Estimated growth of 6.9% in 2011/12 made Ethiopia one of Africa's best performing economies.
The government has brought down inflation but it remains at 10.3% in February 2013.
Ethiopia does not have major natural resources and the government wants growth from industrialisation.
Ethiopia’s economy saw a ninth straight year of robust growth in 2012, which was estimated at 6.9%. The growth was broad based with an increasing role for services and industry. This momentum is expected to continue in 2013 and 2014, at a slower pace though.
In an effort to combat inflation, the government implemented a tight monetary policy stance. This measure, aided by slowdown in global food and fuel price inflation, saw consumer price inflation decelerate to 10.3% in February 2013 from 39.2% in November 2011. The government’s determination to hold down prices was further reflected in its prudent fiscal policy focusing on strengthening domestic resources and reducing domestic borrowing.
The strong fiscal stance, particularly measures to improve tax administration and enforcement, resulted in a fiscal surplus of 0.2% of gross domestic product (GDP) in 2011/12 from -1.6% the previous year. The balance of payments worsened, partly because of strong import growth relative to export growth. Between 2010/11 and 2011/12, the value of goods imports grew by 34% compared to a 15% growth in exports. Though external debt has been growing, the country will maintain a low risk of external debt distress in 2013. Rebuilding official foreign reserves is a challenge, however, as reserves have fallen to less than two months’ of import coverage.
Figure 1: Real GDP growth 2013 (East)
Table 1: Macroeconomic indicators
|Real GDP growth||11.2||6.9||6.6||6.3|
|Real GDP per capita growth||9||4.8||4.5||4.3|
|Budget balance % GDP||-1.6||0.2||0.8||1|
|Current account % GDP||-0.9||-3.4||-5.5||-7.1|
Recent Developments & Prospects
Table 2: GDP by Sector (percentage of GDP)
|Agriculture, forestry & fishing||-||-|
|Agriculture, hunting, forestry, fishing||47.5||48.8|
|Electricity, gas and water||2||1.1|
|Electricity, water and sanitation||-||-|
|Finance, insurance and social solidarity||-||-|
|Finance, real estate and business services||9.3||9.8|
|General government services||-||-|
|Gross domestic product at basic prices / factor cost||100||100|
|Public Administration & Personal Services||-||-|
|Public Administration, Education, Health & Social Work, Community, Social & Personal Services||4||3.3|
|Public administration, education, health & social work, community, social & personal services||-||-|
|Transport, storage and communication||15.9||18.7|
|Transportation, communication & information||-||-|
|Wholesale and retail trade, hotels and restaurants||5||4.3|
|Wholesale, retail trade and real estate ownership||-||-|
Ethiopia’s economic growth for 2011/12 was estimated at 6.9%, marking a ninth year of strong performance. The service sector was the main source of growth, followed by industry and agriculture, highlighting the broad base of the expansion.
The service sector was estimated to have grown by 11%, driven mainly by the rapid growth of hotels and restaurants, financial intermediation, real estate, public administration and retail businesses.
A construction boom, expansion in mining and manufacturing helped the industrial sector to grow by 13.6% in 2011/12. There are good prospects for 2013 and 2014 and the government is giving increased attention to industrial development.
With a share of about 44% of GDP, agriculture accounts for about 80% of employment and 70% of export earnings. In 2011/12 the sector grew by 5% mainly attributable to a record 23.5 million tonnes of grain production. The robust agricultural production came as a result of favourable weather conditions for cereal growing, increased access to government services for smallholders and improved yields. There has also been an expansion in use of land for crop cultivation. Yield per hectare increased from 1.7 million tonnes in 2010/11 to 1.9 million tonnes in 2011/12. The amount of land under crop cultivation increased by 0.3 million hectares in line with government efforts to intensify smallholder farming.
