Ethiopia Economic

Outlook 2016
The Story Behind
the Numbers

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June 2016 Economic Outlook 2016 | 3 .Preamble The Ethiopia Economic Outlook 2016 report provides an overview of Ethiopia’s economic environment and key sectors. The report also highlights significant allocations from the 2016/17 budget to various sectors in the country.

Ethiopia’s large scale public the current government will compromise the prospects of policy investment in infrastructure is supporting structural transformation and continuity in the medium term. Ethiopia.000 MWs will be the largest in Africa. With the next legislative elections manufacturing sector and rise in exports) and enabling Ethiopia to reach slotted for 2020. due to its robust military and counterterrorism forces. BMI is cautious that the heavy. The GTP targets annual GDP growth of 11% (driven by the the May 2015 parliamentary elections.000 MWs – adequate even as the African Union Mission in Somalia (AMISOM) (of which enough to meet domestic demand and export. Ethiopian troops are a part) continues to battle the group. with EPRDF expected to remain dominant. will Ethiopia faces terrorist threats. primarily from the Al-Shabaab insurgents triple Ethiopia’s generation capacity to roughly 9. Ethiopian People’s Revolutionary Democratic Ethiopia’s long term development framework is underpinned by the 5 Front (EPRDF). which has been in power since 1991 asserted its grip in year Growth and Transformation Plans (GTPs) which runs from 2015 the country’s politics by clinching 500 out of the 547 available seats in to 2020. continues to face increasing ethnic tensions the state-led model that has been responsible for a decade of growth. agriculture and manufacturing. BMI however notes that the country is unlikely to suffer from large-scale terrorist attacks over the medium term. the EIU predicts a relatively stable political environment middle income status by 2025. major hydropower projects such the Grand Ethiopia Renaissance Dam which at 6. Notably.Ethiopia Economic Review Political overview Economic overview Ethiopia’s ruling party. Ethiopia’s largest ethnic group who claim Real economic growth is projected at 7% between 2016 and 2025 political and economical marginalisation. BMI projects that Ethiopia‘s economic growth trajectory to be shaped by According to BMI. country that have moved to form coalitions with the aim of unseating According to IMF’s Article IV Consultation. specifically from the Oromo. as the government continues its heavy public investment into priority handed approach of the security services is subduing rebel groups in the sectors such as infrastructure.  growth. 4| Economic Outlook 2016 .

7% in 2016 owing to the 12 El Nino weather phenomenon. Source: BMI Research 4 13 14 15 16 E 17 F 18 F 19 F 20 F 21 F 22 F 23 F 24 F 25 F Inflation 20 20 20 20 20 20 20 20 20 20 20 20 20 12 The Economic Intelligence Unit (EIU) in January 2016 reported Chart 2: Annual consumer price inflation rates (%) that inflation grew at an average of 10.1% in 2015 and is 10 expected to increase in 2016 to 10.1% growth rate in 2015 driven by the Government’s continued large-scale investment under the 9 11 second phase of its Growth And Transformation Plan (GTP II). Chart 1: Real GDP growth rates (%) GDP 11 The Business Monitor International (BMI). This will attract Foreign Direct 13 14 15 E F F F F F F F F F Investments (FDIs) in the country to ensure sustained 20 20 20 16 17 18 19 20 21 22 23 24 25 20 20 20 20 20 20 20 20 20 20 5 economic growth. projects Ethiopia‘s real Gross Domestic Product (GDP) to record a 7. EIU 30 35 Economic Outlook 2016 | 5 25 30 . 4 continued fiscal deficits and a depreciating exchange rate. 8 10 BMI reports that manufacturing and agricultural sectors will be the main contributors to real GDP growth between 97 2016 and 2020 due to the government’s investment in the 86 country’s infrastructural backbone by improving logistics channels. The resultant low crop yields will reduce the food supply and result in higher food prices. 20 20 20 20 20 20 20 20 20 20 2 13 14 15 F F F F F F F F F F 20 20 20 16 17 18 19 20 21 22 23 24 25 20 20 20 20 20 20 20 20 20 20 35 Source: BMI Research.8% growth 10 rate in 2016 from an 8. 8 10 Inflation is expected to average 9% between 2017 and 2020 as food supply improves and local prices moderate. 6 A decrease in inflation from the current high levels could have 2 a positive impact on the economy by lowering costs of living 13 14 15 F F F F F F F F F F 4 20 20 20 16 17 18 19 20 21 22 23 24 25 and improve demand for products. Ethiopia’s investment into the fixed capital 75 formation and construction industry will grow by 14% per 64 year over 2016 and 2017. The EIU 6 however notes that a sharp decline in inflation is unlikely 8 given the forecasted strengthening of oil prices in 2017/18.

