Africa > East Africa > Ethiopia > Ethiopia Outlook for 2015-17

Ethiopia: Ethiopia Outlook for 2015-17


Ethiopia is situated in Eastern Africa, west of Somalia.
It has borders with Djibouti for 349km, Eritrea for 912km, Kenya for 861km, Sudan for 1606km and Somalia for 1600km.
Land in Ethiopia is high plateau with central mountain range divided by Great Rift Valley.
Climate: tropical monsoon with wide topographic-induced variation.mali, Arabic, other local languages, English (major foreign language taught in schools).


 Ethiopia continues to record robust growth. However, the state-led development model is constraining the private sector and has resulted, from time to time, in macroeconomic imbalances, and therefore seems unsustainable in the long term.

Ethiopia, located in Eastern Africa, is the most populous landlocked country worldwide and the second most populous country in Africa. The economy is agriculture based, despite some diversification in recent years. The degree of modernization in agriculture is low, so the economy is highly susceptible to weather conditions. Ethiopia has a history of frequent droughts leading to famine. Large hydropower capacity makes Ethiopia the largest energy supplier in East Africa.

The country’s most important trade partner is China. However, neighbour Djibouti is a particularly important business partner, as it gives Ethiopia access to the sea. Ethiopia’s economy is dominated by the state and is relatively closed, since authorities restrict private and/or foreign participation in many sectors. Prioritizing pro-poor spending has led to marked improvement of human development.

For example, poverty almost halved between 2005 and 2011 and the country is one of the few African states with a social assistance programme. Ethiopia is one of the oldest countries in the world (2000 years) and the only African country that maintained independence from colonial rule, bar 4 years of occupation by the Italians. The country became a multiparty democracy in 1991, but it is a de facto one-party state dominated by the Ethiopian People's Revolutionary Democratic Front (EPRDF). Prime minister Meles Zenawi ruled the country for 21 years, before dying in August 2012.

The oppression of opposition and dissent intensified after improved results for the opposition in the 2005 elections led to protests. Security risks are particularly high in Ethiopia, stemming from conflicts in neighbouring Somalia, South Sudan and Sudan, the post-war border conflict with Eritrea and domestic secessionist groups.

Strengths (+) and weaknesses (-)

(+) Regional geopolitical importance

Ethiopia plays an important role in maintaining stability in the Horn of Africa. Being an important partner to the West, especially the US, Ethiopia receives financial assistance on a structural basis.

(-) Narrow economic base

Agriculture accounts for 50% of GDP, 75% of employment and more than 80% of exports. Hence, the economy is very susceptible to volatility on global commodity markets and to weather patterns.

(-) Unsustainable economic model

Ethiopia’s state-led development economic model is not sustainable in the long term, as financing by the central bank leads to macroeconomic instability and hinders private sector development.

(-) Poor development

Despite progress in recent decades, human development is very poor. Against this background, episodes of double digit inflation that erode purchasing power significantly could spark social turmoil.
Key developments

1. Economic growth slows, though still robust, and inflation is down to single digits

After a decade of very strong performance (9% average economic growth), economic growth slowed down somewhat, but remained nevertheless relatively high. In 2013, economic growth decreased to 7.1%, from 8.5% in 2012, driven down by a marked slowdown in gross fixed investments. Ethiopia’s economic policy is based on a 5-year Growth and Transformation Plan (GTP), which envisages improvements in infrastructure, human development and agricultural productivity through public support. The large public investments (19% of GDP, third highest in the world) are largely financed domestically, including through compulsory financing by commercial banks and direct financing by the central bank. These high investment levels led to very strong domestic demand, which on its turn fuelled inflation, with consumer price inflation reaching 40% in August 2011, and increased FX demand. FX restrictions are in place to prioritize public demand. Furthermore, private sector investment has been crowded out and private sector development in general has been hampered. Tighter monetary policy, in the form of less monetary financing, aided by lower prices for food and imported fuel, brought down the inflation to single digits in 2013.

In 2013, foreign exchange (FX) reserves increased after shortages were reported in late 2012. Looking forward, the economy is likely to grow by roughly 7%. Just like in 2013, growth will be supported by good performance in agriculture, as government programmes and infrastructure development stimulate investment and shift subsistence farmers into commercial farming. However, risks are tilted to the downside, as agriculture remains susceptible to weather conditions. Besides, lack of external financing could slow down infrastructure development or result in more financing by the central bank (already reported in 2H2013), which could once again fuel macroeconomic imbalances.

