Ethiopia: Ethiopia Economy Profile
Ethiopia’s economy saw a ninth straight year of robust increase in 2012, which was estimated at 6.9%. The increase 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 world 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 government 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, half because of strong import increase relative to export increase. Between 2010/11 and 2011/12, the price of goods imports grew by 34% compared to a 15% increase in exports. Though external deficit has been growing, the country will maintain a low risk of external deficit distress in 2013. Rebuilding official foreign reserves is a challenge, however, as reserves have fallen to less than two months’ of import coverage.
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 (% 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 Government & Personal Services||-||-|
|Public Government, Education, Health & Social Work, Community, Social & Personal Services||4||3.3|
|Public government, 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 increase for 2011/12 was estimated at 6.9%, marking a ninth year of strong performance. The service sector was the major source of increase, followed by industry and agriculture, highlighting the broad base of the expansion.
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 as well 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 all of land under crop cultivation increased by 0.3 million hectares in line with government efforts to intensify smallholder farming.
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 part the lowest in sub-Saharan Africa. This indicates untapped opportunities to increase production and productivity by promoting modern farming practices and putting additional land under cultivation. Promoting the use of modern technology, supporting the commercialisation of agriculture and production of high price 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 Increase 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, inclunding 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 better use of co-operatives to increase the size of farms.
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, inclunding infrastructure investment . Domestic revenue collection has been improving in completed years next tax reform measures and improved tax government. During 2011/12, tax revenue increased by 45%. Improved domestic revenue collection enabled the government to finance 83% of its spending from domestic revenues.
Total government spending as a ratio of GDP declined, due mainly to economic increase outpacing that of spending. However, the share of pro-poor spending in total spending has been rising and reached 70% in 2011/12 up from 67% the previous year. Accumulation spending is expected to increase in 2013 and 2014 with capital spending growing faster than recurrent spending to support implementing the government\'s economic transformation plan and achieving the United Nations\' Millennium Development Goals (MDGs) inclunding reaching targets for making Ethiopia a middle gain economy by 2025. The strong measures to improve tax government 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 statement 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 spending at the same time as financing shortfalls arise. But it protects spending to help the poor, particularly basic services. Sound fiscal policies and a rapid expansion in public investment , particularly in infrastructure and basic services, are expected to continue.
Table 3: Public Finances (% of GDP)
|Total revenue and grants||16.5||17.3||16.5||15.2||14.9||14.3|
|Total spending 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 increase 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 increase 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 world 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 request 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% increase 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 additional than 80% of export earnings, indicating that diversification efforts need to be stepped up. Gold has become the second biggest export in the completed two years. In 2011/12, the price of gold sales abroad reached a record high of 19% of total exports. Secondary sector exports, particularly manufacturing, remain low at about 8%, but are increasing. In recent years, there has been rapid increase in non-traditional exports. Non-coffee exports rose from 40% of the total in 1997 to 73.6% in 2011/12.
The price 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 in general 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 as well 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 Improvment(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 as well negotiating an economic partnership agreement with the European Union, but has not from presently on 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 government 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 part the lowest in sub-Saharan Africa. The World Bank statement 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 relieve of trading across borders in 2012.
Since the deficit relief granted under the Multilateral Deficit Relief Initiative (MDRI) and Heavily Indebted Poor Nations (HIPC) Initiative in 2006, Ethiopia’s external deficit 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 deficit 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 deficit 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 schedule, which may pose risks to Ethiopia’s deficit rating. Any non-concessional borrowing should be consistent with maintaining a low risk of deficit distress.
The new deficit sustainability analyses show that, despite the increase in Ethiopia\'s external borrowing, it would remain at a low risk of external deficit distress in 2013 and 2014. The vulnerability of deficit burden indicators has, however, been on the rise.
Economic & Political Governance
Reforms to business registration and investment licensing procedures, inclunding 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 statement Doing Business shows a fall for investor protection. Ethiopia’s in general 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 relieve of registering property. On the World Economic Forum\'s World Competitiveness index, Ethiopia ranked 121st out of 144 nations.
