Overview: Ethiopia is one of the poorest countries in the world, with a gross domestic product (GDP) of roughly US$6 billion, a per capita annual income of about US$100, and chronic trade deficits in the early 2000s. The basis of the economy is rainfed agriculture, which means that crop production fluctuates widely according to yearly rainfall patterns, leaving the country subject to recurrent and often catastrophic drought. Droughts have increased in severity since the 1970s in step not only with shortfalls in crop production but also with burgeoning population growth. Indeed, the increase in population has outstripped the productive capacity of the agricultural sector, creating a structural food deficit even in times of normal or superior production. Services, including retail trade, public administration, defense, and transportation, constitute the second largest component of the economy. Manufacturing and mining are a distant third and fourth. Within the budget, defense outlays have been high since the early 1990s, most recently because of war with Eritrea from 1998 to 2000, although they have declined since then. The budget has been in deficit since at least the late 1990s, with expenditures regularly exceeding revenues. Shortfalls have been covered by grants and loans from international lending institutions. Ethiopia is heavily dependent on international donor largesse, particularly in times of drought.
Since the early 1990s, the country has received financial support for economic reforms from the International Monetary Fund and the World Bank. In 2001 it qualified for debt reduction under these institutions’ heavily indebted poor countries initiative. On the whole, the reform process has been beneficial; government revenue has risen, and outlays have been redirected from defense to education, health, and infrastructure. Still, economic performance suffers from hindrances such as public ownership of farmland, low levels of investment, corruption in high levels of the government, and dependence on foreign finance. The United Nations and the World Bank maintain that without immediate steps to deal with a burgeoning population, large-scale environmental degradation, soil exhaustion, and rural land-holding policies, Ethiopia will become permanently reliant upon donor largesse just to feed itself.
Gross Domestic Product (GDP): In 2002–3 GDP was US$6.5 billion. Per capita GDP amounted to US$94.0, among the lowest in the world. In 2002–3 GDP per sector was estimated as follows: agriculture and fishing, 39.4 percent; industry, 11.9 percent; and services, 48.7 percent.
GOVERNMENT Budget: Largely because of the long-term demands of economic and social development and the short-term impact of recurrent drought, government expenditures have regularly exceeded revenues since the early 1990s. Much of the difference has been made up by foreign assistance. Government revenue has been rising steadily since the late 1990s, reflecting, among other measures, recently improved tax-collection procedures and the substitution of a value-added tax in January 2003 for the former sales tax on transactions of larger enterprises. On the spending side, there has been a marked shift in funding from defense to economic and social programs since 2000 and the conclusion of the war with Eritrea. For 2003–4, revenue and foreign grants were estimated to have reached ca. US$1.7 billion, up from ca. US$1.5 billion in 2001–2; spending was estimated at ca. US$2.2 billion, up from ca. US$2 billion in 2001–2. For 2004–5, revenue was projected to increase by almost 20 percent, reflecting further rises in both domestic revenues and foreign grants, whereas spending was expected to increase by 14 percent, reflecting increases in outlays for regional administration, infrastructure, and poverty alleviation. Deficits for 2003–4 and 2004–5 were in the range of ca. US$500,000.
Inflation: During the early 1990s, inflation averaged about 10 percent per year, but the rate has fallen in the years since. It is highly volatile, being greatly influenced by grain prices, which in turn depend upon annual harvests, which in turn depend largely upon seasonal rains. In 2003, for example, inflation rose to more than 15 percent following drought and a poor harvest, but when weather conditions reversed in 2004, the rate fell to less than 5 percent. Excluding volatile grain and pulses prices, the core rate of inflation has averaged about 3 percent in the early 2000s.
Agriculture, Forestry, and Fishing: Agriculture is the most important sector of Ethiopia’s economy, constituting nearly 40 percent of gross domestic product. The sector provides by far the largest percentage of exports and employs up to 80 percent of the population. About 20 percent of potential arable land is actually cultivated, almost all of it dependent on rainfall. Farming is in the hands of peasants, who cultivate individual plots. All land belongs to the state. In the highlands, grains (barley, corn, teff, and wheat) as well as pulses and oilseeds are the major crops; at lower elevations, sorghum and sugarcane are favored. Ethiopia is home to an estimated 7 million pastoralists who tend a large number of livestock—a survey in 2003 counted 35 million cattle, 25 million sheep, and 18 million goats. A large portion of them are found in the dry lowlands of the east, southeast, and south that are suited to pastoralism but not farming. Two bush crops flourish in the south—coffee, the major export earner, in the southern highlands, and chat, a mild stimulant that is also exported, in the southeastern lowlands. The government has announced plans to boost both grain and livestock production in an effort to address the problem of chronic food shortages. Ethiopia has no significant fishing or forestry industries. Deforestation and destructive farming practices have led to increasing soil erosion and degradation during the last 30 years, especially in the northern highlands. Recurrent droughts and livestock disease have had a severe impact on pastoralism in the southeast and south.
Mining and Minerals: The mining sector is quite small in Ethiopia. The country has deposits of coal, gemstones, kaolin, iron ore, soda ash, and tantalum, but only gold is mined in significant quantities. In 2001 gold production amounted to some 3.4 tons.
Industry and Manufacturing: This sector constitutes about 4 percent of the overall economy, although it has shown some growth and diversification in recent years. Much of it is concentrated in Addis Ababa. Food and beverages constitute some 40 percent of the sector, but textiles and leather are also important, the latter especially for the export market. A program to privatize state-owned enterprises has been underway since the late 1990s.
