Ethiopia’s Economy
The Republic of Ethiopia is a landlocked country located in the Horn of Africa. It is the second-most populous country in Africa, with a population of over 108 million people, and the largest landlocked country in the continent. With its capital in Addis Ababa, Ethiopia holds an important position in the region, due to its location bordering countries such as Sudan, Eritrea, Djibouti, and Somalia.
Since its transition to a mixed economy in the 1990s, Ethiopia has enjoyed considerable economic growth, with its GDP increasing by an average of 10.3% between 2005 and 2019. It is the fastest-growing non-oil dependent African economy, and is set to become a regional powerhouse.
GDP and Economic Overview
Despite its geographical challenges, Ethiopia is the second-most populous country in Africa and the fastest-growing economy in the region. In 2020, Ethiopia’s GDP was estimated to be $123.8 billion, with a per capita GDP of $1,151, according to the World Bank.
The agriculture sector is the primary source of Ethiopia’s economy, contributing 40% of its GDP, and the manufacturing and service sector accounting for the rest. The service sector is the fastest growing, with the financial sector and tourism being the main contributors.
In terms of trade, Ethiopia imports goods principally from Saudi Arabia, China, India, and the United Arab Emirates. Its key exports include coffee, oilseeds, precious metals, and live animals, primarily to China and Saudi Arabia.
Foreign Investment & Economic Growth
Ethiopia’s economic fortunes rose significantly beginning in the early 2000s, driven by considerable foreign investment, largely from China, who is the country’s leading source of FDI. This influx of foreign capital has enabled the country to invest in infrastructure projects such as roads, dams and power plants, leading to an increase in its GDP from 5.8% in 2005 to 10.3% in 2019.
Furthermore, a rapid increase in FDI projects in the country has given rise to numerous employment opportunities, leading to an overall decrease in poverty levels. Ethiopia has also seen a rapid increase in its banking sector, which has encouraged an increase in capital investments and credit facilities, further stimulating the country’s economy.
Reforms by the Addis Ababa Government
The Ethiopian government has implemented several reforms to improve the country’s economy. One of the most prominent reforms was the privatization of key state-run enterprises, which led to significant operational and financial improvements. Furthermore, the government imposed a set of economic reforms to increase foreign investment and reduce the country’s reliance on foreign aid. These reforms included lower transaction costs, improved capital control regulations, and an increase in export incentives.
Furthermore, the Ethiopian government implemented an ambitious plan to become Africa’s biggest economy by 2025, known as the ‘Vision2025’ plan. This plan seeks to transform the country’s economy by reducing poverty, creating job opportunities, and increasing foreign investment.
Sectors Contributing to Ethiopia’s Economy
Agriculture
The agricultural sector is the backbone of Ethiopia’s economy, accounting for 40% of its GDP and employing around 80% of the country’s workforce. Ethiopia’s main crops include coffee, oilseeds, khat, cotton, and soybeans. The country is also the world’s sixth-largest producer of livestock, and exports live animals to China and Saudi Arabia.
Manufacturing
The manufacturing sector accounts for 25% of Ethiopia’s GDP and employs 8% of the country’s workforce. This sector has seen considerable growth in recent years due to increased foreign investment and government reforms. Major manufactured exports include electronics, textiles, leather products, and processed food.
Services
The services sector is the fastest-growing sector of Ethiopia’s economy, and accounts for the remaining 35% of its GDP. The sector has rapidly grown due to the increase in foreign investment, particularly in the financial and tourism industries.
Tourism
Tourism is a growing sector of the Ethiopian economy. Despite being a relatively new industry, it has seen considerable growth in recent years, with an estimated 2 million tourists in 2019. Some of the country’s popular tourist attractions include the Gheralta mountain range, the Danakil Depression, and the churches of Lalibela.
Challenges Faced by Ethiopia’s Economy
Despite its impressive economic growth, Ethiopia faces several challenges that threatens its stability. These include the lack of access to electricity, political instability, and a lack of diversification of its economy.
Electricity Access
One of the biggest challenges facing Ethiopia’s economic growth is the lack of access to electricity. Around 77% of the country’s population does not have access to electricity, and this has severely hampered the country’s prospects for industrial growth.
Political Instability
Ethiopia is a politically unstable country, and this can potentially affect the country’s economic progress. Political instability can act as a deterrent for foreign investors and can lead to an overall decline in the country’s economic performance.
Lack of Diversification
The Ethiopian government has made efforts to diversify the country’s economy, but these efforts are yet to bear fruit. The country’s over-reliance on the agricultural sector, and its underdeveloped manufacturing sector, has led to an overall decline in economic growth, as the sector is easily affected by external shocks.
Having transitioned to a market economy in the 1990s, Ethiopia has seen its economy grow significantly, emerging as a regional powerhouse in Africa. Its economic transformation has been driven by increased foreign investment, government reforms and the emergence of the tourism and financial sectors. Despite this, the country still faces numerous challenges with regards to access to electricity, political instability, and a lack of economic diversification. With its strategic location, Ethiopia has the potential to experience further economic growth, and become an important player in the region and beyond.
