With about 117 million people (2021), Ethiopia is the second most populous nation in Africa after Nigeria, and still the fastest growing economy in the region, with 6.3% growth in FY2020/21. However, it is also one of the poorest, with a per capita gross national income of $960. 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% 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% 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% in 2011 to 24% in 2016 and human development indicators improved as well. However, gains are modest when compared to other countries that saw fast growth, and inequality has increased in recent years. Furthermore, conflicts in various parts of Ethiopia risk undermining the economic and social development progress the country has achieved in recent years.
The government has launched a 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 development 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 society. 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:
- The incidence of conflict has increased, particularly in the North since November 2020, having a substantial impacts on lives, livelihoods, and infrastructure.
- 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 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.
- Food insecurity is growing due to adverse weather events, locust invasion, conflict, and global conditions leading to high inflation of food prices. 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 millions in southern and eastern parts of the country. Overall, more than 20 million persons face severe food insecurity in 2022.
- Ethiopia’s Human Capital Index is at a low 0.38 (2020) which means that a child born in Ethiopia today will be 38% 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% and 37% of children under 5 years of age are stunted.
- 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 (with roughly 2 million persons reaching working age per year) puts pressure on absorption capacity of the labor market, necessitates improving current jobs, while creating sufficient new jobs.
Last Updated: Oct 06, 2022