Vulnerability to environmental and climatic shocks, especially unreliable rainfall, remains a critical factor for Ethiopia’s agriculture. Despite improvements in yields, productivity is still very low, partly owing to limited use of improved farming practices. The Ethiopian Commodity Exchange plays a pivotal role in disseminating price information to farmers but marketing institutions and infrastructure are still weak, leading to high transaction costs. The rising price of agricultural inputs such as chemical fertiliser does not help to enhance productivity. Soil erosion in the densely populated highlands, due to over-cultivation and over-grazing of land, and limited land conservation practices continued to hold back sustained agricultural output growth. Ethiopia has seen a decline in per capita land use due to the growing population. Hence, in 2011/12 close to 4 million people were dependent on emergency food aid and another 7.7 million people were chronically food insecure.
In spite of these challenges, agriculture's potential remains enormous. Ethiopia has only cultivated 15% of its arable land potential so far and productivity is among the lowest in sub-Saharan Africa. This indicates untapped opportunities to increase production and productivity by promoting modern farming practices and putting more land under cultivation. Promoting the use of modern technology, supporting the commercialisation of agriculture and production of high value crops, encouraging micro-irrigation schemes and improving marketing and infrastructure are some of the key tools the government is pursuing to enhance agricultural production and productivity. The government’s Growth and Transformation Plan aims to overhaul the economy by radically altering the agricultural sector and boosting industry through expanded investment in the sector. The aim is to move from subsistence farming to commercially oriented, small-scale production, including for export. There are obstacles to overcome, such as security of tenure, inefficient input and output market structure, access to credit, improved extension services and promoting irrigation. Addressing property rights issues and plot fragmentation is one approach to assist in the transition from smallholder farming to commercial agriculture. There should be a greater use of co-operatives to increase the size of farms.
In the medium term, GDP growth is projected to decelerate. This is largely owing to the limited opportunities for the private sector to leverage large public investment, facilitated partly by low nominal interest rates, to further growth.
In 2012, the government pursued its prudent fiscal policy, which was co-ordinated with monetary policy to combat inflation, while maintaining high infrastructure investment. Authorities sought to increase collection of taxes and other domestic resources, reduce domestic borrowing and increase spending to help the poor, including infrastructure investment. Domestic revenue collection has been improving in past years after tax reform measures and improved tax administration. During 2011/12, tax revenue increased by 45%. Improved domestic revenue collection enabled the government to finance 83% of its expenditure from domestic revenues.
Total government expenditure as a ratio of GDP declined, due mainly to economic growth outpacing that of expenditure. However, the share of pro-poor spending in total expenditure has been rising and reached 70% in 2011/12 up from 67% the previous year. Aggregate expenditure is expected to increase in 2013 and 2014 with capital spending growing faster than recurrent expenditure to support implementing the government's economic transformation plan and achieving the United Nations' Millennium Development Goals (MDGs) as well as reaching targets for making Ethiopia a middle income economy by 2025. The strong measures to improve tax administration and collection have reduced the fiscal deficit, which is within an acceptable threshold.
Better fiscal and monetary policy co-ordination helped the government avoid the use of deficit financing during 2011/12. The central bank used alternative liquidity management mechanisms such as cash budgeting and the sale of treasury bills. An International Monetary Fund report released in October 2012 projected Ethiopia’s fiscal deficit to remain within a sustainable threshold up to 2016/17.
Ethiopia’s fiscal policy framework is flexible to accommodate revenue and external financing shocks by restraining expenditure when financing shortfalls arise. But it protects spending to help the poor, particularly basic services. Sound fiscal policies and a rapid expansion in public investment, especially in infrastructure and basic services, are expected to continue.
Table 3: Public Finances (percentage of GDP)
|Total revenue and grants||16.5||17.3||16.5||15.2||14.9||14.3|
|Total expenditure and net lending (a)||17.4||18.9||18||15||14.1||13.3|
|Wages and salaries||4.9||5.2||5.3||4.3||4.1||4|
Maintaining macroeconomic stability, particularly combating inflation, was the central aim of monetary policy during 2011/12. High inflation, contained once in 2009/10, re-emerged during 2010/11, mostly because an unexpected foreign currency buildup increased monetary expansion.
