Barrow, Lamin

Mwanakatwe, Peter

English

Research Papers in Economics

                  The African Development Bank Group 
                Chief Economist Complex 
      
 
 
 
 
 
 
 
 
   
 
 
Contents: 
1.    Introduction 
2.  Recent Trend in Real 
GDP Growth  
 
3.  Sectoral Sources of 
Growth and Structural 
Shift  
 
4.  Growth and Poverty 
Reduction 
 
5.  Explaining Ethiopia’s 
Recent Growth  
 
6.  Challenges of 
Sustaining Growth 
 
 
1.  Introduction 
 
Ethiopia  has  experienced  strong 
economic  growth  in  recent  years. 
With  real  GDP  growth  at  or  near 
double digit levels since 2003/04, the 
country has consistently outperformed  
 
most  other  countries  in  Africa  and 
expanded  much  faster  than  the 
continent-wide  average  (Figure  1).  At 
the  same  time,  the  country  still  faces 
some structural weaknesses that present 
significant  challenges  in  the  medium 
term.  
   
 
 
 
 
Prepared by the following staff:  Peter Mwanakatwe (p. mwanakatwe @afdb.org, Tel +216 7110 
6707) ; and Lamin Barrow (l.barrow@afdb.org), Tel +216 7110 6707) 
    
 
  Mthuli Ncube 
  m.ncube@afdb.org 
  +216 7110 2062 
 
  Charles Leyeka Lufumpa 
  c.lufumpa@afdb.org 
  +216 7110 2175 
 
  Leonce Ndikumana 
  l.ndikumana@afdb.org 
  +216 7110 2076 
 
Figure 1: GDP Growth Rate Comparison 
 
Economic Brief 
Volume1, Issue 5 
17 September, 2010 
 
 
  Ethiopia’s Economic growth Performance: 
Current Situation and Challenges 
2. Recent Trend in Real GDP 
Growth 
  
2.1.  Real  GDP  growth  averaged 
11.2% per annum during the 2003/04 
and 2008/09 period, placing Ethiopia 
among the top performing economies 
in  Sub-Sahara  Africa.  This  growth 
performance is well in excess of the 
population  growth  rate  and  the  7 
percent rate required for attaining the 
MDG  goal  of  halving  poverty  by 
2015. Yet, a number of issues warrant 
the attention of policy makers. 
 
22.2.  Ethiopia’s  economy  is  highly 
vulnerable to exogenous shocks by virtue 
of  its  dependence  on  primary 
commodities and rain fed agriculture. 
 
Ethiopia  has  experienced  major 
exogenous shocks during the past  five to 
seven years. These are notably droughts 
and adverse terms of trade (e.g., prices of 
coffee  and  fuel).  There  is  a  strong 
correlation  between  weather  conditions 
and Ethiopia’s growth performance.  
 
 
“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.” 
 
 
Ethiopia’s Economic Growth Performance: Current Situation and Challenges     Page 2 
 
 
 
  
A  change  of  1 percent  in  average 
annual  rainfall  is  associated  with  a 
change of 0.3 percent in real GDP in 
the  following  year.    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.  Since then real GDP 
growth has consistently been above or 
near two-digit levels. 
 
2.3.   Ethiopia’s  recent  growth  has 
been  accompanied  by  mounting 
macroeconomic  pressures  (which  are 
now easing). The country has had to 
grapple with the twin macroeconomic 
challenges  of  high  inflation  and  low 
international  reserves.    Pressures  on 
prices  and  the  balance  of  payment 
heightened  from  FY  2007/2008  as  a 
result of the global food and economic 
crisis.  The  difficult  macroeconomic 
situation  Ethiopia  faced  during  the 
period FY 2007/08 to 2008/09 is also 
attributable  to  the  structural 
weaknesses in the economy, including 
supply-side  rigidities.    The  growing 
domestic  supply-demand  gap,  in  the 
context  of  the  surge  in  growth, 
contributed to a rise of inflation and 
the  depletion  of  foreign  exchange 
between 2007/08 and 2008/09. 
 
3.  Sectoral Sources of Growth and 
Structural Shift  
 
3.1. Although  initially  led  by 
agriculture, the growth base is   
broadening,  with  increasing 
contributions to GDP from services and 
industry.  
 
As  illustrated  in  Figure  2,  the  pace  of 
agriculture  sector  growth  during  the 
2003/04-2008/09 period declined, while 
the industrial and services sectors grew 
more rapidly. 
 
Until  recently,  agriculture  (particularly 
small holder crop production) was by far 
the  most  dominant  sector.  In  2003/04 
the crop production alone accounted for 
60 percent of overall GDP growth.   
 
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.    The 
expansion in agriculture production has 
been driven by increases in the area of 
land  cultivated,  rather  than  major 
improvements  in  productivity.    Given 
current technological conditions and the 
structure  of  production,  pushing  the 
production  frontier  further  is  difficult 
due 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.”  
 