This depreciating exchange rate will continue to exert 8inflationary pressures. the Ethiopian birr (ETB) is closely managed by the 13 14 15 016E 017F 018F 019F 020F 021F 022F 023F 024F 025F 20 bank central 20 which 20 uses2 the 2exchange 2 2 as a2policy2tool. 6The weakening of the ETB will make imported raw materials and machinery more expensive which will put an upward pressure on the 4prices of products. EIU 6| Economic Outlook 2016 18 .2balancing rate 2 2 2 the impact of imported inflation and maintaining export competitiveness by devaluing the ETB. 2 13 14 15 F F F F F F F F F F 20 20 20 16 17 18 19 20 21 22 23 24 25 20 20 20 20 20 20 20 20 20 20 Chart 4: Exchange rates in Ethiopia 35 30 ETB/USD ETB/Euro 25 20 15 13 14 15 F F F F F F F F F F 20 20 20 16 17 18 19 20 21 22 23 24 25 20 20 20 20 20 20 20 20 20 20 Source: BMI Research.11 10 9 8 7 6 5 Exchange rates 4According to the EIU. 12 BMI expects the ETB to gradually weaken by 19% against the US Dollar and by 33% against the Euro between 2016 and 2020 in line with the 10 National Bank of Ethiopia‘s (NBE’s) managed floating rate exchange rate system.

Sectoral perspectives .

operated in the country and have become a major source of financial services to many farmers and businesses. The reason for present. that “foreign investors will most likely loans for construction plants. it offers all other case in most sectors in the country. this success of the CBE is that it is a fairly well-run and efficient bank. it can be expected that the GDP will peak at close to 3% of comparison to that of other African countries. 8| Economic Outlook 2016 . as has been the dwellings. reaching 2. insurance companies. and will promote growth. At last count about 31 MFIs. due to the low levels of development currently The other 30% is controlled by the other private banks. in order to help industries in the country attain growth overall. and real estate development. which The insurance sector has been recognized as a great sector for controls 70% of the total assets in the country. according to the IMF. and provides an element of security in that it is run by the government.Financial services Ethiopia will show growth in the sector over the coming years according Ethiopia has continued to be one of the fastest-growing countries in to the IMF. The complete closure of the process of developing one that is expected to be open by the end the financial sector to foreign companies has limited the opportunities of 2016. medium and to fund development of the system and structure of the market. The banking sector in Ethiopia consists of 2 public banks and 16 private banks. and agricultural projects.4 million people. next four years. but is currently in and completely closed from foreign companies. Capital markets It should be noted that the financial sector in Ethiopia is highly regulated Ethiopia does not have a secondary capital market. The government borrowed close to $1 billion from its Eurobond in order The Development Bank of Ethiopia (DBE) extends short. for competition in the financial sector. however. It also provides other banking services. and thus also little information Banking available about it. the opening of the capital commercial banking services to business. There is little development in the sector. acquisition or maintenance of be barred” from participating in the country’s markets. Some unlicensed NGOs are also active in the delivery of microfinance services through informal channels. with BMI predicting close to a 7. In addition. However. such checking and saving accounts to its clients. leaving potential for growth. While it does house 14 deficit. Insurance As the government pushes ahead with its Growth and Transformation The Ethiopian insurance industry is relatively under developed in Plan (GTP). but could greatly expand its horizons by opening up to Africa. It provides long-term The World Bank states. including industrial beginning to see positive results. schools. It is dominated by the Commercial Bank of Ethiopia. investment in Ethiopia. market will regardless show signs of development in the country.5% growth maintained over the international banks. and is long-term loans for viable development projects. The microfinance sector is relatively well developed but not strictly supervised. all of them are relatively weak and small-scale.