In response, the monetary authorities sought to limit money growth through the use of base money as the operating target. The central bank avoided deficit financing and a cash budget mechanism was introduced. Further, the treasury bills market was reactivated in a bid to mop up excess liquidity in the banking system. These measures to control money growth resulted in the decline of base money by 4.4%, against a target of 3.9% decline. Inflation tumbled through the year to an annual rate of 10.3% in February 2013 from 39.2% in November 2011. This was helped by a slowdown in global food and fuel price inflation.
Although government monetary policy allows for flexibility in interest rate determination (subject to a minimum deposit rate of 5%), in practice rates are rigidly set. In the high inflationary environment, this led to negative real interest rates, which limited the effectiveness of monetary policy in demand management and discouraged savings. Because of these negative real interest rates and prevailing high inflation, commercial banks are facing liquidity constraints.
Economic Cooperation, Regional Integration & Trade
Merchandise exports totaled 3.2 billion US dollars (USD), posting 15% growth from the previous fiscal year. As a share of GDP, exports decreased from 9% in 2010/11 to an estimated 7.1%. Coffee remained the leading export, accounting for 26% followed by gold 19%, oil seeds 15%, khat 8% and live animals 7%. The leading six items account for more than 80% of export earnings, indicating that diversification efforts need to be stepped up. Gold has become the second biggest export in the past two years. In 2011/12, the value of gold sales abroad reached a record high of 19% of total exports. Secondary sector exports, especially manufacturing, remain low at about 8%, but are increasing. In recent years, there has been rapid growth in non-traditional exports. Non-coffee exports rose from 40% of the total in 1997 to 73.6% in 2011/12.
The value of imports jumped to USD 11.1 billion in 2011/12 from about USD 8.3 billion the previous year. With imports rising faster than exports, the trade deficit deteriorated to USD 7.9 billion in 2011/12 from USD 5.5 billion the previous year. The overall balance of payments deficit in 2011/12 was USD 973 million compared to a surplus of USD 1.4 billion the previous year. It would have been worse had it not been for a significant increase in private and public transfers. Higher inflation has also contributed to an appreciation of the real effective exchange rate, which affects economic competitiveness.
Ethiopia is a member of regional groupings such as the Common Market for Eastern and Southern Africa (COMESA) and the Inter-Governmental Authority on Development (IGAD) and has signed all regional integration protocols, except the COMESA Free Trade Area Protocol, which only gives a 10% preferential discount to COMESA members. Ethiopia is negotiating to join the World Trade Organization (WTO) and submitted initial tariff offers on a range of commodities. It is also negotiating an economic partnership agreement with the European Union, but has not yet concluded an interim accord.
Ethiopia has streamlined its tariff structure. The minimum tariff rate on imports is zero while the maximum is 35%. There is a weighted average tariff of 9.7%. The number of tariff bands was reduced from over 30 to five as part of trade reforms. There are no minimum export price export restrictions, nor quotas. Neither export financing nor export performance requirements are applied. There are no quantitative import restrictions nor import quotas. However, strict foreign exchange control regimes administered by the National Bank of Ethiopia deter imports. Customs administration and administrative entry barriers appear to be the major non-tariff barriers affecting Ethiopia’s trade with other COMESA states. Ethiopia’s trading across borders, diversification, and trade freedom indices are among the lowest in sub-Saharan Africa. The World Bank report Doing Business identified cross border trade as an area of Ethiopia’s business climate where performance is relatively weak. Globally, Ethiopia was ranked 161st of 185 economies on the ease of trading across borders in 2012.