 
3.2. The share of the services sector in 
GDP  has  been  rising,  while  that  of 
agriculture has been declining steadily 
(Figure  3).    The  agriculture  sector’s 
share  of  GDP  declined  by  three 
percentage  points  between  2003/04 
and  2008/09  and  has  now  been 
surpassed by services. This impressive 
growth in services was driven by the 
rapid  expansion  in  financial 
intermediation,  public  administration 
and  retail  business  activities.  These 
services  sub-sectors  grew  by  more 
than 10 percentage point in GDP share 
during the past five years. 
 
 
Some analysts, in fact, are forecasting 
that  the  services  sector  will  make  up 
more  than  50  percent  of  Ethiopia’s 
GDP  in  just  two  years  time.  On  the 
other  hand,  the  share  of  industry  in 
GDP  has  remained  relatively  static, 
amounting  to  between  13  and 
14 percent.  The  manufacturing  sub-
sector contributed less than 4 percent of 
GDP  growth  in  2008/2009.  The  low 
share  of  the  manufacturing  sector,  a 
crucial  sector  in  transforming  an 
economy, is a concern for the Ethiopian 
Government. 
4. Growth and Poverty Reduction 
 
The  Ethiopian  government  attaches 
great  importance  to  fostering  rapid 
economic growth with equity.  Indeed, 
acceleration  in  Ethiopia’s  growth  has 
been  a  key  factor  in the reduction  in 
the incidence of poverty.   
 
According  to  the  2004  Household 
Income  and  Expenditure  Survey 
(HICES),  the  proportion  of  people 
below the poverty line at national level 
measured  by  the  poverty  head  count 
index  declined  from  44.2  percent  in 
1999/00 to 38.7 percent in2004/05.  
 
 
 
 
Much of the decline in national poverty 
reported in the last HICES is attributed 
to a fall in headcount poverty in rural 
areas.  A  new  HICES  by  the  Central 
Statistical  Authority  that  is  currently 
underway  is expected  to show  further 
declines  in  the  poverty  head  count 
index. 
 
 
Ethiopia’s Economic Growth Performance: Current Situation and Challenges    Page 3 
 
 
 
  
Figure 3: Structural Composition of Economy 
 
 
“The agriculture 
sector’s share of GDP 
declined by three 
percentage points 
between 2003/04 and 
2008/09 and has now 
been surpassed by 
services.” 
“The  Ethiopian 
government attaches great 
importance  to  fostering 
rapid  economic  growth 
with  equity.    Indeed, 
acceleration in Ethiopia’s 
growth  has  been  a  key 
factor in the reduction in 
the incidence of poverty.”   
  
 
  Heavy  investment  to  address 
infrastructure bottlenecks: 
The concerted infrastructure push has 
been a particularly important factor in 
driving  growth.  Over  the  past  five 
years,  the  Government  and  public 
enterprises have invested about US $ 6 
billion  in  roads,  telecommunication, 
and  energy  sector.  Those  huge 
investments  have  led  to  a  major 
expansion in infrastructure, albeit from 
a  low  base.  For  example,  the  power 
generation capacity has nearly doubled 
and the paved road network increased 
three-fold.  Overall,  the  heavy  public 
investment in infrastructure and social 
services has created a major expansion 
in  domestic  demand,  raising  overall 
growth. 
 
 
 
Ethiopia’s Economic Growth Performance: Current Situation and Challenges    Page 4 
 
 
 
  
 
5.  Explaining  Ethiopia’s  Recent 
Growth 
In  addition  to  favorable  weather 
conditions  for  agriculture  during  the 
last couple of years, several      other 
drivers  help  explain  Ethiopia’s  recent 
growth:   
  Conducive Government Policies: 
In  recent  years,  the  government  has 
adopted  a  robust  growth  and  poverty 
reduction  strategy,  focusing  on 
infrastructure  development, 
commercialization  of  agriculture, 
improvements  in  access  to  basic 
services,  as  well  as  on  private  sector 
development, including the creation of 
appropriate regulatory and institutional 
frameworks  to  support  private 
business.  
Business  registration  and  licensing 
procedures and requirements have been 
streamlined,  leading  to  a  reduction  in 
transaction  costs.  Improvements  in 
policies  along  with  major  public 
investments  in  infrastructure  have 
underpinned  Ethiopia’s  recent  growth 
in  output and  services,  as  well  as  the 
expansion  and  diversification  of  its 
exports.  Incentives  provided  to  new 
economic  activities  have  started  to 
yield results. The flower industry is a 
case  in  point.  Flower  exports  have 
expanded  from  less  than  USD  10 
million in 2004/05 to close to USD 170 
million  in  2009/10  (Figure  4).    The 
success  story  of  the  flower  industry 
could be replicable in other economic 
activities with export potential.  
 
