Emerging

Strategy change

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25  
EcoEmerging // 1 quarter 2020  
economic-research.bnpparibas.com  
Ethiopia  
Strategy change  
In order to support economic growth, the Ethiopian government is transitioning from the traditional debt investment strategy to a  
foreign equity-based one, by privatizing some state-owned entities and removing foreign investments’ barriers. The recently  
approved IMF program is targeted to address foreign-exchange shortages as well as to contain debt vulnerabilities by strengthening  
state-owned enterprises management. Nevertheless, the moving towards a more liberalized exchange rate will be done gradually to  
avoid triggering inflationary pressures and consequent social unrests.  
Ethiopia has experienced a public investment-driven strong growth  
1- Forecasts  
model for the last 15 years. This model has definitively reached its  
limits and has now resulted in high vulnerabilities, principally forex  
shortage and increasing external debt and servicing costs. To tackle  
them, the authorities have designed a new economic program (the  
Homegrown Economic Reform Plan) and obtained the IMF financial  
support. This might speed up the long-awaited transition towards a  
more flexible exchange rate regime. But in a context of high inflation  
and given that general elections are approaching, this is likely to be  
cautiously implemented.  
2
018 2019e 2020e 2021e  
Real GDP growth (%)  
7.7  
7.4  
7.2  
7.1  
Inflation (CPI, year average, %)  
Central gov. balance / GDP (%)  
Central gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
13.8  
-3.2  
14.6  
-2.8  
12.7  
-3.0  
9.3  
-3.0  
61.0  
-6.5  
59.1  
-6.0  
54.4  
-5.3  
52.2  
-4.7  
35.8  
4.0  
34.5  
3.9  
33.6  
4.3  
32.2  
4.5  
Forex reserves (USD bn)  
Economic growth weakening and inflationary pressures  
Forex reserves, in months of imports  
Exchange rate USDETB (year end)  
2.0  
2.8  
3.2  
3.4  
28.4  
31.4  
33.5  
35.1  
After a period of double-digit growth between 2004 and 2017, the  
economy has been experiencing a slowdown since 2018 because of  
a steady deterioration in the terms of trade. Indeed, dipping coffee  
prices (around 40% of total exports) and rising oil prices (+31% in  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
- Real GDP growth and contributions by sector  
GDP in year-on-year % change, contributions in percentage points  
Real GDP  Agriculture  Industry  Services  
2018 for the Brent) have strongly weighted on external accounts so  
far. Due to external account weakness, foreign exchange  
restrictions hamper economic growth and contribute to flagging  
industrial growth. Nevertheless, economic growth remains robust,  
supported by solid private consumption, fostered by strong  
12  
1
2
10  
8
demographic growth as well as gradual poverty reduction .  
Investment is another engine of the economic activity. Important  
public infrastructure investments are in progress, while foreign direct  
investments (FDI) remain sustained. They are currently above 4% of  
GDP and are mainly focused on manufacturing industries. The  
energy sector concentrates the bulk of national investment efforts.  
In a country where only 30% of population have access to electricity,  
needs are huge. Several power supply projects have been launched  
since 2018 for an amount of USD 6 bn. Moreover, a USD 1.8 bn  
agreement has been reached with a Chinese public company to  
complete the electricity distribution network.  
6
4
2
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Source: IMF  
Consumer price inflation has reached 20% at November  its five-  
year higher point reflecting food shortages, owing to lower  
agricultural output in the harvest season. On average, it should  
remain above 10% in 2020.  
economic program, and ii) reduce macroeconomic imbalances  
through the IMF support.  
Opening the economy to foreign investors is a priority. Parliament is  
finalizing the new investment law enabling foreign companies to  
enter joint ventures with Ethiopian companies, up to a maximum  
Looking for stronger private sector participation  
49% share of ownership. Sectors involved are aviation, energy,  
The authorities have settled their economic policy over two main  
axes: i) stimulate private-sector contribution thanks to their new  
logistics and telecommunications.  
At the end of November, the government announced that it will  
remove barriers to investment in the mining sector and that it will  
privatize six sugar projects in Q1 2020. Industry should also benefit  
1
It has averaged +1.6% per year over the past 10 years.  
