Ethiopia has a large domestic market with a total population of over 120 million people (2023), making it the second most populous country in Africa after Nigeria. This offers a substantial consumer base for various industries. Over the 15 years prior to 2019, Ethiopia’s economy had one of the fastest growth rates in the world, averaging 9.5% per year, driven in part by significant public infrastructure investments.
In 2022, Ethiopia had a real gross domestic product (GDP) of 6%, which was greater than the 4% average for East Africa. However, it also remains one of the poorest, with a per capita gross national income of $1,020.
Abiy Ahmed’s appointment to the office of Prime Minister in 2018 signaled a new push toward liberalizing Ethiopia’s economy through improving the investment climate and privatizing leading state-owned enterprises in several sectors, including telecoms, shipping and logistics, power, rail, and sugar. This momentum came to a halt with the double onset of the COVID-19 pandemic and a prolonged civil conflict. However, with these events now in the rearview mirror, the country is showing signs of a move toward recovery and reconstruction. Key sectors, including telecoms and banking continue to move in a more open market direction.
The business climate is undergoing significant changes with broad policy reforms implemented under the new leadership of Prime Minister Abiy Ahmed. Government plans to privatize leading state-owned enterprises signal a significant shift toward market based reforms and a new flexibility with respect to economic policymaking. However, Ethiopia still contends with command economy proclivities that persist more than 30 years after the overthrow of the Marxist Derg regime in 1991.
While the economy is growing rapidly, presenting many opportunities, there are also hurdles to doing business in Ethiopia. The 2019 World Bank’s Ease of Doing Business report (EODB) ranked Ethiopia 159th out of 190 countries; an improvement of two positions from that of 2018. The new leadership has a focused target to improve the country’s ease of doing business ranking and has formed an interministerial committee led by the Prime Minister to improve specific areas of the ease of doing business.
Read also: A Journey Through East Africa
The World Economic Forum (WEF) has identified burdensome customs administrative procedures, the high cost of logistics, and access to credit and foreign exchange as major challenges to small and medium-sized enterprises (SMEs) in Ethiopia.
Economic Structure
Agriculture has historically been the driver of the Ethiopian economy but recently the service sector has grown to become the largest contributor to GDP. According to the National Bank of Ethiopia (NBE), services, agriculture, and industry accounted for 40%, 32%, and 29% of GDP respectively, during the 2021/22 Ethiopian fiscal year.
Service sector growth is dominated by expansion in communication and transport services, hotel and restaurant businesses, as well as wholesale and retail trading. Growth in the industrial sector is particularly due to investments in roads, railways, dams, industrial parks, and housing.
As of 2023, agriculture accounts for almost 36% of GDP, 81 percent of exports, and 73 percent of the labour force. Many other economic activities depend on agriculture, including marketing, processing, and export of agricultural products. Principal crops include coffee, pulses (e.g., beans), oilseeds, cereals, potatoes, sugarcane, and vegetables.
Ethiopia – The African Economic Anamoly (Ethiopian economy 2020)
Read also: Geography of Finote Selam
Financial and Fiscal Environment
In September 2023, Moody’s downgraded Ethiopia’s credit rating from Caa2 to Caa3. Fitch and S&P also recently downgraded their ratings - Fitch in December 2022 from CCC to CCC- and S&P from CCC+ to CCC. The negative ratings, which have a significant effect on the country’s borrowing costs, are due to heightened political instability and the Government of Ethiopia (GOE)’s participation in the G20 Common Framework debt relief initiative.
During 2022, the year-on-year inflation rate gathered momentum and rose due to price increases in both food and non-food items, peaking in May 2022, at an annualized rate of 38%. Real interest rates in Ethiopia remain largely negative.
The birr has continued to follow a steady depreciation, with the NBE following a crawling peg exchange rate policy. The shortage of available dollars has led to a black-market exchange rate close to double the official rate.
The allocation of foreign exchange (U.S. dollars) to the private sector is determined by the NBE. The NBE operates within the context of a large trade deficit and the need to meet sovereign debt obligations stemming from government infrastructure projects funded by foreign debt, which enjoys priority for scarce foreign currency.
Ethiopia Exchange rate historical data
| Year | Exchange rate (1 US dollar to ETB) | % change |
|---|---|---|
| 2018 | 27.43 | - |
| 2019 | 29.07 | 5.8 |
| 2020 | 34.93 | 18.3 |
| 2021 | 43.73 | 22.4 |
| 2022 | 51.76 | 16.8 |
| 2023 | 54.35 | 4.8 |
A second phase of Ethiopia’s Homegrown Economic Reform Agenda, first introduced in 2019, is under development according to the Ministry of Planning and Development. This forthcoming initiative is expected to include liberalizing the banking sector, readjusting the exchange rate to strengthen the birr’s market-based valuation, and eventually introduce a liberalized foreign currency market.
