The economic context of Ethiopia

Economic Indicators

Africa's second most populous country, Ethiopia, with a population of more than 120 million people, has experienced sustained growth averaging around 10% per year over the past decade. The main drivers of this growth have been agricultural products and services, supported by foreign development aid. However, the Ethiopian economy has faced multiple challenges over the past two and a half years, including the COVID-19 pandemic, drought, conflict in the north, and the war in Ukraine, leading to significant macroeconomic and humanitarian challenges. According to the latest IMF estimates, GDP growth was 6.1% in 2023, down from 6.4% the previous year, due to strong fixed investment following the resolution of the conflict in Tigray. For 2024, the IMF anticipates growth at 6.5%, driven by private consumption, followed by another 6.5% growth in 2023.

Ethiopia's FY 2023/24 budget is 801.7 billion birr, representing a 1.9% increase, but inflation reduces its buying power by 17.8%. Over 70% of the budget is allocated to federal spending, with 26% for regions and 1.7% for local SDG projects. Capital spending is at a 10-year low, accounting for 35.5% compared to 61% for recurring costs (UNICEF). The debt-to-GDP ratio decreased to 37.9% in 2023, down from 46.4% the previous year, and is expected to decline further to 31.2% and 28.9% in the subsequent years, according to the IMF. Despite this, Fitch downgraded Ethiopia's credit rating to junk in December 2023 due to rising default risk, following a missed coupon payment on its USD 1 billion Eurobond. Ethiopia has experienced high levels of inflation in recent years, with an average of 16% over the last decade. Inflation reached 28.7% by the end of 2023, according to the National Bank of Ethiopia, with food prices, comprising 53.5% of the consumer price index, growing to 30.6% compared to the same period in 2022. Inflation is expected to decelerate to 20.7% in 2024 and 16.5% the following year, as progress is made on implementing roadmaps for foreign exchange reforms and modernizing monetary policy. The government is pursuing the "Homegrown Economic Reform Plan" and launching numerous projects under the third "Growth and Transformation Plan 2021-2025" to address vulnerabilities and stimulate private sector activity. IMF forecasts suggest that medium-term macroeconomic and structural reforms will lead to a reduction in public debt, lower external vulnerabilities, and stronger growth, investment, and exports. However, this outlook faces challenges from domestic opposition to reforms, rising global protectionism, the war in Ukraine, and climate-related shocks.

Despite doubling over the last decade, GDP per capita in Ethiopia remains one of the lowest globally, estimated at USD 2,812 in 2022 by the World Bank (PPP). Poverty reduction remains challenging due to demographic dynamics and a low initial level of development. Life expectancy at birth is only 65 years, and the average duration of schooling is 7.8 years. The unemployment rate stood at 3.4% of the total labor force in 2022, according to the World Bank, but the vast majority of the workforce is still employed in the informal economy.

Main Sectors of Industry

Ethiopia boasts one of the largest livestock herds in Africa and has significant potential for hydropower energy, estimated at 954 TWh. It stands as the 5th-largest coffee producer and exporter globally and is among the leading producers of oilseeds and dry beans. The agricultural sector plays a pivotal role in the economy, contributing over a third of Ethiopia’s GDP (37.6%) and employing nearly two-thirds of the workforce (63%). Major agricultural products include cereals, coffee, oilseeds, cotton, sugarcane, vegetables, khat, cut flowers, hides, cattle, sheep, goats, and seafood. However, challenges such as periodic droughts, soil degradation, and deforestation persist. Key cereals consumed in Ethiopia are maize and wheat, with the country being self-sufficient in maize but importing around 30% of its wheat requirements. High taxation levels and poor infrastructure pose obstacles to the agricultural sector, prompting government efforts to establish large agro-industrial parks across the nation to add value to agricultural products.

The industrial sector, though modest, contributes significantly to the GDP (22.7%) and employs 7% of the workforce. Industries include food processing, beverages, textiles, leather, garments, chemicals, metals processing, and cement. While the manufacturing sector currently has a limited impact on exports, it is anticipated to expand in the future, representing around 4% of GDP. Notably, Ethiopia has attracted textile production outsourcing from Asia in recent years. Government policies, such as the Home-grown Economic Reform and the 10-year Perspective Development Plan, emphasize support for local manufacturers.

The tertiary sector, led by state-run Ethiopian Airlines, drives Ethiopia’s foreign exchange earnings, constituting 36.6% of GDP and employing an estimated 31% of the workforce. Growing sectors like tourism and telecommunications are anticipated to contribute significantly to the country’s economic growth. Despite ongoing privatization efforts and a transition toward a market economy, the public sector retains a dominant role, particularly in strategic sectors like telecommunications, financial services, transportation, and retail. Land in Ethiopia is state-owned, with long-term leases provided to tenants. The banking sector comprises the National Bank of Ethiopia as the central bank, one state-owned development bank, a government-owned commercial bank, and several private banks.

 

Breakdown of Economic Activity By Sector	Agriculture	Industry	Services
Employment By Sector (in % of Total Employment)	63.7	10.2	26.2
Value Added (in % of GDP)	37.6	22.7	36.6
Value Added (Annual % Change)	6.1	4.9	7.6

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:

51,7/100

World Rank:

151

Regional Rank:

35

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

 

Sources of General Economic Information

Ministries

Ministry of Finance
Ministry of Trade and Regional Integration
Ministry of Mines

Statistical Office

Ethiopian Statistics Service

Central Bank

National Bank of Ethiopia (NBE)

Stock Exchange

Ethiopian Commodity Exchange

Economic Portals

Addis Fortune