making it the second highest in all of Africa. Economic Outlook 2016 | 9 . such as Kenya. only an estimated 12% of the population security score. Ethiopia’s energy supply stems from biomass. and hope to begin construction on the Nile within the next year. need for substantial investments in the power system. takes its fair share of crime. Ethiopia currently spends only $550 million (0. but Ethiopia can be 22% by August 2016. but in Security the world.4% of its crime to a low.7% from oil. BMI ranks Ethiopia as the second faster grower worldwide in As would be expected from a developing country in East Africa. with a strongly rural breakdown of energy provision. Political issues with Egypt The government is determined to increase road coverage from 20% to over control of the Nile may hinder the process. shown towards developing the ability to use the rest. Ethiopia signed a $200 has access to electricity. The Black Rhino Group.Public sector Ethiopia is a clear outperformer in this sector not only in Africa. only 8% infrastructure sector.000 MW in from 2016-2020. according to USAID. especially in the developed Energy and Resource urban center of Addis Ababa. Ethiopia is receiving investment from the African Development Bank (AfDB). however. robbery. and a mere 0. In December 2015. BMI predicts an 18. in order to help loans. MoWIE is improvement. in order to facilitate energy development. to increase the electric grid connectivity by 2020. and only 2% of the rural population fall under million deal with Kenya to help strengthen their borders. especially for hydropower. which may show why the country has a low According to the World Bank. vehicle theft and burglary are fairly common in the country. with little commitment being growth in the East Africa region. This project will focus on building five years. which should also help boost tourism and international working closely with the Ethiopian Electric Utility (EEU) and Ethiopian investment. another 917 km of roads.91% of its GDP) on military enforcement. There is a military capabilities. contributor of 86% of the Blue Nile) has a potential of 45. The government plans reduce transportation costs for goods. This phase emphasizes key focus on hotel and airport hydropower. only behind Myanmar. Ethiopia this sector. However. UK-based Turner & Townsend to help The World Bank has provided Ethiopia with millions of dollars in 5-year build large highways and roads across the country. and The Ministry of Water.7% in real terms over the next 10 years. has an average growth rate of 10. If Ethiopia is to this category. Electric Power (EEP) to attract investors in the hydropower industry from nearby countries. and has discovered that Ethiopia (the The Growth and Transportation Plan (GTP) is entering its second phase. recently recognized this potential. it must look towards expanding its power supply of large commercial and industrial customers. with BMI predicting it to be the leader is such of the 54 potential GW have been used. Petty theft.5% growth for Ethiopia’s infrastructure in 2016. as of 2014. The overloading of the network frequently disrupts the strengthen its borders and its region. however. The abundance of private security outfits Ethiopia has one of the lowest levels of modern energy access in only goes to buttress the fact that Ethiopia requires intervention to keep Africa. 6. Construction and Infrastructure Ethiopia has an abundance of natural resources for energy generation Ethiopia is expected to see huge growth in the construction and purposes.9% from hydropower. 92. with assistance from the China Seventh Group expected to see between 6-10% of growth in this sector over the next and the Export-Import Bank of Korea. Irrigation and Electricity (MoWIE).

