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ETHIOPIA

Growing exposure to the unfavorable external environment

D4

SENSITIVE RISK

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD107.645 bn (World ranking 64, World Bank 2020)
Population 114.964 mn (World ranking 12, World Bank 2020)
Form of state Federal Parliamentary Republic
Head of government Abiy Ahmed Ali (PM)
Next elections 2026, legislative
  • Key partnership with China on Africa’s new silk road
  • State committed to meeting development objectives such as the MDGs and SDGs
  • The international community is supportive, particularly in times of drought-induced famine
  • High GDP growth rates in recent years, with an annual average +10.2% in 2006-16
  • Large domestic market (population over 95mn)
  • Fastest growing manufacturing sector in Africa.
  • Strong track record of attracting FDI from both advanced and emerging economies.
  • International agencies periodically question the commitment on protection of human rights
  • The region (Horn of Africa) is high risk. Ethiopia has borders with Sudan, South Sudan, Eritrea and Somalia - all offering challenges
  • The country is landlocked, which increases transport costs and vulnerability to external shocks.
  • High dependence on rain-fed agricultural output but recurrent drought, locust infestations etc. Water rights are a source of potential conflict in the Nile area.
  • Continuing aid dependence, despite significant external debt forgiveness and re-profiling.
  • Fiscal and current account deficits and weak foreign exchange reserves (about 2 months of import cover)
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Strong growth is dependent on external factors

With 112 million inhabitants, Ethiopia is the second most populous country of the African continent after Nigeria. It experienced strong growth (+10% on average) between 2010-2018 on account of strong public investment in the industrial sector. However, the transformation of Ethiopia from an agriculture-based to an industry-driven economy is far from complete. Economic activity remains highly dependent on external factors such as weather conditions and key international commodity price developments (coffee and oil seeds). Growth slowed down as of 2018 (+8% in 2018 and +6.5% in 2019), reflecting a political divide, high inflation, foreign exchange shortages and power supply disruptions. The farming sector is highly exposed to locust infestation risk; the locust invasion in February 2020 already destroyed near 20% of crop production. The Covid-19 sanitary crisis hit the Ethiopian economy through weaker external and internal demand. Together with the tourism and hospitability sectors, manufacturing exports have been severely affected by the global economic fallout of the crisis. The air transport industry recorded large losses due to travel restrictions and lower remittance inflows worsened foreign exchange liquidity tensions. On the other hand, high inflation – mainly driven by food prices – dampened domestic demand. We expect economic growth to slow down to +1.7% in 2020, and then to rebound slightly to +3.5% in 2021. High inflation will remain the main drag on the recovery of economic activity in 2021. In 2020, both food and overall inflation remained above 20% and we expect price dynamics to stabilize at these levels in 2021.  On a positive note, the country’s fairly credible reform agenda (under the IMF agreement) is likely to attract foreign direct investment inflows into the private sector. All in all, we expect Ethiopia to return to a strong growth regime over the medium term. 
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A continuous struggle with depleted FX reserves

Ethiopia’s structural current account deficit worsened after 2014 to reach -11.8% of GDP in 2016.The deficit reduced somewhat over the past few years (-5.3% of GDP in 2019) on the back of declining imports. On the other hand, poor export diversification and the overvaluation of the exchange continue to put the break on the export performance. The chronic current account deficit coupled with a managed exchange rate regime (de facto a crawling peg to USD) are at the origin of the persistent foreign exchange shortages. Since 2012, the foreign exchange reserve coverage has been hovering around two months of import cover, well below the recommended levels (three to six months of import cover) by international institutions.

Most importantly, the difficulty of accessing foreign currency is one of the key impediments to attracting foreign direct investment. Depleted foreign currency reserves also translate into a large gap between the official and parallel exchange rates and increase the cost of imports. Consequently, Ethiopia has been struggling with double-digit inflation rates since the devaluation in 2017.

Ethiopia’s public debt stands at 56.6% in 2020, with an elevated external debt component in foreign currency (30% of GDP). The main debt vulnerabilities are related to rising debt-servicing needs, an overvalued exchange rate and a weak export base. Ethiopia is eligible for the 2020 G20 debt relief initiative. In this context, the Paris Club of creditor countries has agreed to suspend debt service payments. In April 2020, the IMF approved a budget support of USD411mn (under the Rapid Financing Instrument) to help Ethiopia to overcome urgent balance of payment needs. The World Bank also granted USD82.6mn in financing to Ethiopia to fight the pandemic. In the context of a growing external financing gap (estimated to  USD1.7bn for 2019/20), Ethiopia is  seeking additional financing from multilateral and bilateral donors. Finally, Ethiopia’s commitment to the reform objectives of the three-year financing agreement (ECF-EFF) with the IMF (USD2.9bn) was confirmed in August 2020 (validation of the first review of the arrangement by the IMF). Ethiopia’s engagement for reforming its economy is likely to attract further support from the international community.

 

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“Homegrown” economic reform agenda is slowly progressing

The government of Abiy Ahmed introduced the “Homegrown Economic Programme” in end 2019, with the aim of addressing the country’s long-lasting structural problems (infrastructure bottlenecks, difficulties in accessing finance, power shortages). The reform program is mainly geared towards the privatization of state-owned companies and the liberalization of some state-controlled sectors, such as telecommunication and energy. However, the budget restrictions in the context of the Covid-19 pandemic paused serious reforms implementation challenges in 2020.    

Despite the ongoing reform efforts, Ethiopia continued to be poorly ranked in by the World Bank Ease of Doing Business survey 2020 (159th among 190 economies). Its ranking remained unchanged between 2018-2020 despite some improvements in the rating sub-components relative to dealing with construction permits and registering property. The government aims at improving the doing business ranking above 100 in 2021, thanks to recent reforms concerning digitalization and the investment law.

In the past, Ethiopia has experienced difficult relationships with neighboring countries, as well as between its regions. After a painful war in the 1980s, the political situation normalized progressively. However, the difficulty to engineer policies acceptable to the different groups within the country has implied some paralysis, a key difficulty to reform the economy. The postponing of the 2020 general elections to 2021 due to the Covid-19 pandemic generated some public discontent and protests.

 

Trade structure by destination/origin

(% of total, 2020)

Exports Rank Imports
Sudan 27.7%
1
29.7% China
Hong Kong 10.8%
2
9.8% United States
China 9.6%
3
8.1% India
United States 9.0%
4
6.6% Kuwait
Switzerland 4.4%
5
4.1% Turkey

Trade structure by product

(% of total, 2020)

Exports Rank Imports
Coffee, tea, cocoa, spices, and manufactures thereof 28.8%
1
8.9% Petroleum, petroleum products ans related materials
Vegetables and fruits 17.1%
2
7.4% Road vehicles
Oil seeds and oleaginous fruits 14.2%
3
7.0% Cereals and cereal preparations
Leather, leather manufactures and dressed furskins 8.0%
4
6.1% Electrical machinery, apparatus and appliances, n.e.s.
Gold, non-monetary (excluding gold ores and concentrates) 4.4%
5
6.0% Iron and steel

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Contacts

 
Euler Hermes Economic Research
research@eulerhermes.com
Selin Ozyurt
Senior Economist for France and Africa
selin.ozyurt@eulerhermes.com

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