Ethiopia’s location gives it strategic dominance as a jumping off point in the Horn of Africa, close to the Middle East and its markets. Bordering Eritrea, Somalia, Kenya, South Sudan, and Sudan, Ethiopia is landlocked, and has been using neighboring Djibouti’s main port for the last two decades. However, with the recent peace with Eritrea, Ethiopia is set to resume accessing the Eritrean ports of Assab and Massawa for its international trade.
With about 109 million people (2018), Ethiopia is the second most populous nation in Africa after Nigeria, and the fastest growing economy in the region. However, it is also one of the poorest, with a per capita income of $790. Ethiopia aims to reach lower-middle-income status by 2025.
Ethiopia’s economy experienced strong, broad-based growth averaging 9.9% a year from 2007/08 to 2017/18, compared to a regional average of 5.4%. Ethiopia’s real gross domestic product (GDP) growth decelerated to 7.7% in 2017/18. Industry, mainly construction, and services accounted for most of the growth. Agriculture and manufacturing made lower contribution to growth in 207/18 compared to the previous year. Private consumption and public investment explain demand-side growth, the latter assuming an increasingly important role.
Higher economic growth brought with it 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. The government is implementing the second phase of its Growth and Transformation Plan (GTP II) which will run to 2019/20. GTP II aims to continue expanding physical infrastructure through public investments and to transform the country into a manufacturing hub. GTP II targets an average of 11% GDP growth annually, and in line with the manufacturing strategy, the industrial sector is set to expand by 20% on average, creating more jobs.
Ethiopia’s main challenges are sustaining its positive economic growth and accelerating poverty reduction, which both require significant progress in job creation as well as improved governance. 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:
- Limited competitiveness, which constrains the development of manufacturing, the creation of jobs and the increase of exports.
- An underdeveloped private sector, which would limit the country’s trade competitiveness and resilience to shocks. The government aims to expand the role of the private sector through foreign investment and industrial parks to make Ethiopia’s growth momentum more sustainable.
- Political disruption, associated with social unrest, could negatively impact growth through lower foreign direct investment, tourism and exports.