Read also: Journey Through Ethiopian Orthodox History
Trade Dynamics
Ethiopia’s trade deficit has been widening, with total imports rising by more than 12% annually on average during the last 11 years. The trade deficit grew to $14 billion in 2022 from nearly $11 billion in 2021, with total imports reaching $18 billion due in part to rising imports of consumer goods, fuel, and semifinished goods.
According to an annual NBE report, 42% of total import spending ($7.6 billion) was on consumer goods and 17% ($3 billion) was on capital goods.
In 2021-the most recent year in which United Nations COMTRADE data is available-Ethiopia’s major goods exports included coffee (27%), gold (15%), oil seeds (9%), vegetables (7%), flowers (5%) and legumes (5%). The top five destinations for Ethiopian exports in 2021 were United Arab Emirates (18%), the United States (14%), Somalia (9%), China (7%), and Germany (6%).
Ethiopia’s imports from the United States have increased steadily throughout the past decade. In 2022, Ethiopia imported over $1 billion worth of goods from the United States, with transportation equipment-primarily in aviation-comprising the largest segment, followed by construction equipment, agricultural machinery, and engineering services.
Imports from Ethiopia (Million)
| Product | Value | Product | Value |
|---|---|---|---|
| Transportation Equipment | $494 | Apparel and accessories | $349 |
| Agricultural Products | $290 | Agricultural products | $214 |
| Processed Foods | $85 | Good returned | $83 |
| Other Special classification provisions | $46 | Processed Foods | $27 |
| Machinery, Except electrical | $43 | Transportation Equipment | $10 |
Chinese companies, supported by the Government of the People’s Republic of China’s trade and project finance agencies, are active in Ethiopia and aggressively pursue projects in the infrastructure and textile sectors. Indian and Saudi Arabian firms are mainly involved in the agricultural sector. Many Indian companies have also begun to invest in government-sponsored industrial parks. Dutch companies play a prominent role in the floriculture industry and Turkish and Chinese companies are increasingly engaged in manufacturing, particularly textiles and garments, as well as in construction.
Investment and Incentives
The GOE offers investment incentives with the goal of attracting FDI, particularly for projects with an export focus. By making investments in designated priority industries, American businesses operating in Ethiopia can take advantage of tariff and duty-free benefits. However, those benefits were suspended by the Biden Administration in January 2022 due to government concerns of human rights violations. The GOE is making efforts to have AGOA preferences returned in 2024.
Ethiopia is also a member of the Common Market for Eastern and Southern Africa (COMESA), a regional economic bloc, which has 21 member countries and has introduced a 10 percent tariff reduction on goods imported from member states. Ethiopia has not yet joined the COMESA free trade area, however.
In April 2020 Ethiopia became a member of the African Continental Free Trade Area (AfCFTA). The AfCFTA aims to create a single continental market for goods and services, with free movement of businesspersons and investments.
Infrastructure and Logistics
As a landlocked country, Ethiopia relies heavily on the port of neighboring Djibouti for the import and export of goods. Other ports, such as Port Sudan in Sudan, Berbera in Somalia and Assab and Massawa in Eritrea are used to a far lesser degree - but this may change as the GOE has signaled a desire to reduce its dependence on Djibouti’s port.
Ethiopia has built seven inland ports in Modjo, Kallity, Semera, Mekelle, Dire Dawa, Gelan, and Kombolcha with an installed handling capacity of 22,000 containers. The dry ports, notably Modjo, approximately 70 kilometers from Addis Ababa, serve as intermediate logistics destinations for cargo. Most goods are transported by trucks from the neighboring ports to Addis Ababa and other parts of Ethiopia.
A Chinese-led infrastructure project to revamp Ethiopia’s rail system, which connects Djibouti’s port to Addis Ababa began operations in 2018. Cargo capacity on the rail network is 3,500 to 4,000 tons of freight per train, with the Ethiopian Railway Corporation (ERC) anticipating 6 to 7 million tons of cargo per year in its first few years of operation and increasing to 10 million tons in the mid-term.
Political Landscape
Current Prime Minister (PM) Abiy Ahmed came to power in April 2018 through a vote by the House of Peoples Representatives (the lower house of Parliament). The vote followed his selection in March 2018 as chairman of the ruling EPRDF. Following his appointment as chairman of the EPRDF and Prime Minister of Ethiopia, the executive committee of the EPRDF decided by majority vote to dismantle that party structure and form a new party without ethnic affiliation, the Prosperity Party (PP), in December 2019. Most members of the former EPRDF joined the newly formed PP.
With the spread of COVID-19, the August 2020 election was first postponed to June 5, 2021, and then again to June 21, 2021. When Ethiopia’s sixth general election was held at that point, the leading Prosperity Party won 510 of the 547 House of Parliament seats that allowed the Party to form a ruling government for the next five years.
