Ethiopia has registered fast and impressive growth for the last decade and this has provided momentum for accelerated economic development. The country’s economic growth has been driven by well-chosen policies and rapid expansion of public infrastructure and basic services. The increase in exports, remittances and Foreign Direct Investment has provided impetus to growth. Furthermore, a significant paradigm shift in economic policy and the importance given to integrated agricultural development, the emphasis on small enterprises and encouragement of added value and massive infrastructure development in road links and power supplies have helped Ethiopia to sustain double digit growth.

Ethiopia’s economic achievement has been well recognized in the 2013 African Economic Outlook, launched on September 26 at the Sheraton Hotel in Addis Ababa. This annual report is jointly published by the United Nations Economic Commission for Africa, the African Development Bank, the Development Center of the Organization for Economic Co-operation and Development, and the United Nations Development Program. The theme of this year’s report was “structural transformation and natural resources”, and in its synopsis of country case studies, it portrayed Ethiopia as one of Africa’s best performing economies. Unlike other fast-growing Sub-Saharan economies with growth supported by minerals, Ethiopia’s robust growth has been driven by the service sector and by agriculture. The report says agriculture, with a share of about 44% of GDP, accounts for about 70% of export earnings, and its potential remains enormous. Looking at the Government efforts to enhance agricultural production and productivity, the report notes promotion of the use of modern technology, commercialization of agriculture and production of high-value crops, encouragement of micro-irrigation schemes and improved marketing and infrastructure.

The report also notes that the Growth and Transformation Plan aims to overhaul the economy by radically altering the agricultural sector and boosting industrial development through expanded investment. It suggests the growth of the service sector has been driven mainly by rapid growth of hotels and restaurants, financial intermediaries, real estate, public administration and retail businesses. The service sector has recently outstripped agriculture in terms of the share of GDP, but agriculture remains critical for broad-based growth and the Government continues to give it priority. The industry sector has been marked by a construction boom and expansion in mining and manufacturing. These helped the sector to grow by 13.6% in 2011/12. The report predicts good prospects for 2013 and 2014 with the Government giving increased attention to industrial development.

The report indicates that this rapid growth has been accompanied by macro-economic imbalances. The main underlying domestic factor was excessive domestic borrowing to finance the largely public investment programs. This was exacerbated by the recent global food and fuel crises. Inflation emerged as the foremost macro-economic challenge. The Government responded with prudent fiscal and monetary policies and various administrative measures to fight inflation while continuing to maintain high infrastructure investment and increased pro-poor expenditures. Its adjustment efforts paid off and macroeconomic stability has been largely restored and domestic borrowing contained. The report notes that domestic revenue collection has been improving after tax reform, and the government was able to finance most of its expenditure from domestic revenues. The strong measures to improve tax administration and collection reduced the fiscal deficit to an acceptable threshold. The central bank avoided deficit financing along with the introduction of cash budgeting mechanisms and reactivated a treasury bills market in a bid to mop up excess liquidity in the banking system. The Government’s determination to hold down prices was further reflected in its cautious monetary policy focusing on bringing inflation down to single digits from the high levels of 2009-2010.

Fighting corruption is a priority of the Government’s good governance agenda and the African Economic Outlook report acknowledges that there has been significant progress in public finance management reforms. As part of an official Good Governance Package, efforts are being made to embed accountability and integrity; and the Federal Ethics and Anti-Corruption Commission has embarked on a vigorous sensitization campaign. In assessing the social context and human development in Ethiopia, the report recognizes Ethiopia has made significant progress in reducing poverty. It says Ethiopia is on the right track to meet five of the eight Millennium Development Goals: eradicating extreme poverty and hunger, achieving universal primary education, reducing child mortality rates, combating HIV/AIDS, malaria and other diseases and developing a global partnership for development. It could also still meet the targets for gender equality, maternal health and environmental sustainability.