Table 4: Current Account (percentage of GDP)
|Exports of goods (f.o.b.)||6.1||5.2||7.6||9||7.1||6.1||5.4|
|Imports of goods (f.o.b.)||26.3||27.6||31.2||27||22.9||22.2||21.6|
|Current account balance||-4.7||-6||-4.7||-0.9||-3.4||-5.5||-7.1|
Since the debt relief granted under the Multilateral Debt Relief Initiative (MDRI) and Heavily Indebted Poor Countries (HIPC) Initiative in 2006, Ethiopia’s external debt stock has quadrupled. This is a result of a surge in public enterprises' external borrowings from non-Paris Club sources and commercial banks. In 2011/12, the external debt stock rose to USD 8.9 billion from USD 7.8 billion the previous year. During the same period, commercial banks' share of outstanding external debt rose to 30.28% from 30.26%. The share of Paris Club donors fell to 4.6% in 2011/12 from 6% in 2010/11 and 16.5% in 2007/08. This may continue in light of the government's ambitious investment agenda, which may pose risks to Ethiopia’s debt rating. Any non-concessional borrowing should be consistent with maintaining a low risk of debt distress.
The latest debt sustainability analyses show that, despite the growth in Ethiopia's external borrowing, it would remain at a low risk of external debt distress in 2013 and 2014. The vulnerability of debt burden indicators has, however, been on the rise.
Figure 2: Stock of total external debt and debt service 2013
Economic & Political Governance
Reforms to business registration and investment licensing procedures, as well as changes to regulatory institutions, have simplified rules, improved the quality of business support and considerably reduced the cost of doing business. The time required to clear customs for export and securing a business license has been substantially cut. In 2011/12, it took only 15 days to start a business involving 9 procedures, down from 46 days and 10 procedures in 2004. The World Bank report Doing Business shows a fall for investor protection. Ethiopia’s overall ranking is 127 out of 185 economies, down from 125 the previous year. On the investor protection index, it scored 4.3 out of 10 and Ethiopia ranked 112th for ease of registering property. On the World Economic Forum's Global Competitiveness index, Ethiopia ranked 121st out of 144 countries.
Among sub-Saharan countries covered by the World Bank “Investing across Sectors” indicators, Ethiopia has above average restrictions on foreign equity ownership. It imposes restrictions on foreign equity ownership in many sectors, in particular service industries. The list of prohibited sectors includes telecommunications, financial services, media, transport and retail trade.
Ethiopia's financial sector consisted of three public and 15 private banks, 14 insurance companies (one public and 13 private) and 31 microfinance institutions in 2011/12. The banking system is dominated by state-owned banks, mainly Commercial Bank of Ethiopia (CBE) whose assets represent about 70% of the sector. Public banks account for about 51% of bank branches, 55% of total capital, 64% of total deposits and 64% of outstanding bank loans. A recent directive requiring private commercial banks to invest 27% of their loan disbursements in 5-year National Bank of Ethiopia (NBE) bonds at an annual interest rate of 3%, while the minimum deposit rate is 5%, is likely to make conditions even more difficult between private and public banks.
The financial sector has a limited range of services, limited foreign participation and no capital markets.
Banking coverage stands at about 83 000 people per commercial bank branch, concentrated mainly in urban areas, making Ethiopia one of the most under-banked countries in sub-Saharan Africa. By June 2012, private credit to GDP ratio was around 13.9% compared to the average of 30% for sub-Sahara Africa. In the coming years, credit to the private sector, which is already low, will be held back as banks allocate funds towards NBE bills, following the new directives that private banks are required to invest 27% of their new loans on NBE bills. Interest rates on loans charged by private banks may also rise to compensate the loss, unless banks fully absorb the costs of the new policy. Lending is mainly collateral based and the vast majority of small entrepreneurs lack the necessary collateral.
On the money market, the government offers only a limited number of 28-day, three-month and six-month maturity treasury bills. It prohibits the interest rate from exceeding the bank deposit rate. With the yields on these T-bills set below 2%, this market remains unattractive to the private sector and thus over 95% of T-bills are held by the state-owned CBE and public enterprises. Nonetheless, the policy, regulatory and institutional frameworks for microfinance institutions are well established. There are 31 microfinance institutions helping about three million people, with ETB 10.2 billion (Ethiopian birr) in assets and ETB 7.1 billion in outstanding loans. Demand for micro-credit, however, far outstrips supply.
