ECON Brief_Ethiopias Economic Growth

7/23/2019 ECON Brief_Ethiopias Economic Growth

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The African Development Bank GroupChief Economist Complex

Contents:

1.

Introduction

2. Recent Trend in RealGDP Growth

3. Sectoral Sources of

Growth and StructuralShift

4. Growth and PovertyReduction

5.

Explaining EthiopiasRecent Growth

6. Challenges ofSustaining Growth

1. Introduction

Ethiopia has experienced strongeconomic growth in recent years.With real GDP growth at or near

double digit levels since 2003/04, thecountry has consistently outperformed

most other countries in Africa and

expanded much faster than thecontinent-wide average (Figure 1). Atthe same time, the country still facessome structural weaknesses that present

significant challenges in the mediumterm.

Prepared by the following staff: Peter Mwanakatwe (p. mwanakatwe @afdb.org, Tel +216 7110

6707) ; and Lamin Barrow ([email protected]), Tel +216 7110 6707)

Mthuli [email protected]+216 7110 2062

Charles Leyeka [email protected]+216 7110 2175

Leonce [email protected]

+216 7110 2076

Figure 1: GDP Growth Rate Comparison

Economic BriefVolume1, Issue 5

17 September, 2010

Ethiopias Economic growth Performance:

Current Situation and Challenges

2. Recent Trend in Real GDP

Growth

2.1. Real GDP growth averaged11.2% per annum during the 2003/04and 2008/09 period, placing Ethiopia

among the top performing economiesin Sub-Sahara Africa. This growthperformance is well in excess of thepopulation growth rate and the 7percent rate required for attaining theMDG goal of halving poverty by2015. Yet, a number of issues warrantthe attention of policy makers.

.2. Ethiopias economy is highlyvulnerable to exogenous shocks by virtue

of its dependence on primarycommodities and rain fed agriculture.

Ethiopia has experienced major

exogenous shocks during the past five toseven years. These are notably droughtsand adverse terms of trade (e.g., prices ofcoffee and fuel). There is a strongcorrelation between weather conditions

and Ethiopias growthperformance.
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The last major shock to

growth was in 2002/03

when the economy

suffered a major decline

in real GDP growth on

account of severe

drought.

Ethiopias Economic Growth Performance: Current Situation and Challenges Page 2

A change of 1 percent in averageannual rainfall is associated with achange of 0.3 percent in real GDP inthe following year. The last majorshock to growth was in 2002/03 whenthe economy suffered a major decline

in real GDP growth on account ofsevere drought. Since then real GDPgrowth has consistently been above ornear two-digit levels.

2.3. Ethiopias recent growth hasbeen accompanied by mountingmacroeconomic pressures (which arenow easing). The country has had tograpple with the twin macroeconomicchallenges of high inflation and lowinternational reserves. Pressures on

prices and the balance of paymentheightened from FY 2007/2008 as aresult of the global food and economiccrisis. The difficult macroeconomicsituation Ethiopia faced during theperiod FY 2007/08 to 2008/09 is alsoattributable to the structuralweaknesses in the economy, includingsupply-side rigidities. The growingdomestic supply-demand gap, in thecontext of the surge in growth,contributed to a rise of inflation and

the depletion of foreign exchangebetween 2007/08 and 2008/09.

3. Sectoral Sources of Growth andStructural Shift

3.1. Although initially led byagriculture, the growth base is

broadening, with increasingcontributions to GDP from services andindustry.

As illustrated in Figure 2, the pace ofagriculture sector growth during the

2003/04-2008/09 period declined, whilethe industrial and services sectors grewmore rapidly.

Until recently, agriculture (particularlysmall holder crop production) was by farthe most dominant sector. In 2003/04the crop production alone accounted for60 percent of overall GDP growth.

Though agriculture production hasincreased considerably, due to favorable

weather conditions and enhancedsupport by Government (e.g., improvedsupply of fertilizer) agriculturaproductivity remains low. Theexpansion in agriculture production hasbeen driven by increases in the area oland cultivated, rather than majorimprovements in productivity. Givencurrent technological conditions and thestructure of production, pushing theproduction frontier further is difficuldue to the already existing pressures on

the land.

