Economy of Ethiopia

Economy of Ethiopia

Ethiopia is a developing country with one of the fastest-growing economies in the world. It has a population of over 100 million people and is the second most populous country in Africa. The state plays a central role in the Ethiopian economy. For example, the transportation, banking, energy, and telecommunication sectors are all dominated by state-owned companies. Over the last few years, the Abiy Ahmed government has taken steps to privatize some of the state-owned companies which dominated the economy under the previous regime. However, experts predict that some of the sectors that are considered to be strategic such as defense, energy, telecommunication, and finance will continue to be controlled by the government. Ethiopia has one of the youngest populations around the world with 50% of its people being under the age of 18. Although the country has managed to increase educational enrollment from the primary to the tertiary level, the economic growth has not been fast enough to accommodate the large numbers of people who join the labour market every year.

In 2023, the country had a GDP of 156.1 billion dollars. Over the last few decades, Ethiopia has had an average economic growth of 5-6% per year. Its largest economic sector is agriculture which makes up 37.5% of the economic output. The country relies heavily on exports and imports. Its top trading partners include Egypt, India, the United States, China, Saudi Arabia, the United Arab Emirates, Germany, and Japan among others. As a country in Africa, Ethiopia is also a member of the African Continental Free Trade area, the Intergovernmental Authority on Development (IGAD) the World Trade Organization, and the Common Market for Eastern and Southern Africa (COMESA). 

Ethiopia’s Economic History

Unlike most sub-Saharan African nations, Ethiopia maintained relations with most of the outside world for centuries. As such, it was able to sell products such as animal skins, gold, ivory and agricultural products to the world in exchange for luxury goods, manufactured items, velvet and salt. Ethiopia also became famous as a major coffee producer at the end of the nineteenth century. Although Ethiopia has a lot of natural resources and fertile land, it stopped being a great trading empire after the fall of Axum when people started to emulate priests and legendary warriors. As a result, trade in the country became dominated by Arab, Armenian and Greek traders who settled in the country.

Ethiopia is famous for being the only African country which was not colonized by the Europeans. However, it was occupied by the Italian fascist regime from 1935 to 1941. By the end of the occupation, the economy remained in the same state as it had been for centuries although the Italians improved some of the road network and attempted to establish small industries as well as commercial agriculture. When the Italians left, most people continued to rely on subsistence farming and keeping of livestock as a means of livelihood. The government realized that it had to transform its economy from an agrarian to an agro-industrial one to provide quality jobs to its growing population. As a result, the country adopted central planning by adopting five-year plans to help achieve the needed transformation. The three five-year plans adopted by the government were from 1957to 1963 and during this period, the country enjoyed an average GDP growth of 4.4% per year as sectors such as agriculture, manufacturing, and transportation grew steadily.

By the early 1970s, Ethiopia had achieved impressive growth in almost all sectors as it diversified into services and manufacturing. However, most of the population did not benefit from this growth as they continued to rely on subsistence farming for livelihood. The 1974 revolution led to economic upheaval in the country as the new regime restructured and nationalized the economy. The economy stagnated due to security internal/external threats and instability until 1978-80 when the economy grew at an average yearly rate of 5.7%. The 1980-90 period was also characterized by stagnation and even decline due to drought which lead to famine in the country.

Like most other countries, Ethiopia started a process of economic reform in 1991 by investing in industries and privatizing some of the government-owned enterprises. This process continues to this day and has been able to attract foreign direct investment as investors are attracted by the country’s natural resources, low labour costs, and large population. For example, the textile industry has attracted investors from countries such as China, the United States, and other European nations who seek to take advantage of the low labour costs to make clothes for the export market. The government has also created favorable conditions such as low water and energy costs, allowing the importation of machines without taxes as well as offering tax exemptions among other incentives. In addition, Ethiopia also has trade agreements with major countries and markets such as China, the United States, and the European Union which allow traders/investors to export their products without having to pay customs duties. 

Economic Sectors

1.     Agriculture

As stated earlier, agriculture (also comprising forestry and fishing) is the largest economic sector in Ethiopia. It employs approximately 85% of the labour force and accounts for nearly 80% of exports and 40% of GDP. The agriculture sector is particularly important for the country because it supports/enables other sectors such as processing and marketing of agricultural/manufactured goods. Most of the people engaged in this sectors are subsistence farmers who engage in the farming of sugarcane, oil-seeds, coffee, cereals, sorghum, beans and potatoes among others. Ethiopia is a major commodity exporter in Africa with coffee being its largest earner of foreign exchange. Over the last two decades, the horticulture sector has also grown significantly making the country a significant exporter of cut flowers to the world market. Most of the farmers also keep livestock contributing to at least 10% of the country’s GDP.

Ethiopia is rich in forests/ planted trees meaning that it also produces and exports timber as well as other forestry products. The forest products in the country are primarily used in the construction industry and to produce furniture. The fact that Ethiopia is a landlocked countries means that all its fish are produced from fresh water sources. Most of the fishermen in the country rely on artisanal means of catching fish from its rivers and lakes. Fish farming is only practiced by a small number of fish farmers. Although the production of fish has increased steadily since 2010, the fishing industry plays a minimal role in the national economy.

