Ethiopia Economic Outlook
Real GDP growth slowed in 2017/18, due partly to civil unrest, political uncertainty, and policy adjustments that involved fiscal consolidation to stabilize the public debt. On the supply side, GDP growth was driven by services (8.8% growth) and industry (12.2%), facilitated by the development of energy, industrial parks, and transport infrastructure. On the demand side, private consumption and investment continued to drive growth, along with the government’s stable spending on public infrastructure and strong foreign direct investment inflows.
With a public debt–to-GDP ratio of 61.8% at the end of June 2018, Ethiopia remains at high risk of debt distress, according to a 2018 debt sustainability analysis. A tax transformation program is under way to strengthen tax policy and administrative efficiency.
A reduced trade deficit and strong growth in remittances helped improve the current account deficit from 8.1% of GDP in 2016/17 to 6.0% in 2017/18. Gross official reserves remained low, at 2.5 months of imports in 2016/17 and 2.1 months in 2017/18.
Tailwinds and headwinds
Real GDP growth is projected to recover from 7.7% in 2017/18 to 8.2% in 2018/19 and 2019/20, supported by industry and service sector expansion and agricultural sector recovery. Industrial growth will be boosted by ongoing industrial zone development, and agriculture will benefit from investments in fertilizer, irrigation, and improved seeds. Public investment will remain moderate, reflecting efforts to stabilize the public debt. The impending privatization of the state-owned railway, maritime, air transport, logistics, electricity, and telecommunications sectors is expected to boost private investment and mitigate the reduction in public spending.
Ethiopia’s rising incomes, 94 million people, emerging consumer goods market, and increasing urbanization provide economic opportunities. Its export-led industrialization strategy includes developing industrial zones across the country and business enablers for energy, transport, and trade logistics. Abundant low-cost and trainable labor presents a comparative advantage in export-oriented light manufacturing, notably in leather, textiles, and agro-processing. The country’s strategic location eases access to lucrative markets in the Middle East and Europe. And investments in renewable energy will generate up to $1 billion in exports by 2020. Political reforms and normalized relations with neighboring Eritrea should boost prosperity and stabilize the region.
Political reforms implemented in the last few months led to stabilization of the Ethiopian economy and restored overall calm in the country. The reforms focused mainly on institutionalizing democracy and rule of law and expanding the political space. But these achievements are not without risks. There are disruptions of economic activities in some parts of the country, displacements of people in large numbers, and skirmishes that could affect overall economic performance in the short to the medium term.
Despite reducing the extreme poverty rate from about 46% in 1995 to 23.5% in 2016, Ethiopia still has more than 25 million poor people. Demographic dynamics and a low initial level of development make poverty reduction challenging. Promoting inclusive growth through deep structural transformation becomes essential.
Only 60% of the population has access to electricity, 65.7% of households have access to potable water, and paved road density is among the lowest in Sub-Saharan Africa. The leading exports are coffee, oil seeds, and pulses, and manufacturing accounts for less than 10% of GDP. Private sector development faces limited financial access, foreign currency shortages, and a costly and weak business regulatory environment. And frequent droughts driven by climate change have major fiscal and humanitarian consequences.