Population 88.918 million
GDP 41.893 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
8 |
7.5 |
7 |
6.5 |
|
Inflation (yearly average) (%)
|
8.1 |
33.1 |
23 |
10.2 |
|
Budget balance (% GDP) *
|
-4.6 |
-4.8 |
-4.1 |
-4.2 |
|
Current account balance (% GDP)
|
-4.4 |
0.7 |
-6.1 |
-7.5 |
|
Public debt (% GDP)
|
39 |
37.4 |
34.2 |
36.6 |
| (e) Estimate (f) Forecast *Grants excluded, debt of public enterprises included | ||||
STRENGTHS
- Progress in economic diversification
- Public investment in infrastructures (transport, energy and telecommunications)
- Support from international donors
- Good hydroelectric potential
WEAKNESSES
- Vulnerable to weather conditions and volatility of raw materials prices
- Failure to resolve causes of food insecurity
- Consequences of the drought on education and on family and social ties (migration)
- Weak level of foreign exchange reserves
- Governance shortcomings
- State borrowing weakens the private sector
- Border conflicts
Risk assessment
Growth slowing gradually, still driven by public investment
Growth was sustained in 2012, driven by public investment, especially in infrastructures under the five-year government development plan or Growth Transformation Plan (GTP). However, this strategy, financed by the Central Bank and by a system of dedicated lending compelling banks to acquire treasury paper, limits the private sector’s access to credit. In this context and with monetary policy set to tighten in 2013, growth is expected to slow slightly. In addition, external demand is likely to remain moderate, while private consumption will again be hit by high, albeit improving, inflation. Inflation is generated by rising public spending, exchange rate depreciation (controlled by the Central Bank) and rising food prices. Nevertheless, it should fall with the tightening of the monetary policy. Industrial activity should benefit from the extension of energy networks thanks to public and foreign investment in the sector. On the supply side, growth is likely to be driven by construction (especially relating to energy with the Renaissance Dam), industry, transport (road infrastructure) and telecommunications.
Growth strategy resulting in a precarious financial situation
The country’s current account deficit is expected to widen in 2013 due to the sharp increase in the import of goods and services linked to public and foreign infrastructure investment, especially in energy (second wind farm project, Adama II, signed recently with China). At the same time, exports, mainly of agricultural and mining products, are expected to increase, though moderately, in line with slowing demand from Europe (over half of exports). Indeed, despite high levels of income transfers by expatriate workers and foreign aid (amounting to about 10% of GDP), the current account deficit looks set to widen. FDIs, sharply higher since the introduction of the GTP, will enable coverage of some of it (about 30%) and the country will therefore need to assume more debt. In this context, foreign exchange reserves, which plummeted with the “controlled” exchange rate depreciation conducted by the Central Bank, will be insufficient, covering less than two months of imports.
Despite technical assistance from the IMF to improve tax collection, the fiscal deficit is expected to increase slightly due to high levels of public spending (programme to curb poverty) and investments by state-owned companies (transport, energy) under the GTP. So to limit the extent of the fiscal deficit, the country will remain dependent on foreign aid (about 1.3% of GDP expected in 2013) and will make use of borrowing from the National Bank of Ethiopia and commercial banks. The latter are obliged to devote at least 27% of their loans to the purchase of government bonds. Government borrowing will therefore increase significantly and push up public debt.
Political stability but difficult business environment
The death of Prime Minister Meles Zenawi announced on 20 August 2012 raised fears of a period of political uncertainty, especially as he had been in power since 1991 and did not have a designated successor. However, the appointment in September of a new prime minister, Hailemariam Desaglen, calmed these fears. As a reminder, the ruling party, the EPRDP (Ethiopian People's Revolutionary Democratic Party), won the May 2010 parliamentary elections with a crushing majority (546 out of 547 parliamentary seats), thanks to previously adopted restrictive laws concerning the press, civil society and political funding. The government is certainly not immune to social tensions, after the example of the Arab demonstrations, but the absence of an organised opposition is not conducive to demands being expressed. Political stability is unlikely to be challenged but strong military tensions with Southern Somalia and Eritrea will, however, remain.
Finally the country suffers from a high degree of poverty and a difficult business environment marked by lack of transparent public sector data, corruption and the eviction of the private sector. The latter is adversely affected by limited access to credit, brought about by a strongly concentrated banking sector, with only one large public bank that holds 70% of assets, and restrictions placed on other banks through a system of dedicated lending.