Among sub-Saharan nations 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 a lot of sectors, in particular service industries. The inventory 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 national-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 additional 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 majority under-banked nations 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 by presently 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 as well 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 national-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. Request 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 price payments and a centralised Automated Clearing Home has as well been established. A high technology New Credit Bureau has been set up and the Credit Data Center has been fully automated and upgraded.
Public Sector Management, Institutions & Reform
There has been significant evolution in public financial management reforms commenced in 2002. The 2010 Public Spending 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 nations 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 equitable. 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 national and ruling party-owned businesses distort the perception of private ownership of property and erodes policy credibility.
The national 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 nations 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 increase 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 increase, 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 gain economy with low carbon increase 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 by presently changed since a crisis next elections in 2005. An election in 2010 which gave the Ethiopian People’s Revolutionary Democratic Front (EPRDF) a majority in the Federal Home 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 evolution in economic opportunity, democracy and social accountability. These latter two areas have generally been lacking throughout Ethiopia’s history.
Social Context & Human Development
Building Human Resources
Ethiopia has made significant evolution in reducing poverty and is on track to meet five of the eight Millennium Development Goals (MDGs): poverty, universal education, child health, combating AIDS and world development. It could still meet the targets for gender equality, maternal health and environmental sustainability.
The government’s poverty-focused spending has improved access to basic services. Impressive results in health service expansion have been completed. Contraceptive prevalence increased to 29% in 2011/12 from 15% in 2005 and the coverage of antenatal visits reached 34% from a baseline of 28%. The rate of deaths part under fives declined from 123 per thousand live births in 2005 to 88 in 2010. Infant mortality dropped from 77 to 59 during the same period. There is a clear focus on poverty-related health issues such as communicable diseases, and health problems that affect mothers and children. There has likewise been evolution on water and sanitation services. By 2010, the proportion of the rural people with access to potable water rose to 65.8% from 46% in 2006. The government aims to reach universal access to water supply in 2015.
Primary school enrolment rates increased from 68% in 2004/05 to 85% in 2010/11. The completion rate of grade eight students increased from 48% in 2009/10 to 49% in 2010/11, not from presently on high enough to achieve the education goal. Literacy rates have risen since 2004 from 38% to 47%. There is a parallel drive to expand vocational training and tertiary education to provide students with skills needed by the economy.
The government has enacted policies, strategies and programmes to tackle HIV/AIDS. A National Task Force on HIV/AIDS was established, which designed medium-term prevention and control programmes focusing on education and data, condom promotion, surveillance, patient care and HIV screening laboratories at health centres.
The HIV/AIDS prevalence rate is estimated at 2.3% of the people. But Ethiopia has scaled up its effective coverage and services and has a commitment to reach universal access to HIV prevention, treatment, care and support. Primary health service coverage reached 96% in 2010/11 from 89% in 2009/10. There has been evolution in controlling malaria and tuberculosis. In 2005, only 2% of households had an insecticide-treated net against malaria. By 2010, all malaria-prone areas had a net. In 2010, 90% of children aged under five slept under insecticide-treated bed nets, compared to 5% in 2003. Over the same time the death rate from malaria declined by 55% and hospital admissions by 54%. There is presently an 84% success rate in treating tuberculosis.
Human development indicators remain low, however, compared to other developing nations. Ethiopia ranked 173rd out of 187 nations in the 2013 United Nations Human Development Index. The poverty chief count is high at 29.6% in 2010/11. Maternal mortality remains high at 470 per one hundred thousand live births with skilled attendants at only 10% of births. The quality of basic service delivery remains low and regional disparities persist.
