Ethiopian Economy

It is believed that the government earns much more from khat sales than it does from coffee, which is officially the country's first export product. "Ten times more," according to one trader. "But they will never say so, because some countries consider it to be a drug." In Ethiopia, people consume about 400 grams (14 ounces) per day on average, and sometimes much more. About 20% of all Ethiopians chew khat to an extent that can have negative consequences for their health. Considering the amount of money khat presents for the country, it is unlikely that production and consumption will slow down anytime soon. On the contrary, more and more farmers abandon coffee and other crops to cultivate the stimulant. By 2019, about 70% of agricultural land in the Harari region is allocated to khat. Around 90 percent of adult males in neighboring Somaliland chew the narcotic plant khat. They’re after 'mirqaan,' the Somali word for the buzz that it can give.

With abject poverty it seemed idle to hope for peace or democracy. The ruling Ethiopian People's Revolutionary Democratic Front (EPRDF) governance model had been focused on rigid long-term planning and centralised policy-making. Its primary purpose had been the structural transformation of the economy from an agriculture-dominated to one where industry holds a substantial share.

Ethiopian central bank devalued the Ethiopian Birr by 15 percent on October 10, 2017, the first in seven years to boost lagging exports. The birr was quoted by the National Bank of Ethiopia at a weighted average of 23.4177 against the dollar on Monday, compared to what will be 26.9215. "The devaluation was made to prop up exports, which have stagnated the last five years owing to the birr's strong value against major currencies," Yohannes Ayalew, the bank's vice governor, told a news conference in the capital Addis Ababa. The International Monetary Fund (IMF) and the World Bank, have been advising the Ethiopian government to consider devaluing its currency to boost exports as they are mostly unprocessed products and need to stay competitive on price. Ethiopia has operated a managed floating exchange rate regime since 1992.

Ethiopia’s first industrial park in Dukem is part of a government-led push to turn the mostly agricultural country into Africa’s manufacturing center. The Ethiopian government plans to have 15 industrial parks nationwide by June 2018. Chinese companies are building 5 more. In 2014, the government planned to expand the capital, Addis Ababa, into the surrounding area of Oromia. Under the proposed expansion, the city would, in effect, swallow up rural towns. The proposal incited large protests, which spread across the country. The unrest resulted in hundreds of deaths and eventually led the government to declare a nine-month state of emergency.

Droughts and weak international prices for agricultural commodities dampened growth and opened an external imbalance. Ethiopia experienced a growth recovery after the 2015/16 drought. The authorities’ determined actions to control public borrowing and imports has reduced the current account deficit; and foreign direct investment is rising fast. However, exports remained stagnant in 2016/17 and drought conditions lingered in some areas. In October 2017, Ethiopia devalued its currency by 15 percent in a bid to boost its export competitiveness, but foreign exchange remains in short supply, slowing down business.

Ethiopia’s huge population of about 102 million (2016) makes it the second most populous nation in Africa (after Nigeria). But, although the fastest growing economy in the region, it is also one of the poorest, with a per capita income of $660. Ethiopia’s government nonetheless wants the country to reach lower-middle-income status by 2025.

Ethiopia’s economy experienced strong, broad-based growth averaging 10.5% a year from 2005/06 to 2015/16, compared to a regional average of 5.4%. The expansion of services and agriculture accounted for most of this, with manufacturing growth only modest. 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. In the year 2000, 55.3% of Ethiopians lived in extreme poverty, but by 2011 this figure was 33.5%.

The government implemented the 2nd phase of its Growth and Transformation Plan (GTP II). GTP II, which will ran to 2019/20, aimed to continue work on physical infrastructure through public investment projects, and to transform Ethiopia into a manufacturing hub. Growth targets are an annual average GDP growth of 11%; in line with manufacturing strategy, it also hopes the industrial sector will grow by an average of 20%, creating jobs.

The main challenges for Ethiopia are sustaining its positive economic growth and accelerating poverty reduction, which requires significant progress in job creation as well as improved governance. The government is already devoting a very high share of its budget to pro-poor programs and investments.

Ethiopia has proven resilient. Over the past two decades, there has been significant progress in key human development indicators: primary school enrollment has quadrupled, child mortality been cut in half, and the number of people with access to clean water has more than doubled. These gains, together with more recent moves to strengthen the fight against malaria and HIV/AIDS, paint a picture of more well-being in Ethiopia.

However, Ethiopia still faces challenges in maternal mortality, nutrition, and gender. While access to education has increased, learning outcomes and the quality of education are not keeping pace with it, and there are regional and gender disparities in basic educational proficiency. Notwithstanding the progress in critical aspects of human development, Ethiopia still needs a considerable amount of investment and improved policies as well to reach its development objectives, given the country’s low starting point.

Ethiopia ranked 125th out of 189 countries in the World Bank’s 2014 Ease of Doing Business report a decrease from the previous year. The decrease is due to lower rankings in starting a business, registration of property and paying taxes partially offset by improvements in energy access and insolvency resolution procedures.

Ethiopia kept its economic growth forecast at 10 percent for the 2015/16 fiscal year despite a drought. By late 2015 Ethiopia was battling its worst drought in decades. The impact of the failed spring belg rains was compounded by the arrival of the El Niño weather conditions that weakened summer kiremt rains that feed 80 to 85 per cent of the country.

