Unit 4: Growth & Development in Ethiopia

Ethiopia is a fascinating country to use as a case study in economic growth and development. According to a recent editorial in the Financial Times, "Ethiopia has transformed in 20 years from a famine-ravaged nation into a destination for savvy and well-known private equity groups such as KKR."

Ethiopian economic growth compared to Sub Saharan Africa

Economic growth

• Over the last decade, Ethiopia has been one of the fastest-growing countries in the world averaging annual increases in real GDP of close to 10%.
• The pace of expansion is expected to slowdown in the near term but real GDP growth is likely to be around 7.5% in 2014-15, driven by public capital investment in critical infrastructure such as extended road and power networks, which benefit both industry and agriculture.
• Long-term economic growth potential is boosted by untapped reserves of coal, gold, oil and gas.
• The country has experienced significant foreign direct investment valued at 2% of GDP in 2014 and this is set to continue growing, through investments in agriculture and manufacturing.

Structure of GDP

• Ethiopia remains heavily dependent on farming for her economic growth
• Rain-fed agriculture (accounting for almost 50% of GDP) is the country’s main source of employment and export earnings, which results in vulnerability to weather shocks that affect farm yields, incomes, profits and domestic investment.

Inflation

• Fast growing countries often experience accelerating inflation rates and Ethiopia is no exception with consumer price inflation measured at 6% on average in 2014.
• However higher interest rates set by the Ethiopia central bank and a period of lower global commodity prices has helped to prevent inflation from surging into double-digit territory.

• A key feature of the Ethiopian economy is a persistent large current account deficit on the balance of payments combined with low foreign exchange reserves estimated to be sufficient only to cover the cost of three months worth of imports.
• The current account deficit may exceed 6% of GDP in 2015 and is structural rather than cyclical, given major capital imports for infrastructure development and low-value exports (20% of which come direct from coffee exports). Major power generation projects are under way and are set to boost exports when completed.
• At around 30% of GDP, Ethiopian external debt is relatively low as are its servicing costs. Indeed, 70% of the debt stock is public medium- and long-term debt to official creditors, both multilateral and bilateral.
• The Ethiopian government benefits from large foreign aid inflows – worth 6% of GDP in 2013 and almost 20% of government revenues. They are supported by Ethiopia’s geopolitical importance as a key Western ally in the unstable, terrorism-prone Horn of Africa.

Fiscal Position

• After increasing sharply in 2013 due to high spending on infrastructure (capital spending reached 14% of GDP in 2013), the fiscal deficit is likely to decline to 2.5%-3% of GDP in 2014-15. Public (government) debt is low, at less than 25% of GDP.