Ethiopia: Economic and Political Overview
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Africa's second most populous country (more than 120 million people) Ethiopia has experienced sustained growth of around 10% per year on average over the past decade. The main drivers of growth have been agricultural products and services, sustained by foreign development aid. However, the Ethiopian economy has been subject to multiple shocks over the past two and a half years, including the COVID-19 pandemic, drought, conflict in the north, and the war in Ukraine, creating significant macroeconomic and humanitarian challenges. According to the latest IMF estimates, GDP growth decelerated to 3.8% in 2022 (from 6.3% one year earlier). For 2023, the economy is expected to pick up to 5.3%, driven by industry and by private consumption and investment, replacing Kenya as the fourth-largest economy in sub-Saharan Africa amid the easing of armed conflict in the nation and the continuation of ambitious economic reform programmes (IMF).
According to figures by Fitch Ratings, the general government fiscal deficit widened to 3.4% of GDP in FY22, owing to lower revenue collection and a supplemental budget that increased military and humanitarian spending. However, the debt-to-GDP ratio decreased to 46.4% in 2022, from 53% one year earlier, and is expected to decline further this year (40.4%) and the next (37.4% - IMF). While more than half of government debt is held by external creditors, the overwhelming majority is held by multilateral and bilateral lenders. A significant share of domestic debt has been in the form of direct advances from the National Bank of Ethiopia, reaching ETB 160 billion (2.7% of GDP) as of end-FY22 (Fitch Ratings). Ethiopia has been recording high levels of inflation in recent years, with a further uptick in 2022 (to 33.6%) due to the rise in food prices (which account for the largest share of the consumption basket) exacerbated by drought in some areas and the Tigray conflict that complicated domestic supply chains. For 2023 and 2024, inflationary pressures should ease, with a marginal decrease in the inflation rate to 28.6% and 21.1%, respectively (IMF forecast). Furthermore, progress on implementing roadmaps on foreign exchange reforms and modernization of monetary policy should help address foreign exchange shortages and reduce inflation. The authorities are pursuing the “Homegrown Economic Reform Plan”, which consists of a mix of macroeconomic, structural and sectorial policies, to address vulnerabilities and tackle structural bottlenecks inhibiting private sector activity. Also, numerous projects will be launched under the third “Growth and Transformation Plan 2021-2025”. According to the IMF, in the medium term, macroeconomic and structural reforms should lead to a reduction in public debt, lower external vulnerabilities, and stronger growth, investment and exports. Nevertheless, this outlook can be challenged by downside risks, in particular from domestic opposition to reforms, rising protectionism worldwide, the war in Ukraine, and climate-related shocks.
Although GDP per capita has doubled over the last 10 years before the COVID-19 pandemic, it remains one of the lowest in the world (estimated at USD 3,434 in 2022 by the IMF – PPP). Demographic dynamics and a low initial level of development make poverty reduction challenging. Life expectancy at birth is only 64 years and the average duration of schooling is 7.8 years. According to the World Bank, the unemployment rate in 2021 stood at 3.7% of the total labour force (latest data available).
| Main Indicators | 2022 | 2023 (E) | 2024 (E) | 2025 (E) | 2026 (E) |
| GDP (billions USD) | 120.37 | 155.80 | 192.01 | 223.52 | 248.94 |
| GDP (Constant Prices, Annual % Change) | 6.4 | 6.1 | 6.2 | 6.5 | 6.7 |
| GDP per Capita (USD) | 1,156 | 1,473 | 1,787 | 2,048 | 2,245 |
| General Government Gross Debt (in % of GDP) | 46.4 | 37.9 | 31.2 | 28.9 | 29.0 |
| Inflation Rate (%) | n/a | 29.1 | 20.7 | 16.5 | 12.6 |
| Current Account (billions USD) | -5.17 | -3.73 | -3.88 | -2.77 | -4.26 |
| Current Account (in % of GDP) | -4.3 | -2.4 | -2.0 | -1.2 | -1.7 |
Source: IMF – World Economic Outlook Database, October 2021
Ethiopia has one of the largest livestock herds in Africa and a strong hydropower energy potential, estimated at 954 TWh. It is the 5th-largest coffee producer in the world (by volume) and the 7th-largest coffee exporter (in value); the 3rd producer of oilseeds; the 11th producer of dry beans (FAO, 2022). The agricultural sector contributes to more than a third of Ethiopia’s GDP (37.6%) but is considered the foundation of the country's economy as it employs more than two-thirds of the workforce. The main agricultural products are cereals, coffee, oilseed, cotton, sugarcane, vegetables, khat, cut flowers, hides, cattle, sheep, goats and seafood. However, the country is plagued by periodic drought, soil degradation and deforestation. The most consumed cereals in the country are maize and wheat. While the country is self-sufficient in maize, it imports about 30% of its wheat requirements. Also, the agricultural sector is hindered by high levels of taxation and poor infrastructure, which makes it problematic and expensive to deliver goods to markets. The government has been making sustained efforts to add value to its agricultural products and is planning to develop large agro-industrial parks across the country.
The industrial sector gives a modest contribution to the country’s GDP (21.9%) and occupation (9% of the workforce). The main industries are food processing, beverages, textiles, leather, garments, chemicals, metals processing and cement. The manufacturing sector still has a low impact on total exports but is expected to grow in the coming years: overall, it is estimated to account for only 5% of the GDP. Recently, a large number of companies outsourced their textile production from Asia to Ethiopia.
The tertiary sector leads Ethiopia’s foreign exchange earnings, primarily thanks to the state-run Ethiopian Airlines. It accounts for 36.3% of GDP and is estimated to employ 24% of the workforce (World Bank). Tourism and telecommunications are growing at a steady pace and are expected to play a major role in the country’s growth process. Though the Ethiopian government is in the process of privatizing many of the state-owned businesses and moving toward a market economy, the public sector still holds a predominant role in the economy, with sectors such as telecommunications, financial and insurance services, air and land transportation, and retail considered as strategic and thus expected to remain out of the privatization process in the foreseeable future. Besides, under the country’s constitution, the state owns all land and only provides long-term leases to tenants.
| Breakdown of Economic Activity By Sector | Agriculture | Industry | Services |
| Employment By Sector (in % of Total Employment) | 63.7 | 10.2 | 26.2 |
| Value Added (in % of GDP) | 37.6 | 22.7 | 36.6 |
| Value Added (Annual % Change) | 6.1 | 4.9 | 7.6 |
Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.
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The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}
Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation
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Latest Update: November 2023
