Ethiopia’s shifting economic policy

Ethiopia’s entrenched economic policy positions were largely a reflection of the political and security vision of the EPRDF, and mainly that of Meles: Meles’s 2002 Foreign Affairs and National Security Policy and Strategy document underpinned the government’s industrialization and export-promotion strategy until the recent shifts under Abiy’s Homegrown Economic Reform Agenda, which began to emerge in late 2019. While economic policy is shifting slowly, it has already begun contributing to the positive engagement of the international financial institutions (IFIs) that in December 2019 had agreed to significant new concessional lending frameworks.18

The fundamental objective of the economic policy is to increase Ethiopia’s economic and national security by boosting exports and shifting it from being a net importer to a net exporter

During the past decade, the EPRDF had already shifted from its faltering programme of agricultural development-led industrialization. While the programme had led to increased agricultural output, it was struggling to stimulate the associated processing and light industrial sector businesses to create employment.19 The 2010–15 Growth and Transformation Plan (GTP) and the current 2015–20 GTP II have focused on physical and social infrastructure and on the promotion of industry in business parks around key urban centers linked to the main export routes. Under the two phases, some $28 billion is set to have been spent over the course of the past decade up until July 2020. The country’s road network has seen a dramatic transformation, with hundreds of thousands of kilometers of trunk and feeder roads developed and improved. Electricity and irrigation for large-scale agriculture have been the focus of a series of major dams (along with wind and geothermal projects), helping to bring the country’s electricity output to about 4300 megawatts (MW(e)) by 2018, up from 380 MW(e) in 1991. Notably, the GERD is set to add a further 4000–6000 MW(e) by the mid-2020s. The government has overseen a major expansion of primary, secondary and tertiary education and extension of health services, both of which had previously been concentrated in major urban centers, largely in the capital Addis Ababa. State-owned or state-led enterprises have been at the center of these initiatives, including for the construction of key infrastructure (although this is usually subcontracted to a third-party, often a foreign company).


Be the first to know – Follow us on [wp-svg-icons icon=”twitter-2″ wrap=”i”] @Saxafi

The fundamental objective of the economic policy is to increase Ethiopia’s economic and national security by boosting exports and shifting it from being a net importer to a net exporter.20 However—despite the high rate of real GDP growth (averaging 9.7 percent per year since 2010), poverty reduction (to 24 percent according to government figures) and increasing foreign direct investment (FDI, up from $288 million in 2010 to over $2.6 billion in 2015, and nearly $4 billion in 2016)—export growth has not taken off, fluctuating significantly year to year and averaging only about 4 percent over the last decade.

Prior to Abiy’s administration, the government had maintained its resistance to the orthodox economic liberalization packages; however, Abiy has made a series of moves that have important economic implications, especially related to the role of foreign investment in key sectors

Ethiopia has historically run a significant trade deficit, which, given controls on its capital account and limits on foreign investment, has created balance of payments strains and left the country significantly reliant on foreign aid and borrowing to avoid a foreign exchange crisis. Aid flows remain substantial, including from key bilateral (United Kingdom, United States) and multilateral donors/lenders (World Bank, African Development Bank), but balance of payments pressures have also remained intense. To finance its massive infrastructure campaign— for which human rights and other governance concerns have limited concessional lending from Western donors and multilateral institutions—Ethiopia has also turned to commercial (Eurobond) and other lenders (e.g. the Export–Import Bank of China).

As of 2018 gross government debt had risen to more than 61 percent of GDP (up from just over 40 percent of GDP in 2010). Infrastructure spending has also necessitated a significant boost in imports of inputs, including heavy machinery and fuel. Coupled with tepid export growth, the current account deficit has widened sharply over the GTP periods, from $425 million in 2010 to almost $6.6 billion in 2015–17. Even considering increased FDI and sustained aid flows, balance of payments pressure persists: the government has struggled to maintain sufficient hard currency reserves to cover imports, with foreign currency auctions regularly oversubscribed.21

Prior to Abiy’s administration, the government had maintained its resistance to the orthodox economic liberalization packages recommended by the International Monetary Fund (IMF) and World Bank—in particular liberalization of the capital account, through the introduction of a floating exchange rate and the lifting of restrictions on foreign investment in the banking, financial services and telecommunications sectors. Domestic private banks exist, but the sector is dominated by the state-owned Commercial Bank of Ethiopia and the Development Bank of Ethiopia. In November 2019, the government repealed the 2011 requirement that commercial banks must hold 27 percent of their balance sheet in government debt, which usually pays less than the rate of inflation and has hampered the sector’s lending to the private sector.22

Although the IMF’s current forecasts for Ethiopia reflect an underlying uncertainty given political factors, it appears to have taken a relatively benign view of the outlook for inflation and expects real GDP growth to average just under 7 percent over the next five years. Modest growth in exports is forecast, falling from about 10 percent in 2020 to around 5 percent from 2021, again reflecting uncertainty. The current account deficit is expected still to be a challenge, but at around $5.5 billion would reflect some improvement and a contrast with the sharp deterioration up to 2015–17, when it peaked at almost $6.6 billion, coinciding with the worst period of social unrest.

[su_button url=”” style=”soft” size=”12″ wide=”yes” center=”yes” text_shadow=”0px 0px 0px #FFFFFF” rel=”lightbox”]CONTINUE READING ON THE NEXT PAGE >[/su_button]

This site uses Akismet to reduce spam. Learn how your comment data is processed.