  Figure 4: Flower Export in Million US$ 
 
  Expansion  of  Exports  and 
remittances:  
The country’s exports have also been 
growing strongly, averaging about 25.1 
percent  per  annum  since  2003/04.    
While coffee remains the largest source 
of  merchandize  export  earnings,  non-
traditional  exports  have  registered 
faster growth. As a result, the share of 
non-coffee  exports  rose  from  40 
percent in 1997 to 65 percent in 2008. 
In this regard, the growing demand by 
China  and  India  for  Ethiopia’s  non-
traditional exports, such as sesame and 
other  oilseeds,  has  contributed  to  the 
country’s  output  and  export  growth.   
Indeed, the continued rapid expansion 
of  both  these  economies  is  likely  to 
sustain  the  growth  in  Ethiopia’s 
exports in the medium term. 
 
“In recent years, the 
government has 
adopted a robust 
growth and poverty 
reduction strategy, 
focusing on 
infrastructure 
development, 
commercialization of 
agriculture, 
improvements in access 
to basic services...” 
 
“The concerted 
infrastructure push has 
been a particularly 
important factor in 
driving growth.”  
 
 
 
 
 
Ethiopia’s Economic Growth Performance: Current Situation and Challenges    Page 5 
 
 
 
  
 
Likewise,  remittances  and  FDI  have 
also  been  growing  at  an  impressive 
rate.  Net  private  transfers  have 
increased by three-fold within the last 
five years, surpassing export earnings. 
Remittances  by  Ethiopians  living 
abroad  to  relatives  and  investment  in 
Ethiopia have also played a significant 
role  in  the  surge  in  private  transfer.   
Imports  have  been  growing  by  about 
20 percent per annum since 2003/04. 
  Increased  public  expenditure  to 
enhance pro-poor growth: 
Public  expenditure  has  been  growing 
by about 19 percent per annum since 
2003/04.  The  share  devoted  to  pro-
poor sectors in the total increased from 
about 26 percent in 1999/00 to about 
43.3 percent in 2002/03 and 64 percent 
in  2008/09,  up  by  26.7  percent  per 
annum  since  2003.  The  public 
expenditure  is  concentrated  in 
infrastructure  and  human  capital 
development.  In particular, there has 
been  a  major  expansion  in  social 
services  through  the  construction  of 
new  primary  schools  and  health 
facilities. 
 
  Increased  domestic  revenue 
mobilization and aid:  
Government revenue has increased by 
about 21 percent per annum on average 
since 2003/04, even though revenue as 
a percentage of GDP has declined from 
about 23 percent in 2002/03 to about 
12  percent  in  2007/08.  Tax  revenue 
reached  about  35.7  billion  Birr  in 
2009/10 from about birr 11 billion in 
2003/04, up by 37 percent per annum 
on average. At the same time, external 
aid  volumes  have  increased  in  recent 
years,  reaching  USD  1.6  billion  in 
2008/09  from  USD  0.9  billion  in 
2004/05.    This  surge  in  external  aid, 
alongside  improved  domestic  revenue 
mobilization,  has  enabled  the 
Government  to  increase  spending  on 
infrastructure,  thereby  stimulating 
growth.  
6.  Challenges of Sustaining Growth 
 
6.1.  A  major  challenge  for  Ethiopia   
is  to  sustain  its  current  high  growth 
rate, while ensuring that that growth is 
also  shared.  Agriculture  remains  the 
country’s  largest  source  of  growth. 
However, given the mounting pressure 
on  land,  sustaining  higher  rates  of 
growth in agriculture production over 
the  medium  term  will  require 
substantial  improvements  in  factor 
productivity.  Consequently, 
transformation  in  the  structure  of 
production  (which  is  mostly 
subsistence-based)  to  more 
commercially-oriented  small-scale 
production, including for exports, will 
be  key  in  sustaining  growth.  The 
Government’s  new  five  year 
development  plan,  currently 
preparation, is likely to have a major 
focus  on  commercialization  of 
agriculture  and  development  of  agro 
business. 
 
6.2. The industrial sector of Ethiopia is 
small and highly import dependent. In 
turn,  this  means  that  Ethiopia’s  high 
growth  is  still  vulnerable  to  foreign 
exchange  shortages.  Diversification 
towards the industrial sector is thus key 
to sustaining high growth in the long 
run.  This  will  require  more  private 
investment,  in  export  oriented 
economic  activities  and  in  import 
substituting  industries.  Both  of  these 
require  public  investment  in 
infrastructure.  In  recognition  of  this 
challenge, the Ethiopian Government’s 
new  poverty  reduction  and  growth 
strategy  includes  a  stronger  policy 
focus  on  industrialization  to  support 
economic  transformation.  In  this 
regard,  the  Government  has  also 
received capacity building support for 
the  re-design  of  its  industrial  policy, 
including  from  the  Government  of 
Japan.  
“This surge in external 
aid, alongside improved 
domestic revenue 
mobilization, has 
enabled the 
Government to 
increase spending on 
infrastructure, thereby 
stimulating to growth.” 
 
“A major challenge for 
Ethiopia   is to sustain 
its current growth rate 
while ensuring that that 
growth is also dynamic. 
Agriculture remains the 
country’s largest source 
of growth…” 

Economic Brief - Ethiopiaâ€™s Economic growth Performance: Current Situation and Challenges

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Economic Brief - Ethiopiaâ€™s Economic growth Performance: Current Situation and Challenges

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