The government has made some efforts to improve the settlement system. Recently, the NBE launched a modern payment system and set up a centralised clearing system. A technology platform for Real Time Gross Settlements for large value payments and a centralised Automated Clearing House has also been established. A high technology New Credit Bureau has been set up and the Credit Information Center has been fully automated and upgraded.
Public Sector Management, Institutions & Reform
There has been significant progress in public financial management reforms commenced in 2002. The 2010 Public Expenditure and Financial Accountability Assessment indicated that out of 28 indicators, nine have improved and none has worsened.
In an effort to achieve effective public sector service delivery, the government has sought to revamp its management. In addition, efforts to embed accountability and integrity are underway as part of an official Good Governance Package. However, there is some way to go before a results-oriented mindset is established in the civil service. There is a high turnover of qualified staff because of the low wages. The situation is particularly critical at the regional and 'woreda' district level. Hiring and promotion is generally on merit and ethics levels in the public sector are high. But there is political interference in the civil service.
Public sector corruption is not considered pervasive. Anti-corruption campaigns are intensifying and courts have sentenced a large number of government officials. However, the Heritage Foundation's 2012 Index of Economic Freedom put Ethiopia 118th out of 183 countries on freedom from corruption. According to Transparency International, Ethiopia ranked 120th in 2011 compared to 116 in 2010.
Ethiopia's regulatory system is generally considered fair. Secured interests in property are protected and enforced. Investment, business, and other licenses can be obtained from the Ethiopian Investment Agency in a matter of hours. Proposed national laws are generally circulated for public comment prior to enactment. Property and contractual rights are recognised and there are commercial and bankruptcy laws. Although there are efforts to strengthen capacity, Ethiopia's judicial system is overburdened, poorly staffed, and inexperienced in commercial matters. There is significant government influence and intervention in legal proceedings, particularly those related to government entities or officials. The pervasive presence of state and ruling party-owned businesses distort the perception of private ownership of property and erodes policy credibility.
The state has a generally good record on protecting people from crime and violence. The 2013 Global Competitiveness Report judged crime and theft as the least problematic factor for doing business in Ethiopia. It was ranked 22nd out of 144 countries for the cost of crime and violence and 24th for organised crime.
Natural Resource Management & Environment
Ethiopia’s ecological system is very fragile and vulnerable to climate change, in part due to stress on natural resources. The key challenges include soil degradation, deforestation and loss of biodiversity, besides weak environmental management and enforcement capacity.
The legal, policy and institutional framework on environment, water, forests, climate-change and biodiversity is adequate and sound. Policies are implemented at federal, regional and district level. The government's growth and transformation plan recognises the nexus between poverty and the environment, and gave priority to the environment for sustainable development. The enactment of environmental laws at federal and regional level has strengthened the legal framework on environmental issues.
The government has sought to mainstream environment issues in the development process, through its Community Based Participatory Watershed Development and Sustainable Land Management programmes. A green economy strategy, Climate Resilient Green Economy, was launched in 2011, addressing climate change adaptation and mitigation, while pursuing the goals of economic growth, zero net emissions and building resilience. The Climate Resilient Green Economy Facility was launched in September 2012, to support the government's vision of becoming a middle income economy with low carbon growth by 2025.
Prime Minister Meles Zenawi died in August 2012 and there has been a transition to new leader Desalegn Hailemariam. But Ethiopia’s political situation had already changed since a crisis after elections in 2005. An election in 2010 which gave the Ethiopian People’s Revolutionary Democratic Front (EPRDF) a majority in the Federal House of parliament was largely peaceful. However, the opposition says there has been a narrowing of the democratic and political space. The EPRDF has guarded its position using restrictive laws governing the media, civil society and political funding.
Ethiopia is in a volatile region with significant security and political stability concerns. A border conflict with Eritrea remains unresolved though an outright conflict with Eritrea remains improbable. Conflict in neighbouring Somalia poses immediate security challenges. The government has taken a measured diplomatic approach to tensions between Sudan and South Sudan.
