Ethiopia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Remarkable track record of growth and poverty reduction
- Public investments in infrastructures
- Economy diversification effort
- Strong hydropower potential
- Vulnerability to weather conditions and changes in world commodity prices
- Isolation of the country
- Insufficient level of foreign exchange reserves
- On-going difficulties in the business and governance environment
- Unstable regional context
- Exacerbated ethnic tensions
Rapid Growth Despite Inflation and Political Risk
Despite the obstacles to growth (drought, ethno-political tensions), activity remained buoyant – and even rebounded – in 2016/2017. In 2017/2018, it is expected to remain robust but will likely stagnate, due to the constraints of inflation and political risk. The price increase following the 15% devaluation of the national currency (birr) will likely put pressure on household consumption and weigh on growth. Nevertheless, this devaluation should help to improve the competitiveness of exports, which was low. Exports should also rebound thanks to better agricultural production – coffee and oleaginous fruits (sesame) in particular – after being affected by drought conditions in 2016 and 2017. In addition, the opening of several industrial parks, including those of Hawala and Mekelle, should allow the country to increase its leather, footwear, and textile exports, and, thus, begin to realize the country’s goal to position itself as a large manufacturing hub. Under Ethiopia’s Growth and Transformation Plan II, public investment will also remain strong, particularly in the transport, telecommunications and energy sectors with the “Renaissance Dam” project with a production capacity of 6,000 megawatts. An effort will also be made with respect to social infrastructure (hospitals and schools). On the other hand, the growth of private investment remain hampered by the persistence of ethno-political tensions.
A Sustainable Fiscal Policy, but Persistent External Imbalances
The budget deficit is likely to remain relatively low. The 2017/2018 budget is up almost 10% from the previous fiscal year. This increase is mainly directed towards capital expenditures in infrastructure projects. Revenues are expected to increase in line with GDP growth and thus allow the budget deficit to remain relatively stable. However, the increase in revenues will remain constrained by the collection of domestic receipts, which is still sub-optimal: tax revenues represent less than 14% of the GDP, compared with a relatively low average of around 20% in sub-Saharan Africa. This point has therefore been prioritized by the Ethiopian authorities in the 2017/2018 budget. The deficit is financed by foreign loans and grants (about 18% of the budget).
The current account deficit will likely remain high in 2017/2018, but the devaluation of the birr should reduce the pressure on external accounts. Indeed, the weaker currency should constrain the growth of imports and support the competitiveness of exports, especially manufactured goods and foodstuffs. Transfers by expatriate workers will remain a significant positive contribution in the current account. The favorable economic situation in Europe and the United States could have a beneficial effect on the flows of these transfers. Foreign direct investment flows, particularly in infrastructure and industry, should help finance the current account deficit. Strengthening Ethiopia’s external position could help replenish some foreign exchange reserves, which remain at a low level (around two and a half months of import coverage).
Debt is still relatively high, but given the still large share of concessional loans (around 60% of the external debt stock), the associated risk remains moderate.
The Lifting of the State of Emergency Does Not Relieve Internal Tensions
The coalition in power, the Ethiopian Peoples’ Revolutionary Democratic Front, led by Prime Minister Hailemariam Desalegn and dominated by the minority ethnic Tigrayans, still faces significant ethno-political tensions. The latter have experienced a resurgence since November 2015, as well as demonstrations by Oromos, the ethnic majority. In October 2016, protests in Amharas, with people demanding more representation and political freedoms, led to 600 deaths, in large part due to a deadly melee launched by security forces. Subsequently, the government declared a state of emergency that was not lifted until August 2017. The security measures led to the arrest, under conditions challenged by human rights associations, of 29,000 individuals, allowing a relative lull in political unrest amongst the dissident areas of the Oromia region. However, clashes on the border between the Oromia and Somali regions still occur from time to time and continue to threaten the stability of the country.
The persistence of these ethno-politic issues could eventually lead to a deterioration of relations with its international partners. As one of only two guests from Sub-Saharan Africa at the “One Belt, One Road” Forum (with Kenya), Ethiopia has maintained an increasingly close relationship with China.