Real GDP growth slowed in 2017/18, due partly to civil unrest, political uncertainty, and policy adjustments that involved fiscal consolidation to stabilize the public debt. On the supply side, GDP growth was driven by services (8.8% growth) and industry (12.2%), facilitated by the development of energy, industrial parks, and transport infrastructure. On the demand side, private consumption and investment continued to drive growth, along with the government’s stable spending on public infrastructure and strong foreign direct investment inflows.
With a public debt–to-GDP ratio of 61.8% at the end of June 2018, Ethiopia remains at high risk of debt distress, according to a 2018 debt sustainability analysis. A tax transformation program is under way to strengthen tax policy and administrative efficiency.
A reduced trade deficit and strong growth in remittances helped improve the current account deficit from 8.1% of GDP in 2016/17 to 6.0% in 2017/18. Gross official reserves remained low, at 2.5 months of imports in 2016/17 and 2.1 months in 2017/18.
Tailwinds and headwinds
Real GDP growth is projected to recover from 7.7% in 2017/18 to 8.2% in 2018/19 and 2019/20, supported by industry and service sector expansion and agricultural sector recovery. Industrial growth will be boosted by ongoing industrial zone development, and agriculture will benefit from investments in fertilizer, irrigation, and improved seeds. Public investment will remain moderate, reflecting efforts to stabilize the public debt. The impending privatization of the state-owned railway, maritime, air transport, logistics, electricity, and telecommunications sectors is expected to boost private investment and mitigate the reduction in public spending.
Ethiopia’s rising incomes, 94 million people, emerging consumer goods market, and increasing urbanization provide economic opportunities. Its export-led industrialization strategy includes developing industrial zones across the country and business enablers for energy, transport, and trade logistics. Abundant low-cost and trainable labor presents a comparative advantage in export-oriented light manufacturing, notably in leather, textiles, and agro-processing. The country’s strategic location eases access to lucrative markets in the Middle East and Europe. And investments in renewable energy will generate up to $1 billion in exports by 2020. Political reforms and normalized relations with neighboring Eritrea should boost prosperity and stabilize the region.
Political reforms implemented in the last few months led to stabilization of the Ethiopian economy and restored overall calm in the country. The reforms focused mainly on institutionalizing democracy and rule of law and expanding the political space. But these achievements are not without risks. There are disruptions of economic activities in some parts of the country, displacements of people in large numbers, and skirmishes that could affect overall economic performance in the short to the medium term.
Despite reducing the extreme poverty rate from about 46% in 1995 to 23.5% in 2016, Ethiopia still has more than 25 million poor people. Demographic dynamics and a low initial level of development make poverty reduction challenging. Promoting inclusive growth through deep structural transformation becomes essential.
Only 60% of the population has access to electricity, 65.7% of households have access to potable water, and paved road density is among the lowest in Sub-Saharan Africa. The leading exports are coffee, oil seeds, and pulses, and manufacturing accounts for less than 10% of GDP. Private sector development faces limited financial access, foreign currency shortages, and a costly and weak business regulatory environment. And frequent droughts driven by climate change have major fiscal and humanitarian consequences.
The report also covers the whole continent economic outlook in 2019:
African Economic Outlook 2019: Africa growth prospects remain steady, industry should lead growth
‘The state of the continent is good. Africa’s general economic performance continues to improve, but it remains insufficient to address the structural challenges,” A. Adesina
Five policy actions could raise Africa’s total gains to 4.5 percent of its GDP, or $134 billion a year.
Africa’s general economic performance continues to recover and GDP growth is projected to accelerate to 4.0 percent in 2019 and 4.1 percent in 2020. But improved macroeconomic and employment outcomes require industry to lead growth, according to the 2019 African Economic Outlook report, launched today by the African Development Bank.
Published annually since 2003, the African Development Bank’s flagship report provides headline numbers on Africa’s economic performance and outlook.
The focus of the 2019 report on regional integration for Africa’s economic prosperity, highlights integration for trade and economic cooperation and the delivery of regional public goods.
In opening remarks to diplomats, government officials, policy makers and students gathered at the Bank’s Babacar Ndiaye auditorium in Abidjan, Cote d’Ivoire, Senior Vice President Charles Boamah said even though the report presents daunting challenges, “Africa has the means to overcome them by joining hands together and removing barriers to integration and drivers of migration.”
Guest speakers included Kanny Diallo, Minister of Planning and International Cooperation for the Republic of Guinea and Alma Oumarou, Minister and Special Advisor to the African Union Champion for Regional Integration.
The 2019 African Economic Outlook report analyses gains of regional public goods, including synchronizing financial governance frameworks, opening regional aviation to competition, and facilitating the free movements of people, goods, and services through open borders.
The 2019 report focuses on three key areas - Africa’s macroeconomic performance and prospects; Jobs, growth, and firm dynamism and Integration for Africa’s economic prosperity.
The Bank’s Director of Macroeconomic Policy Forecasting and Research Department, Hanan Morsy, provided participants with the report’s “storyline” and noted that in spite of a rising national debt across Africa, “there is no systemic risk of debt crisis.”
At the current rate of labor force growth, Africa needs to create about 12 million new jobs every year to prevent unemployment from rising. The report states that a “concerted industrialization effort that builds on countries’ comparative advantage,” is required.
“Manufacturing-driven growth has the highest impact on job creation,” Morsy said.
At the core of African integration, the African Economic Outlook suggests that “a borderless Africa” is one of the key foundations of a competitive continental market that could serve as a global business center.”
The Continental Free Trade Agreement (CFTA), signed in March 2018 by 44 African countries, offers substantial gains for all African countries the report says, citing new data and analytics.
“To develop cross-border supply chains, improving customs management and adopting simple and transparent rules of origin, are essential,” the report notes.
Significantly, the report identifies five key trade policy actions that could potentially bring Africa’s total gains to 4.5 percent of its GDP, or U$134 billion a year:
- eliminating all applied bilateral tariffs in Africa;
- keeping rules of origin simple, ﬂexible, and transparent;
- removing all nontariff barriers on goods and services;
- implementing the World Trade Organization’s Trade Facilitation Agreement to reduce cross border time and transaction costs tied to nontariff measures and ;
- negotiating with other developing countries to reduce their tariffs and nontariff barriers, by 50%.
The African Economic Outlook bridges a significant knowledge gap with respect to African economies through regular, rigorous, and comparative analysis.