’s strategy of reducing external borrowing – and been partly offset by official and private transfers. Ethiopia’s debt sustainability rating deteriorated to high risk in 2018 because of worsening terms of trade and the subsequent weak export performance.

The economic outlook is positive, and real GDP growth is projected to stabilize at 7.1%-7.2% in 2020-21 due to ongoing political and economic reforms and normalizing relations with Ethiopia’s neighbors. Growth should benefit from the Homegrown Economic Reform Program, which seeks to address macroeconomic imbalances and unlock structural and sectoral bottlenecks, improving governance of state-owned enterprises and strengthening institutional capacities. Measures to open key sectors to competition – notably transport, logistics, manufacturing, and telecommunication – will attract private investment, catalyze high value-added services, and boost competitiveness.

Transport investments, such as the Addis Ababa-Djibouti railway, and ongoing logistics reforms, including measures to improve first- and last-mile railway connectivity, will produce efficiency gains in trade and manufacturing.

Ethiopia’s public-private partnership framework will diversify the country’s development finance sources, improve debt sustainability, and sustain growth-generating infrastructure investments. Ongoing financial reforms, particularly to develop a capital market, will enhance domestic resource mobilization.

Over-dependence on unprocessed agricultural exports has contributed to persistent trade deficits. Foreign exchange shortages, unstable electricity supply, low access to credit, weaknesses in raw material supply chains, and shortages of skilled labor have hindered business growth and reduced production capacity utilization for manufacturing firms (57% in 2018 versus the targeted 68%). Inefficient trade logistics have also slowed the development of a competitive manufacturing sector. Weak export growth and high debt-service ratios are depressing the growth outlook. Intermittent interregional conflicts could impede socioeconomic progress. Youth unemployment is high, particularly in urban areas (at 25%), requiring improvements in education quality to enhance employability.

Last updated: April 2020