2. Fiscal and external imbalances increase

Ethiopia’s ambitious public investment plan has also increased pressure on the country’s fiscal and external position. In 2013, the budget deficit increased from 2.8% of GDP in 2012 to 3.3% of GDP and public debt increased from 42% in 2012 to 48% of GDP. While net transfers remained strong at 12% of GDP thank to remittances from the Ethiopian diaspora and donor assistance, the current account deficit also deteriorated, from 7.2% of GDP in 2012 to 9.8% of GDP in 2013. As FDI is moderate (2% of GDP in 2013), Ethiopia relies on debt financing to cover the shortfall. Financing has been provided mainly by official creditors; in recent years, such financing came especially from China. Besides, the critically low level of FX reserves - just under 3 months of imports - makes the country highly vulnerable to a deterioration of the current or capital account balances. External debt is mainly public (at least 95% of it). Its favourable structure, 95% is medium to long term and 76% owed to official creditors, provides some comfort, but the strong increase of the debt burden in recent years is concerning. Indeed, external debt in 2013 was 30% of GDP, twice the level of 2006. The fact that the three international rating agencies have for the first time extended a sovereign rating to Ethiopia has widened access to international markets, which might contribute to a further deterioration of the balances. In 2014, the current account deficit is forecast at 11% of GDP and the public deficit at 3.4% of GDP. All in all, the government’s infrastructure plans are set to further hurt external and fiscal balances. However, the still relatively low levels of both external and public debt provide some comfort.

3. Regional tensions around the Renaissance Dam

The ambitious targets of the GTP have also increased regional tensions. Ethiopia’s goal to quadruple energy capacity to 10,000mw relies on the construction of the Renaissance Dam on the Blue Nile, with a capacity of 6000mw. Construction of the dam started in 2011 and the project was around 25% complete in late 2013. However, it has led to tensions with downstream located Egypt, which relies on the river for 98% of its fresh water needs and 10% of its energy supply, and which held the rights to use most of the water and to veto upstream projects according to colonial agreements. Egypt claims that the dam will seriously affect the volume of Nile water reaching its territory and has therefore opposed its construction. Violent rhetoric by former Egyptian president Morsi was replaced by a more cooperative approach by the current regime, but tensions between the two countries remain high. Though Egypt’s international diplomatic efforts against the construction of the dam could lead to delays in its completion, the tensions between the two countries are not expected to result in violence.

4. Political environment remains stable

The death of prime minister Zenawi in 2012, after he had been in office for 21 years, raised concerns about destabilising political infighting or other tensions. However, events so far indicate that the political environment has remained stable. Protests could become more frequent ahead of elections in 2015, but are not expected to pose a threat to stability.


The Central Bank, the National Bank of Ethiopia, has a monopoly on all foreign exchange transactions and supervises all foreign exchange payments and remittances. By June 2011 the private credit to GDP ratio for Ethiopia was around 9% compared with the average of 30% for sub-Saharan Africa. The financial sector has recently been experiencing a reversal of financial deepening. The broad money to GDP ratio declined from 27 % in 2007-2008 to 25 % in 2008-2009, while the ratio of domestic credit to GDP decreased from 32 % to 27 % over the same period.

Negative real interest rates (stemming from high inflation and low deposit rates), high reserve money increase, bank-by-bank credit ceilings, and a lack of competition in the banking sector have contributed to the economy's continued demonetization in recent years, which is posing increasing risks to financial stability. Authorities have made commitments to promote monetization, improve liquidity management and achieve positive real interest rates in the financial sector, but reversing demonetization remains a major challenge.

Ethiopia's banking sector included 16 commercial banks in 2012. While the national has recently allowed the local private sector to participate in banking which brought about a rapid expansion of private banks, foreign ownership and branch operations remain strictly barred. Private banks have generally outperformed their national-owned counterparts and their market share of resource mobilization exceeds that of public banks, with market share of loan collections and deposits rising to 49 % and 52 % in 2007-2008.