The report highlights the improvement of the Government’s poverty-focused spending which has revamped access to basic services. Impressive expansion has been achieved in health services, as evidenced in the steady decline in infant mortality and progress in reducing the incidence of HIV/AIDS as a result of policies and strategies such as the National Task Force on HIV/AIDS. The Government aims to provide universal access to water supply by 2015, and significant progress has been made on the provision of both water and sanitation services. The Government has made noteworthy efforts to roll back malaria through dissemination of information and the provision and use of insecticide-treated nets. In 2005, only 2% of households had these, but by 2010, all malaria-prone areas had nets. The Government has also shown strong commitment to the eradication of poverty as reflected in the high level of pro-poor public expenditures. The resultant improvement in basic services has translated into gains in social indicators such as the rate of primary school enrolment (grade 1 to 8) which has increased from 68% in 2004/05 to 85% in 2010/11. The Productive Safety Net program, one of the largest social protection programs in Africa, which targets almost 8 million chronically food-insecure people in rural areas, has contributed strongly to the reduction of poverty rates. The proportion of people living below the poverty line has fallen steadily from 2010, and the Government’s target is to reduce this to 22.2% by 2015.

The Government’s Growth and Transformation Plan recognizes the nexus between poverty and the environment and it has sought to bring environment issues in the mainstream development process. It has established appropriate legal, policy and institutional frameworks, including drawing up an Environmental Policy and Bio-Diversity Strategy. It has also launched a Climate Resilient Green Economy to address climate change adaptation and mitigation, while pursuing the goals of economic growth, aiming for zero net carbon emissions by 2025, when Ethiopia hopes to become a middle income country.

In its thematic analysis of structural transformation and natural resources, the report considers Ethiopia’s basic natural resources to be its people and its agriculture. It noted the country’s young population, great biodiversity and distinctive ecosystems. The number of livestock, including cattle, is one of the highest in Africa. Ethiopia’s diversified natural resources also range from gemstones to industrial minerals including potash. Development of these resources is a cornerstone of the Government’s export-oriented growth strategy. Ethiopia, of course, also has significant sustainable energy resources, including biomass, hydropower, natural gas and other fossil fuels, as well as geothermal and solar energy potential.

The report notes that the Government has now launched a strategy to change the source of growth and lay the foundation for a structural transformation, with the industrial sector, supported by modern technology, playing a leading role. Expanding industry would help other sectors, particularly agriculture. A comprehensive industrial development policy has been launched with incentive packages, and the Government projects that by 2015 the share of the industrial sector should be 19% of GDP, up from the current 13%.

The report indicates some factors that it considers as an impediment to Ethiopia’s development. One is the financial sector which has a “limited range of services, limited foreign participation and no capital markets”. Another problem is the limited regional economic integration. The report also notes that the private sector remains weak with the Government imposing restrictions on foreign equity ownership in many areas, particularly service industries. The Government argues that closing the financial sector to foreigners, as it is at the moment, will build and strengthen the capacities of local institutions and give them a competitive edge in extending services to rural areas. The Government envisages a comprehensive growth which benefits all, not just urban areas. It also believes the financial regulatory mechanism is not strong enough to accommodate large foreign financial institutions. The transition from a command economy to a market economy is sufficiently recent to explain the restricted development of the financial sector. At the same time, the Government does recognize the role of the banking sector in development and this is why it is paying special attention to the growth of the sector. It is planning to expand financial sector reform and produce financial innovations including venture capital, capital markets and investment banking.

Ethiopia’s private sector has still along way to go but opportunities for private sector investment have increased in recent years. This is shown by the surge in Foreign Direct Investment, in particular from the emerging economies of Asia. The private sector is also expected to play a major role in implementation of the Growth and Transformation Plan. The Government, indeed, is committed to improve the business climate by enabling the private sector to contribute to growth and employment. In accordance with the Plan, higher agricultural productivity is expected to spur industrialization and export growth, with the manufacturing and industrial sectors also conceived as employment opportunities. So priority is accorded to the agricultural, manufacturing and industrial sectors.

The report suggests the limited integration with regional and global markets is caused by lack of infrastructure demonstrated in the poor state of transport corridors and weak trade facilitation. It does also note the Government’s recent emphasis on linking infrastructure regionally as a reflection of a keen interest in regional economic integration.

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Source: Ministry of Foreign Affairs, Oct. 4, 2013, titled “The African Economic Outlook view of the Ethiopian Economy”.