This greatly expanded food insecurity, malnutrition and devastated livelihoods across six affected regions of the country. The level of acute need across virtually all humanitarian sectors has already exceeded levels seen in the Horn of Africa drought of 2011 and was projected to be far more severe throughout an 8-month period in 2016.

The number of hungry Ethiopians needing food aid had risen sharply by October 2015 due to poor rains and the El Nino weather phenomenon with around 7.5 million people in need [out of a population of nearly 100 million], aid officials said. That number had nearly doubled since August, with the UN warning that without action, some "15 million people will require food assistance" next year, more than inside war-torn Syria.

Drought ruined the 2014 harvest for many Ethiopian farmers. The reduction in rainfall was due to the El Nino weather phenomenon. While cycles of drought were expected every 10 to 12 years, the frequency of droughts and erratic rainfalls was expected to increase because of global climate change.

In a country where 85 percent of the people are farmers, millions were in need of aid. By November 2015 the government had purchased nearly 1 million metric tons of wheat at a cost of about $280 million to get through the next three to four months.

Drought and hunger are sensitive topics in Ethiopia since the infamous famine in the early 1980s that killed over 400,000 people. The imperial government's attempt to hide the effects of the 1973-74 famine that aroused world indignation and eventually contributed to Haile Selassie I's demise. Between 1984 and 1986, drought and famine again hit Ethiopia and may have claimed as many as 1 million lives and threatened nearly 8 million more. The government said that the 2015 drought had not killed anyone yet, but that about 8 million people need assistance. The United Nations estimated that number would nearly double in the coming months.

An estimated 41% of the population was reported in 2012 to be undernourished. Only 12% of the population had access to improved sanitation. Chronic cycles of drought, high population growth, state and ruling party dominance in numerous commercial sectors, inefficient agricultural markets, and regular power outages all act to limit Ethiopia's economic development. The agricultural sector comprises over 40 percent of GDP and employs 85 percent of Ethiopia's 80 million people.

The vast majority of farmers are smallholders. About 12.7 million smallholders produce 95 per cent of agricultural GDP. These farmers are extremely vulnerable to external shocks such as volatile global markets and drought and other natural disasters.

Smallholder farmers form the largest group of poor people in Ethiopia. More than half cultivate plots of 1 hectare or less and struggle to produce enough food to feed their households. A large number of poor households face a prolonged hunger season during the pre-harvest period. Herders, like farmers, are vulnerable to increasingly frequent drought, which can wipe out their livestock and assets and bring on severe poverty.

The persistent lack of rainfall is a major factor in rural poverty. Drought has become more frequent and severe throughout the country over the past decade, and the trend shows signs of worsening. The impact of drought is most severe for vulnerable households living in the pastoral areas of the lowlands and the high-density parts of the highlands.

The Ethiopian economy is agriculture based, with the agricultural sector accounting for over 40 of the gross domestic product and contributing 83.6% to overall employment. Agriculture produces food for domestic consumption, raw material for local industry and primary goods for export. The industrial sector, mainly based on processing agricultural goods, accounts for 13% of gross domestic product, while the service sector accounts for 45% of gross domestic product.

The major agricultural export crop is coffee, providing approximately 35% of Ethiopia's foreign exchange earnings, down from 65% a decade ago because of the slump in coffee prices since the mid-1990s. Other traditional major agricultural exports are leather, hides and skins, pulses, oilseeds, and the traditional "khat," a leafy shrub that has psychotropic qualities when chewed. Sugar and gold production has also become important in recent years.

Ethiopia's agriculture is plagued by periodic drought, soil degradation caused by inappropriate agricultural practices and overgrazing, deforestation, high population density, undeveloped water resources, and poor transport infrastructure, making it difficult and expensive to get goods to market. Yet agriculture is the country's most promising resource. Potential exists for self-sufficiency in grains and for export development in livestock, flowers, grains, oilseeds, sugar, vegetables, and fruits.

Total exports in 2009, however, remained flat over 2008's level of USD 1.5 billion mainly due to a drop off in coffee exports. Coffee exports--Ethiopia's major historical export earner -- fell nearly 30 percent in terms of value in 2009 from 2008 (USD 525 million to USD 376 million). In 2009, the GoE blamed coffee exporters (who were allegedly hoarding supply) for the decline in exports and as a result, revoked licenses of six major exporters, detained some company owners overnight, and closed the warehouses of over eighty firms. The reduction in coffee exports appears to be tied to the decline in world prices as well as domestic problems associated with new coffee marketing and control legislation and capacity constraints of the newly established Ethiopia Commodity Exchange (ECX).

In 2009, the Ethiopian government shifted its agricultural policy focus towards encouraging private investment (both domestic and foreign) in larger-scale commercial farms. The Ministry of Agriculture (MOA) created a new Agricultural Investment Support Directorate that is tasked with negotiating long-term leases (all land is owned by the government) on over 7 million acres of land for these commercial farms. The Directorate's goal is to boost productivity, employment, technology transfer, and foreign exchange reserves by offering incentives to private investors. The program, even in its early stages, has encountered some protests from individuals and groups claiming interests in land to be made available to new investors.