Ethiopia Economic

Outlook 2016
The Story Behind
the Numbers
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2| Economic Outlook 2016

Preamble

The Ethiopia Economic Outlook 2016 report provides an overview of Ethiopias economic environment and key sectors. The report also highlights
significant allocations from the 2016/17 budget to various sectors in the country.

June 2016

Economic Outlook 2016 | 3

Ethiopia Economic Review
Political overview
Ethiopias ruling party, Ethiopian Peoples Revolutionary Democratic
Front (EPRDF), which has been in power since 1991 asserted its grip in
the countrys politics by clinching 500 out of the 547 available seats in
the May 2015 parliamentary elections. With the next legislative elections
slotted for 2020, the EIU predicts a relatively stable political environment
with EPRDF expected to remain dominant.
According to BMI, Ethiopia, continues to face increasing ethnic tensions
specifically from the Oromo, Ethiopias largest ethnic group who claim
political and economical marginalisation. BMI is cautious that the heavy-
handed approach of the security services is subduing rebel groups in the
country that have moved to form coalitions with the aim of unseating
the current government will compromise the prospects of policy
continuity in the medium term.
Ethiopia faces terrorist threats, primarily from the Al-Shabaab insurgents
even as the African Union Mission in Somalia (AMISOM) (of which
Ethiopian troops are a part) continues to battle the group. BMI
however notes that the country is unlikely to suffer from large-scale
terrorist attacks over the medium term, due to its robust military and
counterterrorism forces.
4| Economic Outlook 2016
Economic overview
Ethiopias long term development framework is underpinned by the 5
year Growth and Transformation Plans (GTPs) which runs from 2015
to 2020. The GTP targets annual GDP growth of 11% (driven by the
manufacturing sector and rise in exports) and enabling Ethiopia to reach
middle income status by 2025.
BMI projects that Ethiopias economic growth trajectory to be shaped by
the state-led model that has been responsible for a decade of growth.
Real economic growth is projected at 7% between 2016 and 2025
as the government continues its heavy public investment into priority
sectors such as infrastructure, agriculture and manufacturing.
According to IMFs Article IV Consultation, Ethiopias large scale public
investment in infrastructure is supporting structural transformation and
growth. Notably, major hydropower projects such the Grand Ethiopia
Renaissance Dam which at 6,000 MWs will be the largest in Africa, will
triple Ethiopias generation capacity to roughly 9,000 MWs adequate
enough to meet domestic demand and export.
 Chart 1: Real GDP growth rates (%) GDP
11 The Business Monitor International (BMI), projects Ethiopias
real Gross Domestic Product (GDP) to record a 7.8% growth
10 rate in 2016 from an 8.1% growth rate in 2015 driven by the
Governments continued large-scale investment under the
9
11
second phase of its Growth And Transformation Plan (GTP II).
8
10 BMI reports that manufacturing and agricultural sectors
will be the main contributors to real GDP growth between
97
2016 and 2020 due to the governments investment in the
86 countrys infrastructural backbone by improving logistics
channels. Ethiopias investment into the fixed capital
75 formation and construction industry will grow by 14% per
64
year over 2016 and 2017. This will attract Foreign Direct
13 14 15 E F F F F F F F F F Investments (FDIs) in the country to ensure sustained
20 20 20 16 17 18 19 20 21 22 23 24 25
20 20 20 20 20 20 20 20 20 20
5 economic growth.
Source: BMI Research
4
13 14 15 16
E
17
F
18
F
19
F
20
F
21
F
22
F
23
F
24
F
25
F Inflation
20 20 20 20 20 20 20 20 20 20 20 20 20
12 The Economic Intelligence Unit (EIU) in January 2016 reported
Chart 2: Annual consumer price inflation rates (%) that inflation grew at an average of 10.1% in 2015 and is
10 expected to increase in 2016 to 10.7% in 2016 owing to the
12 El Nino weather phenomenon. The resultant low crop yields
will reduce the food supply and result in higher food prices.
8
10
Inflation is expected to average 9% between 2017 and 2020
as food supply improves and local prices moderate. The EIU
6
however notes that a sharp decline in inflation is unlikely
8
given the forecasted strengthening of oil prices in 2017/18,
4 continued fiscal deficits and a depreciating exchange rate.
6 A decrease in inflation from the current high levels could have
2 a positive impact on the economy by lowering costs of living
13 14 15 F F F F F F F F F F
4 20 20 20 16 17 18 19 20 21 22 23 24 25 and improve demand for products.
20 20 20 20 20 20 20 20 20 20