GDP per capita has tripled in 10 years, and stood at USD 950 in 2019.  
2
st  
26  
EcoEmerging // 1 quarter 2020  
economic-research.bnpparibas.com  
from an improving power supply and some fiscal incentives,  
including the elimination of import duty on capital goods, income tax  
exemption for companies operating or developing industrial parks  
and export tax exemptions.  
3
- Exchange rate and forex reserves  
 Official ETB/USD  Black market rate  Fx reserves, USD mn (rhs)  
4
5
4500  
4000  
3500  
3000  
2500  
2000  
1500  
1000  
500  
In the financial sector, the rule forcing banks to divert 27% of their  
loan book to the public sector has also been lifted.  
40  
35  
3
2
2
1
1
0
5
0
5
0
5
0
th  
On December 20 , the IMF Board approved a three-year  
USD 3 billion financing package (around 3% of GDP), with an  
immediate disbursement of USD 308 million. The program aims to  
address foreign exchange shortages, reform state-owned  
enterprises and strengthen fiscal revenue (currently at 10% of GDP  
only).  
0
Regarding public finances, the fiscal deficit strongly increased after  
2014  
2015  
2016  
2017  
2018  
2019  
2016. It averaged 2.8% of GDP between 2016 and 2018. It is  
Source: IMF, BNP Paribas  
expected to decrease slightly in 2019 thanks to a more conservative  
current spending policy while capital expenditure should be limited  
to already committed projects. This should allow the debt-to-GDP  
ratio to decline (it was around 61% of GDP in 2018). Debt ratios will  
also benefit from the privatization of some state-owned enterprises.  
Diaspora Trust Fund, in charge of raising their funds. In September,  
the central bank relaxed exchange control regulations on foreign-  
currency accounts held by the diaspora to simplify their transfers to  
the country. For the moment, the amount raised is quite symbolic  
Easing pressure on foreign exchange liquidity  
(
about USD 5.4 million in 2019).  
If fiscal deficits seem to be under control, external accounts remain  
a major weakness of the Ethiopian economy. The large trade deficit  
We therefore note that the macroeconomic situation is still weak, but  
international financial support might ease tensions on fx liquidity, at  
least temporarily. In 2020, central bank’s foreign exchange reserves  
should reach USD 4.3 bn, covering 3.2 months of imports. This  
positive trend should keep on in 2021. Nevertheless, external  
accounts will remain vulnerable to commodity price volatility and  
high import needs.  
(
-14% of GDP) contributes to large deficits in the current account  
balance despite the positive contribution of transfers from private  
funds and public donors. In net value, these total transfers represent  
55% of total current account receipts. The current account deficit  
reached an average of 8.6% of GDP between 2014 and 2018.  
Even though the country continues to attract the largest share of  
FDI in East Africa, net FDI has recently moderated and covers  
about 70% of the current account deficit. The rest is financed  
through external debt, mostly on concessional terms. Foreign  
exchange reserves are also partly channeled to service external  
debt (around 8% of total foreign-exchange earnings in 2018).  
The central bank’s purpose is to maintain currency depreciation  
under control. It thus draws on its foreign reserves to contain  
exchange rate fluctuations. The Birr depreciated by around 10%  
against the USD in 2019. However, central bank’s resources are  
limited as foreign exchange reserves are below the warning level of  
three months of g&s imports. At end-2019, forex reserves were  
around USD 3.6 bn, covering only 2.2 months of g&s imports. As a  
result, capital controls are also in place, which strongly constrain  
imports. Pressures on the Birr thus remain considerable, and the  
gap between official and black markets is around 40%.  
The IMF agreement might help to catalyze concessional financing  
from other development partners. An additional World Bank support  
package by USD 3 billion is being considered, which would support  
the country's reforms substantially.  
To foster foreign-currency inflows, the government has also decided  
to mobilize the Ethiopian diaspora, estimated at around 3 billion  
people. To support their investment into several economic sectors, a  
government fund was created in October 2018, the Ethiopian  
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