Focus on Ethiopia’s economy Drivers as 7.3% Growth Expected

The economy of Ethiopia is expected to continue growing in the coming two years a recent report has indicated. The report launched in Addis Ababa projected that economic growth in Ethiopia is expected to increase to 7.3 percent and 7.5 percent in 2018 and 2019 respectively.

Fiscal stimulus, foreign investment in infrastructure and manufacturing, diversification of the economy and strong internal demand will continue to support the growth.

In 2017, the Ethiopian economy showed strong resilience amid continued weak global prices for Ethiopia’s key exports, and there was the re-emergence of drought conditions in parts of the country.

According to the report, Ethiopia’s economy leads growth in East Africa, supported by infrastructure investment and improving business environment.

Strong private consumption, increase in investments and government expenditure on infrastructure are the main drivers of the Ethiopian economic performance.

In terms of structure, the economy is still dominated by the service sector followed by Agriculture; the latter is shrinking while the industrial sector is expanding.

Being the second most populous country in Africa  and  a one-party state with a planned economy, Ethiopia For more than a decade before 2016, grew at a rate between 8% and 11% annually. It remains one of the fastest growing states among the 188 IMF member countries. This growth was driven by government investment in infrastructure, as well as sustained progress in the agricultural and service sectors. More than 70% of Ethiopia’s population is still employed in the agricultural sector, but services have surpassed agriculture as the principal source of GDP.

Ethiopia has the lowest level of income-inequality in Africa and one of the lowest in the world, with a Gini coefficient comparable to that of the Scandinavian countries. Yet despite progress toward eliminating extreme poverty  the  country remains one of the poorest countries in the world, dueto  both to rapid population growth and a low starting base. Changes in rainfall associated with world-wide weather patterns resulted in the worst drought in thirty years in 2015/2016, creating food insecurity for millions of Ethiopians.

The state is heavily engaged in the economy. Ongoing infrastructure projects include power production and distribution, roads, rails, airports and industrial parks. Key sectors are state-owned, including telecommunications, banking and insurance, and power distribution. Under Ethiopia’s constitution, the state owns all land and provides long-term leases to tenants. Title rights in urban areas, particularly Addis Ababa, are poorly regulated, and subject to corruption.

Ethiopia’s foreign exchange earnings are led by the services sector – primarily the state-run Ethiopian Airlines – followed by exports of several commodities. While coffee remains the largest foreign exchange earner, Ethiopia is diversifying exports, and commodities such as gold, sesame, khat, livestock and horticulture products are becoming increasingly important. Manufacturing represented less than 8% of total exports in 2016, but manufacturing exports should increase due to a growing international presence.

The banking, insurance, telecommunications, and micro-credit industries are restricted to domestic investors, but Ethiopia has attracted roughly $8.5 billion in foreign direct investment, mostly from China, Turkey, India and the EU; US FDI is $567 million. Investment has been primarily in infrastructure, construction, agriculture/horticulture, agricultural processing, textiles, leather and leather products.

In the fall of 2015, the government finalized and published the current 2016-2020 five-year plan, known as the Growth and Transformation Plan II, which emphasizes developing manufacturing in sectors where Ethiopia has a comparative advantage, such as textiles and garments, leather goods, and processed agricultural products. To support industrialization, Ethiopia plans to increase installed power generation capacity by 8,320 MW, up from a capacity of 2,000 MW, by building three more major dams and expanding to other sources of renewable energy.

Recently launched  light rail service in Addis Ababa                                                                                          – Photo credit – Bloomberg

The African continent is also expected to see a recovery in GDP growth, with an expansion of 3.5 percent in 2018 and 3.7 percent in 2019, up from 3.0 percent in 2017.

The report noted that strengthening external demand and continued firming of global commodity prices will ease fiscal and external pressures.

However, significant fiscal adjustments lie ahead for many commodity exporters, limiting the pace of rebound in countries of this region, the report continued.

Noting the substantial difference in growth prospects among the sub-regions in Africa, the report projected that East Africa will remain the fastest-growing sub-region.

The report also indicated that the world economy is also expected to grow at a steady pace of 3 percent per annum.

Top Image –

Women hand sorting  coffee Berries in south-western Ethiopia                                                                      – Photo credit – Royal Botanic Gardens

 

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