2
13 14 15 F F F F F F F F F F
20 20 20 16 17 18 19 20 21 22 23 24 25
20 20 20 20 20 20 20 20 20 20

35 Source: BMI Research, EIU

30
35

Economic Outlook 2016 | 5

25
30
11

10

5
Exchange rates
4According to the EIU, the Ethiopian birr (ETB) is closely managed by the
13 14 15 016E 017F 018F 019F 020F 021F 022F 023F 024F 025F
20 bank
central 20 which
20 uses2 the 2exchange
2 2 as a2policy2tool- 2balancing
rate 2 2 2
the impact of imported inflation and maintaining export competitiveness
by devaluing the ETB.
12
BMI expects the ETB to gradually weaken by 19% against the US Dollar
and by 33% against the Euro between 2016 and 2020 in line with the
10
National Bank of Ethiopias (NBEs) managed floating rate exchange
rate system. This depreciating exchange rate will continue to exert
8inflationary pressures.

6The weakening of the ETB will make imported raw materials and
machinery more expensive which will put an upward pressure on the
4prices of products.

2
13 14 15 F F F F F F F F F F
20 20 20 16 17 18 19 20 21 22 23 24 25
20 20 20 20 20 20 20 20 20 20

Chart 4: Exchange rates in Ethiopia

35

30 ETB/USD

ETB/Euro

25

20

15
13 14 15 F F F F F F F F F F
20 20 20 16 17 18 19 20 21 22 23 24 25
20 20 20 20 20 20 20 20 20 20

Source: BMI Research, EIU

6| Economic Outlook 2016

18
Sectoral perspectives
Financial services
Ethiopia has continued to be one of the fastest-growing countries in
Africa, with BMI predicting close to a 7.5% growth maintained over the
next four years.
As the government pushes ahead with its Growth and Transformation
Plan (GTP), it can be expected that the GDP will peak at close to 3% of
deficit, in order to help industries in the country attain growth overall.
Banking
The banking sector in Ethiopia consists of 2 public banks and 16 private
banks. It is dominated by the Commercial Bank of Ethiopia, which
controls 70% of the total assets in the country, according to the IMF.
The other 30% is controlled by the other private banks. The reason for
this success of the CBE is that it is a fairly well-run and efficient bank,
and provides an element of security in that it is run by the government.
It should be noted that the financial sector in Ethiopia is highly regulated
and completely closed from foreign companies. The complete closure of
the financial sector to foreign companies has limited the opportunities
for competition in the financial sector.
The Development Bank of Ethiopia (DBE) extends short, medium and
long-term loans for viable development projects, including industrial
and agricultural projects. It also provides other banking services, such
checking and saving accounts to its clients. It provides long-term
loans for construction plants, schools, acquisition or maintenance of
dwellings, and real estate development. In addition, it offers all other
commercial banking services to business.
The microfinance sector is relatively well developed but not strictly
supervised. At last count about 31 MFIs, reaching 2.4 million people,
operated in the country and have become a major source of financial
services to many farmers and businesses. Some unlicensed NGOs are
also active in the delivery of microfinance services through informal
channels.
8| Economic Outlook 2016
Ethiopia will show growth in the sector over the coming years according
to the IMF, but could greatly expand its horizons by opening up to
international banks.
Insurance
The Ethiopian insurance industry is relatively under developed in
comparison to that of other African countries. While it does house 14
insurance companies, all of them are relatively weak and small-scale.
There is little development in the sector, and thus also little information
available about it.
The insurance sector has been recognized as a great sector for
investment in Ethiopia, due to the low levels of development currently
present, leaving potential for growth.
Capital markets
Ethiopia does not have a secondary capital market, but is currently in
the process of developing one that is expected to be open by the end
of 2016.
The government borrowed close to $1 billion from its Eurobond in order
to fund development of the system and structure of the market, and is
beginning to see positive results.
The World Bank states, however, that foreign investors will most likely
be barred from participating in the countrys markets, as has been the
case in most sectors in the country. However, the opening of the capital
market will regardless show signs of development in the country, and
will promote growth.
Public sector
Security
As would be expected from a developing country in East Africa, Ethiopia
takes its fair share of crime. Petty theft, robbery, vehicle theft and
burglary are fairly common in the country, especially in the developed
urban center of Addis Ababa. The abundance of private security outfits
only goes to buttress the fact that Ethiopia requires intervention to keep
its crime to a low.
