Ethiopia

major macro economic indicators

(e): Estimate (f): Forecast * Fiscal year from 8th July - 7th July; 2021 data: July 8, 2020 - July 7, 2021 ** Calendar year

Risk assessment

Robust growth bolstered by the return of peace to Tigray

In 2024, growth will remain robust, albeit below its 2000-2017 momentum, and is expected to post average GDP of 9%. The agricultural sector (representing 32% of GDP), which is the country's economic mainstay (75% of the population and 80% of exports) is likely to suffer a fifth consecutive year of drought. Activity will therefore be driven mainly by a resilient service sector (40% of GDP), thanks to tourism, air freight and telecommunications. The manufacturing sector (4.6% of GDP) will continue to be hampered by the destruction of infrastructure during the conflict, currency constraints and exclusion from the African Growth and Opportunity Act (AGOA) trade preference programme, decreed by the United States in 2022. However, the deployment of new industrial parks, mainly driven by China and India, could stimulate manufacturing activity (clothing, construction equipment, agricultural processing) and attract foreign investment. The end of the conflict in Tigray should boost local investment and private consumption (77% of GDP by 2022) but worrying developments in other regions could delay the peace dividend. While the planning model has enabled major infrastructure projects to be carried out thanks to public investment and indebtedness, it has also led to an embryonic private sector. The government intends to further liberalize and privatize the economy with the Homegrown Economic Reform (HGER) plan. After its suspension due to the health crisis and the conflict in Tigray, these reforms will probably be continued in 2024. In fact, Ethiopia is in talks with the IMF to borrow USD 3.5 billion as part of a programme to support the second phase of the HGER program.
Inflation will remain high, but should begin to ease. Growth in the money supply, linked to the monetisation of the public deficit, and the depreciation of the birr explain the inflationary pressures. In August 2023, to combat high inflation, the Central Bank of Ethiopia (NBE) decided to limit its direct financing of the government, as well as credit growth, essentially that of the two main state-owned commercial banks. In 2024, the NBE is expected to continue its monetary tightening. The Ethiopian birr, a non-convertible currency, is grossly overvalued. While the official rate is 56 birr/USD, the shortage of foreign currency has led to an exchange rate on the parallel market close to double the official rate (110 birr/USD in January 2024).

Twin and contingent deficits to secure an IMF programme

With a view to an IMF-financed programme, the government will continue its fiscal consolidation efforts, and the public deficit will decline in fiscal year 23/24. Revenues (7.9% of GDP in 2022-2023) will increase thanks to the planned broadening of the tax base. Expenditure (10.8% of GDP in 2022-2023) will mainly comprise capital and current expenditure, which will account for 63% and 37% respectively in 2023-2024, taking into account the suspension of debt interest. Capital expenditure will be focused on reconstruction and development (human, agricultural and industrial), while current expenditure will be devoted to humanitarian aid following the conflict, and to social measures to help households cope with inflation and drought. The deficit will be covered by borrowing from local banks and, potentially, by direct financing from the NBE. Western aid has resumed following the peace agreement in Tigray and the government could obtain external financing facilitated by a possible agreement with the IMF. External debt accounts for 44% of total public debt (two-thirds of which is attributed to the federal government). The two main holders of the country's external public debt are the World Bank and China, which respectively hold 41% and 20%. In December 2023, the country defaulted on a USD 33 million coupon of a USD 1 billion 10-year eurobond issued at 6.625% and maturing in December 2024. The aim is probably to obtain debt restructuring on the part of private creditors. Based on the model of the agreement reached with China in August 2023, an arrangement was reached with the other bilateral creditors to suspend debt service payments between the 1 January 2023 and the 31 of December 2024. The suspended amounts will fall due over the 2027-2029 period. The agreement is a relief for Ethiopia, but remains contingent on the adoption in 2024 of an IMF-financed reform programme.
The current account deficit will narrow slightly in 2024, although the trade balance will remain in deficit (11% of GDP in 2022). Exports are being affected by tensions in the Red Sea and Gulf of Aden, and will be harmed by the European directive aimed at limiting imports of coffee derived from deforestation. Coffee exports, which account for 35% of total exports, including 30% destined for the European Union, will be particularly hard hit. The shortage of foreign currency will penalise both imports and exports by limiting input imports. A surplus on services, driven by tourism and Ethiopian Airlines freight, as well as expatriate remittances (5% of GDP in 2022), mainly from the US and Saudi Arabia, will not be able to offset the trade deficit. Foreign aid, such as the previously suspended USD 680 million from the European Union, will help limit the deficit. Given the very low level of foreign exchange reserves (less than two weeks of imports in September 2023), the financing requirement will be met by FDI (2.9% of GDP in 2022) and borrowing, mainly on concessional terms.

Persistently unstable security situation and tensions with neighbouring countries

Abiy Ahmed has been Prime Minister since 2018. His Prosperity Party (PP) won 410 of the 547 seats in Parliament in June 2021. The November 2022 peace agreement put an end to two years of fighting between federal forces and the Tigray People's Liberation Front (TPLF). In other parts of the country, however, tensions have risen, leading to a state of emergency since August 2023 and the arrest of journalists and political opponents. In the Amhara region, in the north-west, tensions are growing between federal forces and a regional "self-defence" militia (Fano), which accuses the federal government of wanting to dismantle the paramilitary units created by the regional states in order to weaken them. In the Oromia region, clashes with the Oromo Liberation Army (OLA), another non-state armed group, are paralysing the region.
In terms of international relations, Ethiopia, which has been landlocked since 1993 following the secession of Eritrea, could benefit from access to 20km of coastline for military and commercial purposes for 50 years, thanks to a memorandum of understanding signed with Somaliland in January 2024. This would be in addition to the current use of the port of Berbera, and would reduce the logistical costs associated with using the port of Djibouti, through which 80% of its trade transits. In return, the agreement implies the transfer of shares in Ethiopian Airlines, as well as Ethiopia's recognition of the separatist territory, which is fuelling tensions with Somalia. However, the precise content of the agreement and its implementation remain uncertain, while international pressure is being exerted due to the international community's non-recognition of Somaliland's de facto sovereignty. Furthermore, Ethiopia's unilateral filling of the Renaissance Dam (GERD) on the Blue Nile has rekindled tensions with Egypt. While Ethiopia sees this hydroelectric mega-dam as a strategic asset for its electricity production, it could, however, disrupt water supplies to downstream countries (Sudan, Egypt). Last, while the advent of peace in Tigray in 2022 has eased tensions with Western countries, allowing a return of foreign aid and possible reintegration into AGOA, fighting in two other regions, infringements of civil liberties, obstacles to humanitarian aid and the draft agreement with Somaliland could put a dampener on the return to the fold.

Last updated: April 2024