publication June 11, 2018

Ethiopia Economic Update: Reform Imperatives for Ethiopia’s Services Sector

World Bank Group


STORY HIGHLIGHTS

  • Ethiopia, one of the world’s fastest growing economies in 2017, is projected to maintain sustainable growth in the medium term, according to the latest economic analysis for the country
  • The economic update also highlights reform priorities to realize Ethiopia’s industrial goals
  • The analysis includes case studies of teff, sesame and textile value chains, and confirms that a dynamic service sector is needed for manufacturing and agro-processing to thrive

ADDIS ABABA, June 11, 2018 –  In its latest economic update for Ethiopia, the World Bank Group provides answers to several key questions:

What role can the services sector play in Ethiopia’s economy?

What reform priorities should Ethiopia pursue in the service sector and how can they be achieved while maintaining a more sustainable economic growth rate?

The latest Economic Update, The Inescapable Manufacturing Services Nexus: Exploring the Potential of Distribution Services, identifies key challenges in Ethiopia’s economy and proposes some recommendations to help unleash the country’s economic prospective. As the country still stands at the beginning of structural transformation, tapping into the potential of the service sector, such as telecom, utilities and finance, could help Ethiopia to reach its industrial goals.

The analysis explores the sustainability of Ethiopia’s economic model based on domestic demand, especially public investment. The report also forecasts that Ethiopia’s growth will remain stable, but projects that it will slow down to a more sustainable growth rate of 9.6% in fiscal year 2018 (July 2017 to July 2018).

According to official statistics, with growth at 10.9% growth during fiscal year 2017 the Horn of Africa nation was one of the world’s fastest growing economies, with an average annual gross domestic product (GDP) growth rate of 10.3% during the 10 fiscal years ending June 2016. To maintain this growth momentum, the report recommends that Ethiopia makes policy adjustments to crowd-in the private sector and strengthen its economic competitiveness.

The sustainability of the Ethiopian economic growth model poses some important risks in light of continued foreign exchange shortages and limited room for external borrowing, the report says. While measures were taken to address persistent Birr overvaluation, the report highlights continued challenges, such as large external imbalances, rising debt and weak competitiveness may constrain the development of manufacturing and the creation of jobs. This calls for a shift toward a more export-led model, the report notes, where the private sector can play a greater role in economic growth, export diversification and employment.

The economic update also examines services in Ethiopia’s economy, including the role of exports as tradable activities and intermediate inputs to manufacturing exports.

Produced in response to the government’s interest, the report focuses on distribution services, including their role in Ethiopia’s dairy, teff, sesame, and textiles value chains. Teff, the main ingredient for injera, is the daily staple food for more than 50 million Ethiopians and the source of livelihood for 6.3 million smallholder farmers. Sesame is the second source of foreign exchange for Ethiopia, after coffee, with over 90% of sesame exported to countries such as China, Jordan, and Israel. The analysis and value chain case studies presented confirm that a dynamic services sector is needed for manufacturing and agro-processing to thrive.

 “Manufacturing and agro-processing cannot be competitive without accessing good quality and wide-ranging inputs from the services sectors,” said Mathew Verghis, World Bank practice manager for the Macroeconomic and Fiscal Management Global Practice. “Eliminating obstacles to services including distribution channels would help link rural producers to markets for inputs and reduce post-harvest and storage losses.”

As Ethiopia lags behind its Sub-Saharan African neighbors in the service sector, the report highlights the need for the country to catch up by removing trade barriers, reforming regulations and moving toward integrating its services markets. For example, the report says that Ethiopia’s distribution services tend to operate in a heavily regulated environment, which can prevent competition and innovation. One example noted is Ethiopia’s Investment Code, which the report says, prohibits foreign investment in distribution.

Services considered strategic by the government, such as telecom, utility, and the air/sea transport sectors are allowed to operate only as strict public monopolies or through limited domestic private ownership, as in the case of the financial sector. According to the report, there may be long-term costs to the country if it continues to be left behind in services, with negative consequences for manufacturing and processed agricultural products.

“The report advocates the adoption of modern distribution channels and procurement systems that slash transaction costs, ease market exchanges and facilitate the inclusion of smallholder farmers in modern distribution chains,” explained Nora Dihel, World Bank senior economist and a co-author of the economic update.

Considering the weak regulatory enforcement capability of the Ethiopian government, the report suggests using nonstrategic sectors, such as distribution services, as a good entry point into a more comprehensive services reform strategy that is linked with national development plans.

“The reforms advocated cannot be treated in isolation,” said Carolyn Turk, World Bank country director for Ethiopia, Sudan and South Sudan. “Reforms need to be part of an interconnected chain of value addition, from production to final consumption. They will achieve the most impact if they improve access to inputs and financial services for smallholder farmers and fast-track their transition away from subsistence agriculture as they access more high-value markets.”

In addition, the report notes additional priorities for a comprehensive Ethiopian economic strategy would include addressing the concerns of the poorest households, helping citizens acquire market-relevant skills, and resolving infrastructure constraints.


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