Ethiopia’s location gives it a strategic position as a jumping off point in the Horn of Africa, close to the Middle East and its markets. Ethiopia is landlocked, bordering Eritrea, Somalia, Kenya, South Sudan, and Sudan, and has been using neighboring Djibouti's main port for the last two decades for its international trade. However, with the recent peace agreement with Eritrea, Ethiopia is set to resume accessing the Eritrean ports of Assab and Massawa, as well. Furthermore, the country is exploring additional options including Berbera, Port Sudan, and Lamu, as well as the possibility of developing, the southern corridor to Djibouti via Dewele (150km shorter than the northern route), .
With about 115 million people (2020), Ethiopia is the second most populous nation in Africa after Nigeria, and still the fastest growing economy in the region, with 6.3 percent growth in FY2020/21. However, it is also one of the poorest, with a per capita gross national income of $890. Ethiopia aims to reach lower-middle-income status by 2025.
Over the past 15 years, Ethiopia’s economy has been among the fastest growing in the world (at an average of 9.5 percent per year). Among other factors, growth was led by capital accumulation, in particular through public infrastructure investments. Ethiopia’s real gross domestic product (GDP) growth slowed down in FY2019/20 and further in FY2020/21 due to COVID-19, with growth in industry and services easing to single digits. However, agriculture, where over 70 percent of the population are employed, was not significantly affected by the COVID-19 pandemic and its contribution to growth slightly improved in FY2020/21 compared to the previous year.
The consistently high economic growth over the last decade resulted in positive trends in poverty reduction in both urban and rural areas. The share of the population living below the national poverty line decreased from 30 percent in 2011 to 24 percent in 2016 and human development indicators improved as well over time. However, gains are modest when compared to other countries that saw fast growth, and inequality has increased in recent years.
The government has launched a new 10-Year Development Plan, based on the 2019 Home-Grown Economic Reform Agenda, which will run from 2020/21 to 2029/30. The plan aims to sustain the remarkable growth achieved under the Growth and Transformation Plans of the previous decade, while facilitating the shift towards a more private-sector-driven economy. It also aims to foster efficiency and introduce competition in key growth-enabling sectors (energy, logistics, and telecom), improve the business climate, and address macroeconomic imbalances.
Ethiopia’s main challenges are continuing its positive economic growth on a sustainable basis and accelerating poverty reduction — which both require significant progress in job creation, as well as improved governance, to ensure that growth is equitable across the society. The government is devoting a high share of its budget to pro-poor programs and investments. Large-scale donor support will continue to provide a vital contribution in the near term to finance the cost of pro-poor programs. Key challenges are related to:
- Like the rest of the world, Ethiopia has been experiencing the unprecedented social and economic impact of the COVID-19 pandemic. While exports and foreign direct investment have rebounded in 2020/21 and jobs have been recovering, some lasting scars are likely to remain. Urban employment levels have not recovered fully, some households and firms continue to report income losses, and poverty is estimated to have increased.
- Frequent severe weather events alongside long-term impacts of climate change undermine agriculture and pastoral livelihoods as well as food security. The 2022 drought is the worst in forty years, severely affecting 7 million persons in southern and eastern parts of the country.
- The incidence of conflict has increased, particularly in the North since November 2020, leading to substantial impacts on lives, livelihoods, and infrastructure.
- Ethiopia’s Human Development Index is at a low 0.38 which means that a child born in Ethiopia today will be 38 percent as productive when s/he grows up as s/he could be if s/he enjoyed complete education and full health. This is lower than the average for the Sub-Saharan Africa region but slightly higher than the average for low-income countries. Learning poverty stands at 90 percent and 37 percent of children under 5 years of age are stunted.
- In 2020 Ethiopia experienced the worst locust invasion in decades and its effects contribute to threatening the food security and livelihoods of millions of Ethiopians.
- Ethiopia has a fledgling private sector, whose growth and job-creation abilities have been hindered by constraints in the business climate and competitiveness.
- The country’s growing workforce (at 2 million per year) puts pressure on absorption capacity of the labor market, necessitates improving current jobs, while creating sufficient new jobs.
Last Updated: Apr 21, 2022