Ethiopia currently spends only $550 million (0.91% of its GDP) on
military enforcement, which may show why the country has a low
security score. In December 2015, however, Ethiopia signed a $200
million deal with Kenya to help strengthen their borders. If Ethiopia is to
strengthen its borders and its region, it must look towards expanding its
military capabilities.
Construction and Infrastructure
Ethiopia is expected to see huge growth in the construction and
infrastructure sector, with BMI predicting it to be the leader is such
growth in the East Africa region.
BMI predicts an 18.5% growth for Ethiopias infrastructure in 2016, and
an average growth rate of 10.7% in real terms over the next 10 years.
The Growth and Transportation Plan (GTP) is entering its second phase,
from 2016-2020. This phase emphasizes key focus on hotel and airport
improvement, which should also help boost tourism and international
investment.
Ethiopia is receiving investment from the African Development Bank
(AfDB), The Black Rhino Group, UK-based Turner & Townsend to help
build large highways and roads across the country, in order to help
reduce transportation costs for goods.
The government is determined to increase road coverage from 20% to
22% by August 2016, with assistance from the China Seventh Group
and the Export-Import Bank of Korea. This project will focus on building
another 917 km of roads.
Ethiopia is a clear outperformer in this sector not only in Africa, but in
the world. BMI ranks Ethiopia as the second faster grower worldwide in
this sector, only behind Myanmar.
Energy and Resource
Ethiopia has one of the lowest levels of modern energy access in
Africa, with a strongly rural breakdown of energy provision. 92.4% of
Ethiopias energy supply stems from biomass, 6.7% from oil, and a mere
0.9% from hydropower.
According to the World Bank, only an estimated 12% of the population
has access to electricity, and only 2% of the rural population fall under
this category. The overloading of the network frequently disrupts the
power supply of large commercial and industrial customers. There is a
need for substantial investments in the power system.
Ethiopia has an abundance of natural resources for energy generation
purposes, especially for hydropower. However, as of 2014, only 8%
of the 54 potential GW have been used, with little commitment being
shown towards developing the ability to use the rest.
The Ministry of Water, Irrigation and Electricity (MoWIE), however, has
recently recognized this potential, and has discovered that Ethiopia (the
contributor of 86% of the Blue Nile) has a potential of 45,000 MW in
hydropower, making it the second highest in all of Africa. MoWIE is
working closely with the Ethiopian Electric Utility (EEU) and Ethiopian
Electric Power (EEP) to attract investors in the hydropower industry from
nearby countries, such as Kenya.
The World Bank has provided Ethiopia with millions of dollars in 5-year
loans, in order to facilitate energy development. The government plans
to increase the electric grid connectivity by 2020, and hope to begin
construction on the Nile within the next year. Political issues with Egypt
over control of the Nile may hinder the process, but Ethiopia can be
expected to see between 6-10% of growth in this sector over the next
five years, according to USAID.
Economic Outlook 2016 | 9
Education
Ethiopias education system underwent major changes over the last
century, switching over from the Ethiopian Orthodox Church system
(which had dominated for many centuries before) to a secular education
system.
Since the 1974 revolution, Ethiopia has seen massive improvement to its
educate populace: it went from a 90% illiteracy rate in 1974 to a 48%
rate today.
While this is a fairly large change in terms of numbers, education in
Ethiopia remains less than satisfactory, especially in rural areas where
facilities are often thinly spread. It begins with 8 years of primary school
followed by 2 years each of middle and high school. Sadly, children in
urban areas are far more likely to succeed because many poorer tribes
consider work a priority.
A key problem in the system is also the abundance of corruption, with
large amounts of assigned budget money going missing along the
way, and with political influence often swaying people in the system.
80% of teachers expressed dissatisfaction with the system and over
50% citing the influence of political parties as a detriment to the system.
To help the system, the government has set up the Higher Education
and Relevance Quality Agency (HERQA) to monitor the quality of
education provided in higher education institutions. HERQA also assists
in training teachers, providing resources, and ensuring that money
assigned reaches where it is meant to.
A research group stated that the root cause of the poor quality of
education in Ethiopia is the misguided, politicized, and authoritarian
administration of the education system by the government, along with
