Ethiopia's Economic Outlook in 10 Minutes

Minute 10. The Ethiopian Economy—a historic shift is in the works. Without much notice, agriculture recently ceased to be the largest sector in the economy for the first time in Ethiopia’s history. This heralds a major structural transformation of the economy and we forecast that the services sector—which covers real estate, hotels, transportation, communication, banking, health and education—will make up more than half of Ethiopia’s GDP in just two years time, a development with many implications and opportunities for Ethiopian business.

Minute 9. Economic policies are set to be relaxed. Somewhat equally unnoticed, policy changes

have accelerated recently in a number of economic spheres, and we forecast this trend to gain

further momentum in the next year or two. The positive trends seen of late include a pick-up

of privatization, an openness to introduce modern commodity and capital markets, a passive

acceptance of private share issuance, reforms (albeit marginal) in the telecom sector, a renewed

policy drive to revitalize the industrial sector and, perhaps most meaningful, a rebalancing of the

policy focus within agriculture from peasant-based to commercial farms. There remain of course

many areas where policy reform is still—in our view—far too gradual and far too controlled.

8. At long last, commercial agriculture will truly be taking off. Agriculture as a whole

will continue to show a diminishing role in the economy, but what is currently just a tiny subset of this sector, namely commercial agriculture, is on the verge of a major growth spurt. We project a five-fold increase in land devoted to commercial agricultural farms will occur in the next few years.

Minute 7. Special incentives to businesses will no longer target only exporters. The previous

policy fixation on providing incentives mainly for exporters will, quite appropriately, now switch

to giving similar support to import-substituting industries. This will help multiple sectors, most

notably those in steel and metal processing, cement, glass, chemicals, several fast-moving

consumer goods, and pharmaceuticals.

Minute 6. Though inflation has fallen sharply, near-term monetary policy will remain

unnecessarily tight. Inflation has ceased to be a serious macroeconomic policy issue for

quite some time. While this is welcome, the central bank’s view towards inflation appears to

have taken a sharp turn from a period benign neglect (2007/08) to what now appears to be an

unusually strong anti-inflationary stance. The costs to the private sector of the latter approach

have been unduly high in our view, as businesses were starved of much-needed credit when the

source of Ethiopia’s inflation problem was more closely linked—as we see it—to excessive public sector activity. Some relief is likely, however, in the second half of the 2010.

300 seconds remaining  . We expect private banks to be relieved from credit caps by July 2010, a welcome end to what has been a very blunt means of inflation control. The banking industry,

long accustomed to open-ended credit growth, recently entered an era of tight, bank-by-bank

credit ceilings. However, with the increasing recognition that the current monetary stance is

unduly tight and the need to develop a much more market-based monetary policy framework,

we believe that bank-by-bank credit ceilings will be removed in the second half of 2010. The

recent credit caps are unlikely to hurt the profitability of banks by much this year; in any case, the expected relaxation of the caps should bring a return of the historically high returns on equity to which banks have become accustomed.

Minute 4. Contrary to official projections, we forecast that Ethiopia’s economic growth will

be the slowest in six years. This projection is due mainly to what now increasingly appears

to have been a poor kiremt harvest: agricultural growth is likely to be close to zero in our view.

We reiterate our view—highlighted in last year’s Macroeconomic Handbook—that Ethiopia’s

medium-term growth can comfortably stay in the 6-8 percent range given several positive trend

breaks seen in recent years.

3. A correct exchange rate policy is finally here to stay—businesses should thus expect

the Birr to reach 14 Birr/USD (but not much more) as early as July 2010 and move close to 15 Birr/USD by mid-2011. We think the current exchange rate level is finally close to what it should be, and also believe this is a policy stance that is here to stay. For the coming year, businessesshould expect gradual monthly depreciations—averaging 4 cents per month according to our forecasts—plus a step devaluation of about five percent, which is roughly the gap being

recorded between inflation in Ethiopia and its trading partners.

120 Seconds . Foreign borrowing is ballooning and will increasingly come from private, not

governmental, sources. Loans from sources such as commercial banks and suppliers credits

surpassed loans from governmental sources for the first time last year and we see this as a

trend that is likely to continue. The government and parastatals remain the near-exclusive

beneficiaries of external loans, but we expect this to change gradually, opening up opportunities

for local businesses and banks as well as for foreign providers of external finance.

60 Seconds. A Shift from West to East—the “MICs” will soon become Ethiopia’s biggest

economic partners. While much of the world is fixated with the rising economic power of

the BRICs (Brazil, Russia, India, and China), Ethiopia’s business and economic fortunes are

increasingly being tied with the “MICs” (Middle East, India, and China). According to our

projections, export, import, and foreign direct investment flows between Ethiopia and the “MICs”will in all three cases exceed the comparable figures with the West within just three years.

You are done!!!

Source:Access Capital-March 30, 2010.

Download the complete report