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With about 126.5 million people (2023), Ethiopia is the second most populous nation in Africa after Nigeria, and one of the fastest-growing economies in the region, with an estimated 7.2% growth in FY2022/23. However, it also remains one of the poorest, with a per capita gross national income of $1,020. Ethiopia aims to reach lower-middle-income status by 2025.

Ethiopia’s strong growth rate builds on a longer-term record of growth over the past 15 years where the country’s economy grew at an average of nearly 10% per year, one of the highest rates in the world. 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 from FY2019/20 to FY2021/22 due to multiple shocks including COVID-19, with growth in industry and services easing to single digits. However, agriculture, where over 70% of the population is employed, was not significantly affected by the COVID-19 pandemic, and its contribution to growth slightly improved compared to previous years.

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.

The government has launched a 10-Year Development Plan, based on its 2019 Home-Grown Economic Reform Agenda, which runs from 2020/21 to 2029/30. The plan aims to sustain the high 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.

Development Challenges

Ethiopia seeks to chart a  development path that is sustainable and inclusive in order to accelerate poverty reduction and boost shared prosperity. Significant progress in job creation, as well as improved governance, will be needed to ensure that growth is equitable across society. Achieving these objectives will require addressing key challenges including the following:

  • Addressing macroeconomic distortions that constrain private sector development, structural transformation, and generation of jobs.
  • Reducing the incidence of conflict that has been having a substantial impact on lives, livelihoods, and infrastructure. The cessation of hostilities in the North in November 2022 is an important step in this direction.
  • Overcoming the effects of the COVID-19 pandemic. Like the rest of the world, Ethiopia has been experiencing the unprecedented social and economic impact of the 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.
  • Addressing food insecurity, which 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 the southern and eastern parts of the country. Overall, more than 20 million persons faced severe food insecurity in 2023.
  • Improving human capital. 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.
  • Generating good jobs. The country’s growing workforce (with roughly 2 million persons reaching working age per year) puts pressure on the absorption capacity of the labor market, necessitates improving current jobs, while creating sufficient new jobs.

In February 2024, the Ethiopia Country Climate and Development Reports (CCDR) was released, sharing findings regarding the increasing impact of climate change that are threatening Ethiopia’s development prospects. The report notes that annual average losses to gross domestic product (GDP) are expected to range between 1-1.5% of GDP and to rise to 5% by the 2040s, potentially pushing millions more Ethiopians into poverty (press release).

The new analysis also points to opportunities for growth and increasing prosperity from climate-informed development policies. These are especially visible in agriculture where, with the support of reforms, Ethiopia can potentially shift from being a net importer of agricultural commodities to generating sizable surpluses of as much as 20% (relative to domestic demand), with climate change, especially under potentially warmer and wetter conditions, increasing these surpluses to 25%.

Last Updated: Apr 09, 2024

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