Ethiopia is going through a smooth political transition following the election of Desalegn Hailemariam as prime minister. He is likely to face challenges sustaining the system built up by his predecessor. The Arab Spring events demonstrate how quickly stability can change, and how much that stability depends on meaningful progress in economic opportunity, democracy and social accountability. These latter two areas have generally been lacking throughout Ethiopia’s history.
Thematic analysis: Structural transformation and natural resources
Ethiopia’s basic natural resources are its people and its agriculture. Ethiopia has a young population, great biodiversity and distinctive ecosystems. With 18 major agro-ecological zones, more than 146 different crops can be grown and nearly half of the potentially cultivable land is still available. In addition, the number of livestock, including cattle, in Ethiopia is one of the highest in Africa. Agriculture accounts for almost 40% of Ethiopia’s GDP and 83% of employment. Livestock, with better management of grazing lands and breeding, has significant potential.
The country has never had major forestry and fishing industries and minerals account for less than one percent of GDP. Only gold is of significance. It earned the country about USD 1.7 billion in 2012. A recent survey increased estimates of gold reserves to 500 tons. The government estimated that production could rise to 40 tons a year from just over four tons in 2012. Ethiopia also has gemstones such as diamonds and sapphires; industrial minerals including potash; and other precious and base metals. Development of these resources is a cornerstone of the government's export-oriented growth strategy and means there is less reliance on agriculture for diversifying the economy. Ethiopia has licensed 250 foreign firms to prospect for minerals.
Furthermore, Ethiopia could have significant energy resources, including biomass, water, natural gas and other fossil fuels, geothermal and solar energy. Ethiopia's largest renewable energy resource is hydropower. The gross hydro-energy potential is estimated at 650 Terawatt hours (Twh) per year, of which 25% is exploitable for power. Studies on domestic fossil fuel resources have confirmed the existence of about 2.7 million cubic feet of commercial quantities of natural gas. More than 100 megawatts (MW) of geothermal power has been discovered. Total geothermal-based electricity generation capacity is estimated at 700 MW. Solar energy and wind resources are other potential sources of energy in Ethiopia. The total solar radiation reaching the territory is about 2.3 million Twh per year. Few coal deposits have been found.
On the one hand, soil erosion, overgrazing, and deforestation have seriously damaged Ethiopia's plateau region, endangering valuable agricultural productivity. On the other hand, natural mineral resources have been under-exploited.
Ethiopia's double digit economic growth over the past eight years has defied standard thinking that it should significantly reduce reliance on agriculture. The share of agriculture in GDP has fallen from 46% in 2003/04 to 40% in 2010/11, but the share of industry, including manufacturing, has also declined marginally. The share of the service sector has increased by the decline in agriculture. There is no sign of positive structural transformation of the economy.
Services are the major source of growth, rather than agriculture. This unintended structural transformation does not generate the foreign exchange which is required to sustain recent high growth levels and poverty reduction. The lack of transformation from agriculture to industry is also mirrored by the structure of trade and the population. Ethiopia’s exports are still dominated by primary commodities. The economy largely depends on this sector for foreign exchange. Urban dwellers make up less than 20% of the population.
The government's development strategy has played a key role in this economic state of affairs. The government's Agricultural Development Led Industrialization strategy assumes that industrialisation, and with it urbanisation, will come naturally from the rapid development of the agricultural sector. Yet, Ethiopian agriculture remains stubbornly low input, low value, subsistence oriented and subject to frequent climatic shocks. It cannot generate the desperately needed rural transformation. The government has now launched a strategy to change the source of growth, or at least to lay the foundation for a positive structural transformation. It seeks an economy that has modern technology with the industrial sector playing a leading role. Expanding industry could help other sectors, particularly agriculture. Efforts are being concentrated on the industrial sector through a comprehensive industrial development policy and incentive packages. By 2015, the government projects the share of the industrial sector to reach 19% of GDP, from the current 13%.