the regimes lack of political will to truly address this root cause of the
problem.
For now, it seems Ethiopias education sector is making progress, but
slowly so. In order to grow in the future, Ethiopia will be looking to
improve this sector above most.
10 | Economic Outlook 2016
Agriculture
Agriculture is very much the base of Ethiopias economy, standing as the
base and the building block of what the country is today.
The agriculture sector accounts for 50% of the countrys GDP, 85% of
exports, and over 80% of total employment in the labor force.
Principal crops include coffee, pulses, potatoes and sugarcane. These
crops thus also spurs great amounts of activity in industries such as
manufacturing, transport and marketing.
Ethiopias agriculture sector, however, faces many threats. These include
soil degradation due to overuse, drought, high tax rates, low subsidies,
and poor infrastructure.
USAID and Ethiopias government are working together to combat
such issues, by providing agricultural education, technology, and better
roads. The government is also in the process of regulating crop prices
via the Agricultural Marketing Corporation (AMC) which will be in
charge of influencing market prices and buying yield at increased prices,
to increase farmer income.
BMI predicts Ethiopias agriculture industry to grow rapidly between
2015 and 2020, citing the expected 14.8% growth in the sugar industry
over the next 5 years. Ethiopia aims to become a top-10 sugar producer
worldwide by 2020, which the government outlined in its Growth and
Transformation Plan (GTP). Ethiopias agriculture sector is a healthy and
important one, and it is safe to assume that it will continue to head in
the positive direction for a while to come.
Transport and Logistics
Ethiopias transport and logistics industry is looked after by the Ministry
of Transport and Communication.
Ethiopia has a well-established and functioning railway system, that it
shares with the neighboring Djibouti. The country has also begun to
privatize many aspects of its railways, including the recent transfer of
construction to Chinese contractor CREC. The Addis Ababa Light Rail
system also started in 2015, which is one of Africas most modern and
efficient intra-city public transport systems.
Seeing as Ethiopia is land-locked, it has an agreement with Djibouti to
use the Port of Djibouti for import and export. The Baro river is also
used for transport of freight. It is, however, a country that is not highly
focused on shipping and port exports, with only 12 ships in its access
fleet. Ethiopia also has 14 paved runways that can be used for transport
and cargo planes, which are all also fairly active.
According to BMI, the primary cause of concern for Ethiopia is in its
logistics department, where there have been multiple complaints and
faults. The challenge stems from the expensive and cumbersome trade
procedures within the country, and the lengthy transport times from the
port to the country. This has made it very expensive to transport goods
within the country, often causing firms to withdraw from the country,
leading to losses in GDP.
So far, Ethiopias government is taking strides in the transport
departments betterment, but there seems to be little being done for
the improvement of logistics and import laws, which may be a cause of
concern for the country.
Manufacturing
Manufacturing is by no means Ethiopias strong suit. The World Bank
has states that Ethiopia needs to improve how well products are
created and serviced.
Ethiopia has made little progress in the manufacturing sector over the
last few years. The Ethiopian government states that he manufacturing
sector, which accounts for merely 6% of GDP, is dominated by food,
beverage, textiles, hides & skins, and leather industries, and faces low
growth rates.
In order to combat this, the government has taken on the very
ambitious Industrial Park Program. This initiative is aimed at boosting
the manufacturing industry via Foreign Direct Investments (FDI).
According to the World Bank, the imperative is to build on the countrys
agricultural foundations by moving toward new tradable activities in
manufacturing that absorb large numbers of young and semi-skilled
workers.
The Bank also identified key areas where Ethiopia is looking to focus, in
order to boost growth. These were:
Increase productivity through skills development.
Improve access to finance for firms especially for SMEs
Address binding constraints including access to land and electricity.
Improve tax administration and simplify the tax system.
Improve trade logistics, customs procedures and trade regulations,
to promote export and FDI.
Simplify business entry regulations and processes to promote a
dynamic and thriving business sector.
Use a strategic and phased approach to develop Industrial Parks
based on best international practices.
Economic Outlook 2016 | 11
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