Figure 2: Sectoral growth rate

Though agriculture

production has

increased considerably,due to favorable

weather conditions and

enhanced support by

Government (e.g.,

improved supply of

fertilizer) agricultural

productivity remains

low.


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3.2.The share of the services sector inGDP has been rising, while that ofagriculture has been declining steadily(Figure 3). The agriculture sectorsshare of GDP declined by threepercentage points between 2003/04and 2008/09 and has now beensurpassed by services. This impressivegrowth in services was driven by therapid expansion in financialintermediation, public administrationand retail business activities. Theseservices sub-sectors grew by morethan 10 percentage point in GDP shareduring the past five years.

Some analysts, in fact, are forecastingthat the services sector will make upmore than 50 percent of EthiopiasGDP in just two years time. On theother hand, the share of industry inGDP has remained relatively static,amounting to between 13 and14 percent. The manufacturing sub-sector contributed less than 4 percent ofGDP growth in 2008/2009. The lowshare of the manufacturing sector, acrucial sector in transforming aneconomy, is a concern for the Ethiopian

Government.

4. Growth and Poverty Reduction

The Ethiopian government attachesgreat importance to fostering rapideconomic growth with equity. Indeed,

acceleration in Ethiopias growth hasbeen a key factor in the reduction inthe incidence of poverty.

According to the 2004 HouseholdIncome and Expenditure Survey(HICES), the proportion of peoplebelow the poverty line at national levelmeasured by the poverty head countindex declined from 44.2 percent in1999/00 to 38.7 percent in2004/05.

Much of the decline in national povertyreported in the last HICES is attributedto a fall in headcount poverty in ruralareas. A new HICES by the Central

Statistical Authority that is currentlyunderway is expected to show furtherdeclines in the poverty head count

index.


Figure 3: Structural Composition of Economy

The agriculturesectors share of GDP

declined by three

percentage points

between 2003/04 and

2008/09 and has now

been surpassed by

services.

The Ethiopian

overnment attaches great

importance to fosteringrapid economic growth

ith equity. Indeed,

acceleration in Ethiopias

rowth has been a key

actor in the reduction in

the incidence of poverty.


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Heavy investment to address

infrastructure bottlenecks:The concerted infrastructure push hasbeen a particularly important factor indriving growth. Over the past fiveyears, the Government and publicenterprises have invested about US $ 6

billion in roads, telecommunication,and energy sector. Those hugeinvestments have led to a majorexpansion in infrastructure, albeit froma low base. For example, the powergeneration capacity has nearly doubledand the paved road network increasedthree-fold. Overall, the heavy publicinvestment in infrastructure and socialservices has created a major expansionin domestic demand, raising overallgrowth.


5. Explaining Ethiopias RecentGrowth

In addition to favorable weatherconditions for agriculture during thelast couple of years, several otherdrivers help explain Ethiopias recentgrowth:

Conducive Government Policies:In recent years, the government hasadopted a robust growth and povertyreduction strategy, focusing oninfrastructure development,commercialization of agriculture,improvements in access to basicservices, as well as on private sectordevelopment, including the creation ofappropriate regulatory and institutionalframeworks to support privatebusiness.

Business registration and licensingprocedures and requirements have beenstreamlined, leading to a reduction intransaction costs. Improvements inpolicies along with major public

investments in infrastructure haveunderpinned Ethiopias recent growthin output and services, as well as theexpansion and diversification of itsexports. Incentives provided to neweconomic activities have started toyield results. The flower industry is acase in point. Flower exports haveexpanded from less than USD 10million in 2004/05 to close to USD 170million in 2009/10 (Figure 4). Thesuccess story of the flower industry

could be replicable in other economicactivities with export potential.