However, the share of new loans disbursements controlled by private banks for the same period decreased, and stood at 43.3 % in 2007-2008. The banking sector as a whole, while remaining relatively sound, is characterized by excess liquidity. Non-performing loan ratio standing at 1.8 % as of March 2012 appears unusually low, particularly given the strong domestic credit expansion.

The microfinance sector is relatively well developed but not strictly supervised. At last count about 31 MFIs, reaching 2.4 million people, operated in the country and have become a major source of financial services to a lot of farmers and businesses. Some unlicensed NGOs are as well active in the delivery of microfinance services through informal channels.

The non-banking sector remains largely undeveloped, except for 16 insurance companies with about 190 branches across the country.

Mobile banking is an underserved sector with strong increase potential. Very low cell phone penetration has prevented the rapid development of mobile banking, which has taken place elsewhere in Africa. However, the mobile phone industry has just started to discover Ethiopia as a relatively large, untapped market. A number of operators are thus preparing to launch, or have by presently launched, payment and transaction systems supported by mobile technology.

Capital markets are in their early stages of development. While no stock market is present the Ethiopia, a Commodity Exchange (ECX) was opened in 2008, trading coffee, sesame, haricot beans, wheat and maize. The interbank money market, established in 2001, is poorly developed and largely illiquid, featuring only a few participants and small transaction volumes. Authorities are currently working on a strategy to develop capital markets in the country through the Financial Sector Capacity Building Project.

The fixed gain market is fairly limited and prevailing negative real interest rates have adversely affected the request for securities. While 28 day, 3-month and 6-month Treasury bills are regularly issued, there is no formal government bond market, with bonds irregularly issued for specific purposes only. As of March 2013 Ethiopia received no sovereign rating from any of the major credit rating agencies. The market is largely dominated by government securities and corporate issuance of deficit instruments is very low, although a few large public enterprises have recently issued a series of corporate bonds. At present, there are no intermediaries operating on either the primary or secondary market; securities, once purchased, are kept until maturity. While foreign investors can access Ethiopian markets, participation is low given that current laws restrict foreign investments in government securities. Aside from trading on the ECX the derivatives market is limited, with no interest rate or currency derivatives available.


Outlook for 2015-17

  • Hailemariam Desalegn will continue to seek to hold together the ruling coalition\\\'s multi-ethnic framework, although this has the potential to prompt a backlash from the traditionally dominant Tigrayan faction.
  • Ethiopia\\\'s engagement with regional affairs is likely to be bolstered by a series of crossborder infrastructure projects, and in the short term Mr Hailemariam\\\'s appointment as chairman of the African Union.
  • The government is likely to be forced into a additional market-oriented economic policy, inclunding permitting foreign participation in some currently protected sectors, during the estimate period as it runs out of finance for its ambitious development plans.
  • The Economist Intelligence Unit forecasts that real GDP increase will average 7% annually in 2013-17 as the dominant agricultural sector performs well, electricity supply improves and export request picks up.
  • The pattern of gradual currency depreciation and intermittent larger adjust‑ments adopted by the central bank will continue. We estimate a depreciation from an estimated Birr17.70:US$1 in 2012 to Birr24.50:US$1 by 2017.
  • We expect aid to dip in the run-up to the 2015 elections, raising the current-account deficit to 8.5% of GDP in that year, before it narrows during the remainder of the estimate period to 7.2% of GDP in 2017.


  • In May Ethiopian police arrested additional than a dozen people, inclunding high-level officials, on corruption charges. This constitutes the majority high-profile crackdown on graft in additional than a decade.
  • Ethiopia has stated that it is prepared for direct negotiations with Eritrea, but a thaw in relations remains unlikely, as neither is willing to compromise on the issue of Badme.
  • Ethiopia\\\'s ranking in the new Human Development Statement remains poor, despite substantial evolution in a number of areas, because evolution is being made from a very low base.
  • March reports of a commercial-grade oil discovery in South Omo have been described as premature by both the government and UK-based Tullow, the oil company concerned.
  • Donor funding should allow the construction of a power line facilitating energy exports to Kenya and beyond to commence in September.
  • The National Bank of Ethiopia (the central bank) has announced a sharp rise in paid-up capital requirements for insurance firms, bringing the Ethiopian market additional into line with regional norms.
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