Africa Economic Forum Ethiopia

Recent Macro Economic and Financial Development

Real GDP growth fell to 5.3% in 2022 from 5.6% in 2021 but remained above East Africa’s average (4.7% in 2021 and 4.4% in 2022). Supply-side drivers of growth were industry and services, and demand-side drivers were private consumption and investment. Inflation rose to 34% in 2022 from 26.6% in 2021. Both growth and inflation were adversely impacted by internal conflict, drought, and the effects of Russia’s invasion of Ukraine on commodity prices. The fiscal deficit widened to 4.2% of GDP in 2022 from 2.8% in 2021 due to higher defense spending and weak revenue performance. The banking sector, dominated by state-owned banks, is stable, although the nonperforming loans ratio was 5.4% in 2021, above the required 5.0% due to conflict-induced project stalling.

The current account deficit deteriorated to 4.0% of GDP in 2022 from 3.2% in 2021 due to higher prices for commodity imports. International reserves declined to about 1 month of import cover in 2022 from 2.2 months in 2021. Public and publicly guaranteed debt declined to 50.1% of GDP (with external debt at 23.6% of GDP) in 2022 from 51.0% in 2021. Ethiopia benefited from the G20 Debt Service Suspension Initiative in 2020–21. However, Ethiopia’s application for the G20 Common Framework for debt restructuring in 2021 saw Fitch and S&P downgrade its sovereign rating from B to CCC. Income per capita grew 2.7% in 2022, but internal conflict and drought increased humanitarian support requirements from 15.8 million people in 2021 to 20 million in 2022.

Outlook and Risks

GDP is projected to grow 5.8% in 2023 and 6.2% in 2024, driven by industry, private consumption, and investment. The peace dividend, rebounding tourism, and prospect of liberalizing more sectors are expected to boost the growth outlook. Inflation is projected to decline to 28.1% in 2023 and 20.1% in 2024, following the peace dividend. The fiscal deficit is projected to grow to 3.1% in 2023 and 2.5% in 2024 due to the expected increase in government revenue driven by domestic resource mobilization improvements, implementation of the fiscal consolidation strategy, and resumption of donor inflows. The current account deficit is expected to narrow to 3.7% of GDP during 2023–24 as merchandise and service exports and foreign direct investment rise and imports of capital inputs continue to decline.

Climate change issues and policy options

Over $316 billion is required to finance Ethiopia’s adaptation (87% of the total) and mitigation (13%) targets for 2021–30. However, only $63.2 billion of financing is expected to be mobilized from domestic sources, with the rest from international sources. The average financing gap for 2021–30 is about $33.1 billion a year, hampering Ethiopia’s ability to build climate resilience. Limited financing, low technical capacity, and the use of poor technologies restrain the operationalization of climate and green growth strategies. Economic reforms and the establishment of money and capital markets will help increase the scope for financing green growth.

Tax relief and other incentives are needed to encourage private companies to invest more in climate and green growth as part of their strategic goals and corporate social responsibility. Ethiopia launched its Natural Capital Accounting Initiative to build a robust information system for natural capital to underpin national priorities and strategies. Natural capital accounts for about 40% of wealth, with natural resource rents amounting to about 5% of GDP. Raising awareness of and mainstreaming climate and green growth policies in public and private investment, especially in the natural resource sectors, are important to exploit the natural capital potential.