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Thematic analysis: Structural transformation and natural resources

Authors: Admit Zerihun Wondifraw, Haile Kibret, James Wakaiga

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  • In 2013/14, Ethiopia’s economy grew by 10.3%, making the country one of Africa’s top performing economies and this strong growth is expected to continue in 2015 and 2016.
  • Owing to a co-ordinated prudent fiscal and monetary policy stance, inflation has been contained to single digits since 2013.
  • Federalism and devolution of power to the regions are paving the way to overcoming geographic and socio-economic barriers to inclusive growth and structural transformation.

The International Monetary Fund (IMF) ranks Ethiopia as among the five fastest growing economies in the world. After a decade of continuous expansion (during which real GDP growth averaged 10.8% per annum), in 2013/14 the economy grew for its 11th consecutive year posting 10.3% growth. Over the 12 months from July 2013 (the country’s fiscal year runs from July-July), all of the economy’s main sectors performed well. Agriculture (which represents 40.2% of GDP) grew by 5.4%, industry (14% of GDP) expanded by 21.2% and services (46.2% of GDP) rose by 11.9%. This positive growth should continue for the coming two years, although constraints on private sector development could slow its momentum.

Supported by a slowdown in global commodity prices, the Government of Ethiopia succeeded in containing annual consumer price inflation to 7.1% in December 2014 (down from 39.2% in 2011) by pursuing a tight monetary policy and using base money as its nominal anchor. Fiscal policy focuses on strengthening domestic resource mobilisation and reducing domestic borrowing with the goal of maintaining macroeconomic stability. A strong fiscal stance, particularly through measures to improve tax administration and enforcement, contained the fiscal deficit to 2.6% of GDP in 2013/14, although this was up from 1.9% of GDP the previous year.

Merchandise exports expanded in value by 5.6% in 2013/14, to reach USD 3.25 billion, although their GDP share decreased from 6.5% to 5.9% year on year. Imports, mainly from Europe and Asia, rose from USD 11.5 billion in 2012/13 to USD 13.7 billion in 2013/14, causing the trade deficit to deteriorate (from USD 8.4 billion to USD 10.5 billion). The effect on the overall balance of payments however remains contained, with the deficit down to USD 91.5 million in 2013/14 from minus USD 6.5 million the previous year, mainly due to a good performance in other accounts (non-factor services, private transfers and a surplus in the capital account).

Although debt as a proportion of GDP rose from 21.6% in 2012/13 to 24.3% at the close of 2013/14, the country presents a low risk of debt distress. The country faces a challenge to rebuild its foreign exchange reserves however, as these have fallen to less than two months’ import cover.

Table 1: Macroeconomic indicators

 20132014(e)2015(p)2016(p)
Real GDP growth9.810.38.58.7
Real GDP per capita growth7.27.866.2
CPI inflation13.58.199
Budget balance % GDP-1.9-2.6-1.4-0.9
Current account balance % GDP-6-8.6-5.9-7.2

Source: Data from domestic authorities; estimates (e) and projections (p) based on authors’ calculations.

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