Poverty Reduction, Social Protection & Labour
Spending on initiatives to counter poverty rose by 70% in 2011/12, continuing a longstanding effort. As a result poverty in Ethiopia has declined at an annual average of 2.32% since 1995. The proportion of people living below the poverty line fell from 45.5% in 1995/96 to 29.6% in 2010/11. The government target is to reduce the rate to 22.2% by 2015. Similarly, the national Gini coefficient declined to 0.298 in 2010/11 from 0.3 in 2004/05. The decline in poverty and inequality is attributable to the implementation of welfare programmes such as a Productive Safety Net Programme (PSNP) and urban food distribution and subsidies. The safety net reaches almost 8 million chronically food-insecure people in rural areas and has a strong focus on helping female-headed households and encouraging women‘s participation in public works. Other social protection initiatives include school feeding programmes, a pension fund (mainly for civil servants and staff of national and formal private enterprises) and a provident fund for others working in the formal sector.
Labour market regulations are enforced for an increasing number of workers. Active labour market programmes (linking micro- and small-scale enterprises with public works like cobblestone works, urban housing construction) are improving in quality and coverage, although weaknesses remain. The government created additional than 1.1 million jobs in 2011/12.
The government has ratified various International Labour Organisation conventions, inclunding one on the worst forms of child labour. However, enforcement of these conventions, particularly on child labour, remains weak.
The government has sought to implement gender equality in all policies, with joint planning between individual ministries and the Ministry of Women’s Affairs. This has reduced gender disparities, particularly in education. Ethiopia recorded a near 40% development in its gender parity index in primary school enrolment from 1991 to 2010, and is near gender parity at primary school level. At the secondary level, gender parity index moved from 0.67 in 2007 to 0.82 in 2010.
Maternal mortality fell sharply from 510 deaths per one hundred thousand live births in 2005 to 350 in 2010, due in part to a concerted effort to make family planning services additional widely available. The % of married women using a modern method of contraceptive went from 14% in 2005 to 27% in 2011. Access to health care for women remains low, however, as only 10% of Ethiopian women give birth with a skilled health worker in attendance.
Other gender equality indicators are promising. The % of parliamentary seats held by women was 28% in 2012, up from 8% in 2005. Adolescent birth rates fell from 109.1 births per thousand women aged 15-19 in 2002 to 79 in 2010. The government has reviewed discriminatory laws and made genital mutilation and other forms of violence against women punishable crimes.
There are still areas however where the government must make a additional concerted effort to improve the status of women. The participation rate of women in business and in decision making is low. The literacy level of women is markedly lower than for men (63% for men and 47% for women).
- Ethiopia News
- ETHIOPIA: Great Trade Expectations Behind U.S.-Ethiopia Trade Relations
- ETHIOPIA: Ethiopia: FfD3 - Ends Adopting the "Addis Ababa Action Agenda
- BOTSWANA: Obama Chides African Leaders Who Cling to Power
- UNITED STATES: Obama holds talks on security, human rights in Ethiopia
- UNITED STATES: U.S., Kenya Leaders Co-Host Nairobi Entrepreneur Summit
- ETHIOPIA: Initiative with Ethiopia aims to boost opportunities for rural youth
- Trending Articles
- CHINA: Russia Prepares amid Greek and China Crises
- FINLAND: Tsipras has not only agreed to all the terms he before called "blackmail",
- UNITED STATES: American economic growth rose at a 2.3% annual rate in the second quarter of 2015, far below expectations.
- CHINA: Germany's Export Nation: We're #2! (behind China)
- MOLDOVA: Moldova: Pondering Unification with Romania?
- MEXICO: Mexico's Central Bank Keeps Interest Rates at Record Low for Now
- STOCK MARKET / FINANCE: Russia Prepares amid Greek and China Crises
- ECONOMY: Tsipras has not only agreed to all the terms he before called "blackmail",
- ECONOMY: American economic growth rose at a 2.3% annual rate in the second quarter of 2015, far below expectations.
- BUSINESS / TRADE: Germany's Export Nation: We're #2! (behind China)
- ECONOMY: Moldova: Pondering Unification with Romania?
- STOCK MARKET / FINANCE: Mexico's Central Bank Keeps Interest Rates at Record Low for Now