Economic Analysis
Ethiopia

Ethiopia

Population 94.1 million
GDP per capita 853 US$
C
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth * (%) 10.1 7.7 7.5 7.2
Inflation (yearly average, %) 10.9 13.9 15.4 13.2
Budget balance * (% GDP) -3.2 -3.0 -2.8 -3.1
Current account balance * (% GDP) -8.0 -6.2 -6.2 -5.8
Public debt * (% GDP) 56.8 58.5 59.4 59.6

(e): Estimate. (f): Forecast. *Fiscal year from 8th July - 7th July. 2020ata: FY19/20.

STRENGTHS

  • Remarkable track record of growth and poverty reduction
  • Public investment in infrastructure development
  • Drive to diversify the economy
  • Strong hydropower potential
  • Warmer relations with Eritrea

WEAKNESSES

  • Vulnerable to weather conditions and changes in world commodity prices
  • Landlocked country
  • Low foreign exchange reserves
  • Persistent challenges in the business and governance environment
  • Unstable regional context and strong ethno-political tensions

Risk assessment

A robust growth put to the test

Growth should remain robust in 2020, supported by projects under the second Growth and Transformation Plan (2015/2020). Public investment and consumption are expected to remain important drivers of activity, particularly in construction. Projects to extend the road and rail networks, establish special economic zones and build hydroelectric dams, including the Renaissance dam on the Nile, will be given priority. While public spending is expected to remain high in the run-up to the 2020 elections, a more prudent stance is likely to reduce the contribution from these drivers. This should be partially offset by private investment, which will be encouraged by strong momentum in reforms, including privatisations in the telecommunications, agriculture (sugar industry) and transport sectors. Domestic political instability, particularly in the lead-up to the elections, however, could fuel investor caution. The trade balance is expected to contribute to growth, mainly through increased exports of services, which will be driven by an expansion in Ethiopian Airlines' passenger and cargo traffic volumes. However, the unfavourable external environment and the likely weak growth in goods exports, which continue to be dominated by agriculture despite the government's efforts to diversify and boost foreign trade, will continue to limit the contribution from the trade balance. High inflation and unemployment, limited access to foreign exchange and poor agricultural performances in 2019 are expected to affect the contribution of private consumption in 2020.

 

Risk of debt distress and external imbalances

In 2019/2020, prudence should prevail again, resulting in an almost unchanged budget deficit. As a result, the spending increase is expected to be the lowest in many years. The priority will continue to be capital investment spending (54% of federal spending). However, current expenditure is expected to increase more rapidly, due to the rising cost of debt service, the cost of organising the 2020 elections and the increase in education and defence spending. In addition to privatisation proceeds, revenues are set to benefit from efforts to improve resource mobilisation, although progress in this area will probably remain limited. The deficit should be financed by a variety of domestic (commercial banks, central bank and pension funds) and external sources. External financing should favour multilateral creditors, since the authorities have undertaken to slow down commercial borrowing. These loans, which are responsible for the growing risk of debt distress, were contracted with private creditors (about 25% of external debt) and non-Paris Club bilateral creditors (about 30%), mainly China. The trajectory of this debt, which is mainly denominated in foreign currencies, will remain vulnerable to birr depreciation, although the risk is mitigated by the debt’s average maturity (almost 15 years).

Burdened by a substantial trade deficit, the current account deficit is expected to remain large. However, it should narrow slightly because of a smaller import bill owing to lower oil prices and cooler demand for capital goods. The activity of Ethiopian Airlines will contribute to reducing the service deficit. Interest payments on external debt are expected to widen the income deficit. The less favourable external environment could affect remittances and, thus, erode the transfer surplus. While FDI will finance a large part of the current account balance, official loans are likely to remain necessary. The current account deficit is expected to put pressure on the birr, which will continue its gradual depreciation. Foreign exchange reserves, which cover about two months of imports, will remain low, maintaining the chronic foreign currency shortage. In 2019, the central bank announced its intention to liberalise the regime gradually. Although still hypothetical, a reform might ease the pressure but would stoke higher inflation.

 

Growing instability in the run-up to the 2020 elections

In April 2018, the Ethiopian Peoples’ Revolutionary Democratic Front, the coalition in power since 1991, appointed Abiy Ahmed to be Prime Minister. He soon distinguished himself with his desire to liberalise the country, both economically and politically. His time in office has already brought reconciliation with Eritrea, earning him the Nobel Peace Prize. However, despite his release of political prisoners and decision to lift the state of emergency, ethno-political tensions and inter-community violence remain a source of social instability and security threats, as evidenced by bloody protests against the Prime Minister in October (more than 80 people died), or the referendum on the independence of the Sidama people held on November 20, 2019. In this setting, the May 2020 general elections could potentially feature unrest. Challenges to his authority could change his willingness to pursue reforms, including economic ones. Prime Minister Ahmed has also focused on improving the business climate, which suffers, among other things, from infrastructure bottlenecks and difficulties in accessing finance. At the international level, while the desire for reform is attracting the support of the international community, the dispute over the construction of the Renaissance dam remains a source of tension with Egypt and Sudan.

 

Last update: February 2020

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