it seems Ethiopia’s education sector is making progress. Ethiopia will be looking to improve this sector above most. pulses. 85% of system.Education Agriculture Ethiopia’s education system underwent major changes over the last Agriculture is very much the base of Ethiopia’s economy.8% growth in the sugar industry and Relevance Quality Agency (HERQA) to monitor the quality of over the next 5 years. and it is safe to assume that it will continue to head in the positive direction for a while to come. Sadly. to increase farmer income. In order to grow in the future. especially in rural areas where soil degradation due to overuse. Ethiopia has seen massive improvement to its Principal crops include coffee. low subsidies. (which had dominated for many centuries before) to a secular education The agriculture sector accounts for 50% of the country’s GDP. BMI predicts Ethiopia’s agriculture industry to grow rapidly between To help the system. with via the Agricultural Marketing Corporation (AMC) which will be in large amounts of assigned budget money going “missing” along the charge of influencing market prices and buying yield at increased prices. exports. standing as the century. facilities are often thinly spread. While this is a fairly large change in terms of numbers. transport and marketing. and better roads. These educate populace: it went from a 90% illiteracy rate in 1974 to a 48% crops thus also spurs great amounts of activity in industries such as rate today. potatoes and sugarcane. the government has set up the Higher Education 2015 and 2020. high tax rates. followed by 2 years each of middle and high school. and authoritarian administration of the education system by the government. 80% of teachers expressed dissatisfaction with the system and over 50% citing the influence of political parties as a detriment to the system. children in urban areas are far more likely to succeed because many poorer tribes USAID and Ethiopia’s government are working together to combat consider work a priority. however. but slowly so. A research group stated that the root cause of the poor quality of education in Ethiopia is the misguided. by providing agricultural education. which the government outlined in its Growth and in training teachers. and ensuring that money Transformation Plan (GTP). HERQA also assists worldwide by 2020. technology. These include Ethiopia remains less than satisfactory. politicized. such issues. and with political influence often swaying people in the system. important one. and over 80% of total employment in the labor force. education in Ethiopia’s agriculture sector. Since the 1974 revolution. 10 | Economic Outlook 2016 . along with the regime’s lack of political will to truly address this root cause of the problem. For now. way. switching over from the Ethiopian Orthodox Church system base and the building block of what the country is today. drought. Ethiopia’s agriculture sector is a healthy and assigned reaches where it is meant to. faces many threats. citing the expected 14. It begins with 8 years of primary school and poor infrastructure. manufacturing. The government is also in the process of regulating crop prices A key problem in the system is also the abundance of corruption. providing resources. Ethiopia aims to become a top-10 sugar producer education provided in higher education institutions.

Improve tax administration and simplify the tax system. that it created and serviced”. within the country. fleet. and leather industries. The country has also begun to privatize many aspects of its railways. is dominated by food. concern for the country. but there seems to be little being done for the improvement of logistics and import laws.Transport and Logistics Manufacturing Ethiopia’s transport and logistics industry is looked after by the Ministry Manufacturing is by no means Ethiopia’s strong suit. textiles. often causing firms to withdraw from the country. Economic Outlook 2016 | 11 . beverage. including the recent transfer of Ethiopia has made little progress in the manufacturing sector over the construction to Chinese contractor CREC. The challenge stems from the expensive and cumbersome trade The Bank also identified key areas where Ethiopia is looking to focus. • Improve access to finance for firms especially for SMEs leading to losses in GDP. and the lengthy transport times from the order to boost growth. the imperative is to build on the country’s and cargo planes. with only 12 ships in its access the manufacturing industry via Foreign Direct Investments (FDI). however. where there have been multiple complaints and faults. • Address binding constraints including access to land and electricity. It is. which accounts for merely 6% of GDP. customs procedures and trade regulations. it has an agreement with Djibouti to use the Port of Djibouti for import and export. This has made it very expensive to transport goods • Increase productivity through skills development. The Baro river is also In order to combat this. The Ethiopian government states that he manufacturing system also started in 2015. • Use a strategic and phased approach to develop Industrial Parks based on best international practices. hides & skins. has states that “Ethiopia needs to improve how well products are Ethiopia has a well-established and functioning railway system. The Addis Ababa Light Rail last few years. which are all also fairly active. Seeing as Ethiopia is land-locked. a country that is not highly ambitious Industrial Park Program. the primary cause of concern for Ethiopia is in its workers. So far. in procedures within the country. These were: port to the country. which is one of Africa’s most modern and sector. the government has taken on the very used for transport of freight. which may be a cause of to promote export and FDI. logistics department. shares with the neighboring Djibouti. efficient intra-city public transport systems. The World Bank of Transport and Communication. Ethiopia also has 14 paved runways that can be used for transport According to the World Bank. department’s betterment. and faces low growth rates. Ethiopia’s government is taking strides in the transport • Improve trade logistics. This initiative is aimed at boosting focused on shipping and port exports. • Simplify business entry regulations and processes to promote a dynamic and thriving business sector. agricultural foundations by moving toward new tradable activities in manufacturing that absorb large numbers of young and semi-skilled According to BMI.

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