2.     The Energy Sector

Ethiopia mainly relies on hydropower for power generation. As of January 2024, the country had a power generation capacity of 5200MW. Nearly 90% of the installed capacity is hydropower with the rest being from thermal and wind sources (2% and 8% respectively). This means that like its agriculture sector, power generation also relies on the abundance of rainfall in the country. Hydropower is the preferred source of electricity because the country has major rivers such as the Nile which ensure predictable power generation throughout the year. Ethiopia has invested heavily in hydropower over the last two decades. For example, it is constructing the Grand Ethiopian Renaissance Dam which is expected to produce over 5000MW of electricity upon completion. Despite these investments, a large part of the population does not have access to the national grid. As of 2022, 55% of the population had access to electricity in their homes. Most of the urban areas are connected to electricity while the rural coverage is still low.

Ethiopia meets it demand for petroleum products such as jet fuel, petrol, gas, diesel and kerosene through import of refined products from countries such as Saudi Arabia and the United Arab Emirates. Some of the products are also transported by land from Sudan. Oil and gas exploration has led to the discovery of important oil and gas reserves in the countries which are expected to attract foreign direct investment in the country. In addition, it also has significant geothermal resources which can be harnessed to generate electricity. The government is currently cooperating with companies such as KenGen that are experienced in geothermal power generation to develop its geothermal resources.

3.     Transport and Communication

As noted earlier, Ethiopia is a landlocked country. Before the 1998-2000 Ethiopian-Eritrean War, the country mainly relied on the Eritrean ports of Massawa and Asseb for international trade. The war led to a shift in Ethiopian trade routes and now, it relies on the ports of Djibouti for exports and imports from the international market. The state has also developed the electrified Djibouti-Addis Ababa Railway which is key in its connection to the sea ports. Air transport in Ethiopia is relatively well-developed. Ethiopian Airlines is the largest and most profitable airline in Africa serving over 200 destinations. The road network in Ethiopia is also well developed as the country has over 120,000 kilometers of roads with over 80,000 being all-weather roads.

The telecommunication sector in Ethiopia is dominated by the state owned company Ethio Telecom which was previously known as the Ethiopian Telecommunications Corporation. The current government is seeking to attract private investment in the communication sector by opening the sector up for private companies. In addition, the state came up with the national strategy known as Digital Ethiopia 2025 which aims at growing the digital economy to provide jobs especially for the young people. Most of the country is connected to 4G/3G internet services and is connected to international internet cables through Djibouti.

4.     Mining

The mining sector is increasingly important in the Ethiopian economy as it seeks to diversify from agriculture. As of April 2024, the mining sector only contributed to approximately 2% of the national GDP. Its main mineral exports are gemstones (sapphires and diamonds), gold, and some industrial minerals. Although the country has tantalum, coal, opal, iron ore, soda ash, and gemstone deposits, only gold is produced in significant quantities. In 2022, it earned $560 million from gold exports. Ethiopia also produces salt from the Afder and Dire salt springs as well as the salt beds in the Afar depression for domestic consumption.

5.     Manufacturing

Since the 1990s, the government has tried to privatize government-owned companies. The manufacturing sector in the country has experienced fast growth as the state-built industrial parks mainly focus on the manufacturing of textile products. For example, Chinese and American textile giants such as Calvin Klein, H&M Guess, and Shein have established garment factories in Ethiopia to exploit cheap labour as well as  low energy prices for the export market. As a result, Ethiopia has the most developed textile sector in Africa. The country also has other light industries which mainly focus on the manufacture of fast moving consumer products such as dairy products and other consumables.

6.     Tourism

The tourism sector is becoming increasingly important to the Ethiopian economy as it contributes approximately 3 billion dollar annually to the national economy (nearly 5% of GDP). The sector was developed in the 1960s but suffered a national decline under the military regime. It began to recover in the 1990s as more people began to invest in hotels. However, the country still faces a shortage of hotels and accommodation meaning that the sector is under-developed. Moreover, political instability and wars such as the Ethiopia-Eritrean War and the Tigray War have also deterred tourists from visiting its tourist attractions. Nonetheless, the number of tourists visiting the country has increased to over a million in the past few years. This contributes to the growth of the economy and provides much-needed jobs to young people.

Macroeconomic Trends and Challenges

The Ethiopian economy has good macroeconomic management which provides economic stability to the people. For example, in 2023, the country’s debt was 36.1% of GDP which is one of the lowest in Africa. It also has a relatively strong currency with one dollar exchanging for 57 Ethiopian Birr. The country is also known for having low energy prices which contribute to faster economic growth.

Poverty

Although Ethiopia is one of the fastest-growing economies in Africa and the world, it still has high poverty rates. This is attributed to the fact that most people rely on subsistence farming which has low levels of income. The growth of the agriculture sector has helped reduce poverty in the country as farmers have been able to sell their products at higher prices in the local and international markets. However, this expansion has affected the poorest people in Ethiopian society negatively as they struggle to afford the high food prices. Moreover, some of the communities in the country rely on pastoralism which is unpredictable especially during the dry seasons. As such poverty continues to afflict such communities more than others. Nonetheless, the future looks bright as the government is heavily investing in education and developing the population through training in important skills as well as trades which will prove to be important in the eradication of poverty among the youth.

References

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Paul, M., & wa Gĩthĩnji, M. (2018). Small farms, smaller plots: land size, fragmentation, and productivity in Ethiopia. The Journal of Peasant Studies, 45(4), 757-775.

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