Ethiopia Economic Outlook
Economic performance and outlook
Ethiopia is steadily recovering from the 2015/16 and 2017 droughts, with continued expansion of services and industry and a rebound in agriculture. At 39.3%, services accounted for the largest share of GDP in 2016/17, 39.3%, driven by trade, transport, and communications, although this share decreased from 47.3% in 2015/16. Industry’s share of GDP increased from 16.7% in 2015/16 to 25.6% in 2016/17, driven by construction, electricity, and manufacturing. Implementation of the export-led industrialization strategy supported growth in industry. Although agriculture’s share of GDP stagnated at 36%, the sector’s growth rate increased from 2.3% in 2015/16 to 6.7% in 2016/17 due to rising commodity prices, notably for coffee. Growth continues to be led by investment in line with stable public infrastructure spending and higher foreign direct investment (FDI). Real GDP growth during 2017/18–2018/19 will be led by greater agricultural productivity and strong industrial growth.
The government pursued a contractionary fiscal policy stance in 2016/17, prioritizing spending in pro-poor and growth-enhancing sectors, including education, health, agriculture, and roads. Capital expenditure accounted for a large share of the budget, though it decreased from 51% in 2015/16 to 46% in 2016/17. The 2016/17 budget deficit was 1 percentage point lower than programmed; the ratio of tax revenue to GDP remained low, at 12.9%. Revenueenhancing measures are expected to increase tax collection. The monetary policy stance has been consistent with the Central Bank’s objective of maintaining low and stable inflation, which was below the 8% target in 2016/17. The Central Bank is implementing a contractionary monetary policy to address inflationary pressures due to rising food prices. In October 2017, the birr was devalued 15% to boost exports. Merchandise exports increased 1.4%, while imports decreased 5.5%, reducing the current account deficit. Remittances remained stable at $4.4 billion (6% of GDP) in 2016/17; FDI increased 27.6%, to $4.2 billion.
The economic outlook is positive due to the sustained implementation of the government’s export-led industrialization strategy and investors’ positive outlooks. Industrialization has been prioritized, notably through the development of industrial parks and other enablers, such as the 656 km Addis Ababa–Djibouti electric railway, to ease the cost of doing business. Investment in energy, such as the 6,450 MW Grand Ethiopian Renaissance Dam, is expected to boost energy exports. These initiatives are likely to reduce the structural trade deficit and foreign exchange shortages while supporting industrialization and job creation. Ethiopia was ranked as the second largest FDI host economy among the least developed countries in 2016, supported by its large market and affordable labor force.
Major downside risks include weak exports, climate change, and youth unemployment. Exports account for less than 20% of imports, leading to persistent trade deficits and foreign exchange shortages. The most recent debt sustainability analysis in 2016 indicates that Ethiopia’s moderate risk of external debt distress is vulnerable to export performance. The development of industrial parks and devaluation of the birr are expected to increase manufacturing exports, which account for about 20% of total exports, thereby mitigating this risk. The negative effects of climate change have led to interventions to build resilience by focusing on drought-prone regions, in line with the Growth Transformation Plan II (2015/16–2019/20) and Climate Resilient Green Economy Strategy. Youth unemployment requires urgent attention; more than 70% of the population is under age 30. Although the unemployment rate among young people ages 15–29 was low in 2013, 6.8%, the urban youth unemployment rate (23.3%) was higher than the total urban unemployment rate (16.5%). The government established a $493 million Revolving Fund for Ethiopian Youth in 2016/17 to support youth entrepreneurship and job creation.