Ethiopia Economic Update – Overcoming Inflation, Raising Competitiveness
December 13, 2012
ADDIS ABABA, December 13, 2012—Over the past decade, the Ethiopian economy has been growing at twice the rate of the Africa region, averaging, 10.6 percent GDP growth per year between 2004 and 2011 compared to 5.2 percent in Sub-Saharan Africa, according to a new report by the World Bank.
The Ethiopia Economic Update launched today attributes this impressive economic growth mainly to agricultural modernization, the development of new export sectors, strong global commodity demand, and government-led development investments.
“Two and a half million people in Ethiopia have been lifted out of poverty over the past five years as a result of strong economic growth, bringing the poverty rate down from 38.7 percent to 29.6 percent between 2004/05 and 2010/11”,says Guang Zhe Chen, World Bank Country Director for Ethiopia. “The Government target to reduce poverty to 22.2 percent by 2014/15is ambitious but attainable.”
The Government of Ethiopia has also made progress in tackling the persistently high inflation which affected the economy over the past two years by tightening its fiscal and monetary stance. As a result, inflation is on a decreasing trend, falling from 33 percent in 2011 to 15.8 percent in October 2012 (year on year).This is good news for the poor and for the overall economy.
"Ethiopia follows a strategy of increasing exports to facilitate growth. This is appropriate given the limited size of the domestic market and it is consistent with the development experience of some of the recently successful countries, particularly in East Asia”, says Michael Geiger, the Bank’s Country Economist for Ethiopia and one of the lead authors of the report. “Growth of goods exports has mainly been driven by volume growth across a variety of product groups, implying that Ethiopia is increasingly diversifying its export base.”
Lars Christian Moller, Lead Economist and Sector Leader for Ethiopia said “Ethiopia is one of the few large, land-locked economies in the world that exports more services than goods. Yet, there is widespread perception that the comparative advantage of a low-income country like Ethiopia lies in export of primary products and labor intensive, low-skill manufacturing goods.”
Ethiopia’s fiscal performance appears to be adequate given the current state of the economy and financing requirements for development, according to the Bank report. The overall general government deficit (including grants) declined from 1.6 percent of GDP in 2010/11 to 1.2 percent of GDP in 2011/12.Tax collections have been boosted by the 2010 tax reform, while public management reforms (such as program-based budgeting) have strengthened public expenditures. Public debt is on a declining trend at 35 percent of GDP in 2011/12 and Ethiopia has a low risk of external debt distress.
The launch of the Ethiopia Economic Update was complemented with the presentation of a Survey Report of Chinese Foreign Investment in Ethiopia. Responding to a request from the Government, the World Bank surveyed 69 active Chinese enterprises doing business in Ethiopia with a tailored enterprise survey. The report recommends a series of policy areas to facilitate foreign investors coming into Ethiopia so that the country can reap the benefits it needs to further its development path. Key recommendations include streamlining custom procedures and trade regulations, improving tax administration consistency and efficacy, and increasing the supply and quality of skilled workers.
The two reports form part of a new programmatic knowledge service prepared by the World Bank as a part of its economic policy dialogue with the Government of Ethiopia. Going forward, the Bank is planning to release an Economic Update report for Ethiopia every six months along with other tailored knowledge products in close coordination with the Ministry of Finance and Economic Development.