Figure 4: Flower Export in Million US$

Expansion of Exports and

remittances:The countrys exports have also beengrowing strongly, averaging about 25.1percent per annum since 2003/04.While coffee remains the largest sourceof merchandize export earnings, non-

traditional exports have registeredfaster growth. As a result, the share ofnon-coffee exports rose from 40percent in 1997 to 65 percent in 2008.In this regard, the growing demand byChina and India for Ethiopias non-traditional exports, such as sesame andother oilseeds, has contributed to thecountrys output and export growth.Indeed, the continued rapid expansionof both these economies is likely tosustain the growth in Ethiopias

exports in the medium term.

I n recent years, th

government ha

adopted a robust

growth and povert

reducti on strategy,

focusing on

infrastructur

development,

commerciali zation of

agriculture,

improvements in access

to basic services...

The concerte

in fr astructure push has

been a parti cular ly

important factor in

driving growth.


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Likewise, remittances and FDI havealso been growing at an impressiverate. Net private transfers haveincreased by three-fold within the lastfive years, surpassing export earnings.

Remittances by Ethiopians livingabroad to relatives and investment inEthiopia have also played a significantrole in the surge in private transfer.Imports have been growing by about20 percent per annum since 2003/04.

Increased public expenditure to

enhance pro-poor growth:Public expenditure has been growingby about 19 percent per annum since2003/04. The share devoted to pro-

poor sectors in the total increased fromabout 26 percent in 1999/00 to about43.3 percent in 2002/03 and 64 percentin 2008/09, up by 26.7 percent perannum since 2003. The publicexpenditure is concentrated ininfrastructure and human capitaldevelopment. In particular, there hasbeen a major expansion in socialservices through the construction ofnew primary schools and healthfacilities.

Increased domestic revenue

mobilization and aid:

Government revenue has increased byabout 21 percent per annum on averagesince 2003/04, even though revenue asa percentage of GDP has declined fromabout 23 percent in 2002/03 to about12 percent in 2007/08. Tax revenuereached about 35.7 billion Birr in2009/10 from about birr 11 billion in2003/04, up by 37 percent per annum

on average. At the same time, externalaid volumes have increased in recentyears, reaching USD 1.6 billion in2008/09 from USD 0.9 billion in2004/05. This surge in external aid,alongside improved domestic revenuemobilization, has enabled theGovernment to increase spending oninfrastructure, thereby stimulating

growth.

6. Challenges of Sustaining Growth

6.1. A major challenge for Ethiopiais to sustain its current high growthrate, while ensuring that that growth is

also shared. Agriculture remains thecountrys largest source of growthHowever, given the mounting pressureon land, sustaining higher rates ofgrowth in agriculture production overthe medium term will requiresubstantial improvements in factorproductivity. Consequentlytransformation in the structure ofproduction (which is mostlysubsistence-based) to morecommercially-oriented small-scale

production, including for exports, willbe key in sustaining growth. TheGovernments new five yeardevelopment plan, currentlypreparation, is likely to have a majorfocus on commercialization ofagriculture and development of agrobusiness.

6.2. The industrial sector of Ethiopia issmall and highly import dependent. Inturn, this means that Ethiopias high

growth is still vulnerable to foreignexchange shortages. Diversificationtowards the industrial sector is thus keyto sustaining high growth in the longrun. This will require more privateinvestment, in export orientedeconomic activities and in importsubstituting industries. Both of theserequire public investment ininfrastructure. In recognition of thischallenge, the Ethiopian Governmentsnew poverty reduction and growth

strategy includes a stronger policyfocus on industrialization to supporteconomic transformation. In thisregard, the Government has alsoreceived capacity building support forthe re-design of its industrial policyincluding from the Government of

Japan.

Thi s surge in external

aid, alongside improvedomestic revenu

mobili zation, has

enabled th

Government to

increase spending on

inf rastructure, thereb

stimulating to growth.

Amajor chall enge for

Eth iopia is to sustain

its current growth ratwhil e ensuri ng that tha

growth is also dynamic.

Agriculture remains th

countrys largest source

of growth

Documents

ECON Brief_Ethiopias Economic Growth