Energy: Aside from waterpower and forests, Ethiopia is not well endowed with energy sources. The country derives about 90 percent of its electricity needs from hydropower, which means that electricity generation, as with agriculture, is dependent on abundant rainfall. Present installed capacity is rated at about 650 megawatts, with planned expansion to 1,330 megawatts. Less than one-half of Ethiopia’s towns and cities are connected to the national grid. Plans are afoot to exploit natural gas reserves in the southeastern lowlands, estimated at 4 trillion cubic feet. Petroleum requirements are met via imports of refined products, although some oil is being hauled overland from Sudan. Exploration for gas and oil is underway in the Gambela region bordering Sudan. In general, Ethiopians rely on forests for nearly all of their energy and construction needs; the result has been deforestation of much of the highlands during the last three decades.
Services: Aside from wholesale and retail trade, transportation, and communications, the services sector consists almost entirely of tourism. Developed in the 1960s, tourism declined greatly during the later 1970s and the 1980s under the military government. Recovery began in the 1990s, but growth has been constrained by the lack of suitable hotels and other infrastructure, despite a boom in construction of small and medium-sized hotels and restaurants, and by the impact of drought, the war with Eritrea, and the specter of terrorism. In 2002 more than 156,000 tourists entered the country, many of them Ethiopians visiting from abroad, spending more than US$77 million.
Banking and Finance: In 1974 the military government nationalized all private banks and insurance companies, leaving retail banking in the hands of the Commercial Bank of Ethiopia (CBE). The National Bank of Ethiopia is a regulatory body that oversees the private sector and also foreign-exchange mechanisms. In the early 2000s, the CBE has been working with the International Monetary Fund on a restructuring program that involves reducing bad debt and attacking corruption. Since the mid-1990s, Ethiopians have been permitted to establish private banks and insurance companies once more; by 2002–3, the six largest private banks controlled some 20 percent of the loan market. Foreign-owned financial institutions are not permitted.
Labor: In mid-2002 the United Nations reported that Ethiopia’s labor force totaled more than 30 million workers, of whom 24.5 million were engaged in agricultural pursuits. A national survey in 1999 gave an unemployment rate of 8 percent for those aged 15 years and above, certainly a misleading figure, given what are high rates of unemployment and underemployent in both rural and urban settings.
Foreign Economic Relations: Ethiopia has long maintained commercial relations with its immediate neighbors, Sudan and Yemen, and with West European countries, notably Britain, Germany, and Italy. Recently, however, trading relations have broadened somewhat. As of 2002, Ethiopia’s most important markets are in Europe, especially Germany, Italy, and the United Kingdom, now joined by Japan, all of whom purchase large quantities of coffee, plus Djibouti and Saudi Arabia. In the past, Ethiopia’s imports came mostly from Europe, especially Italy and Germany, and from India. By 2002, China had become a major source of imports, along with Italy and India, but Saudi Arabia, supplying fuel and refined petroleum products, is by far the largest supplier, providing nearly 29 percent of total imports in terms of value, followed by China and Italy at 6 percent each and India at 5 percent. Since about 2001, Sudan has begun to supply small volumes of petroleum.
In the decade after the return to civilian rule in 1991, Ethiopia established new relationships with international financial institutions, securing funding from the World Bank for economic recovery and reconstruction and implementing structural adjustment programs with the International Monetary Fund (IMF). After slackened funding during the war with Eritrea from 1998 to 2000, the IMF and World Bank resumed assistance aimed broadly at poverty reduction and financial reform, with aid disbursements tied to defined benchmarks. In 2002 the government produced a five-year framework to guide economic development, reform, and poverty reduction that received US$3.6 billion in support from the international donor institutions for the period from mid-2002 to mid-2005. Under these programs, Ethiopia has made substantial progress in shifting expenditures from defense to social and economic sectors and in reforming its banking system, and the government has taken steps to deal with poverty. Important hurdles remain, however, in achieving further financial reforms and fostering sustainable economic growth, and progress to date has depended on large infusions of international funding to cover huge budget deficits.
Exports: Coffee is Ethiopia’s major export, accounting for 60 percent or more of average annual export earnings, but its value fluctuates widely depending on worldwide production. Other important exports are hides/skins/leather, the leaves of the chat bush (a mild stimulant popular in Somalia and Yemen), gold, and oilseeds. In 2000–2001, the National Bank of Ethiopia estimated the largest principal exports by value as: coffee, US$174.7 million; leather and leather products, US$74 million; chat, US$61 million; oilseeds, US$30.7 million; and gold, US$28 million. In 1999–2000 total exports were valued at US$486 million. In 2000–2001, they dropped to US$441 million, but by 2002–3 they had rebounded to US$468 million, variations caused largely by fluctuations in world coffee prices. Ethiopia’s most important markets are in Europe, especially Germany, the United Kingdom, and Italy, and in Japan, all of whom purchase large quantities of coffee. Djibouti and Saudi Arabia are other outlets for Ethiopia’s exports.
Imports: Ethiopia imports a large range of consumer and capital goods. In 2000–2001, the most important imports consisted of: consumer goods, US$468 million; transport, agricultural, and industrial products, US$445 million; fuel, US$292 million; and semi-finished goods, US$284 million. For the year, imports totaled an estimated US$1.6 billion, nearly identical with the value of imports in 1998–99 and 1999–2000, but up from US$1.3 billion in 1996–97, largely because of increased outlays for purchases of food and fuel. In the past, imports came primarily from Europe, especially Italy and Germany, and from India. In more recent years, China has become a major supplier of goods. Saudi Arabia supplies fuel and refined petroleum products, making it by far the largest supplier in terms of percent of total imports (nearly 29 percent, followed by China and Italy at 6 percent each in 2002). Since about 2001, Sudan has begun to supply small volumes of petroleum.
Trade Balance: Because of the need to import large quantities of food and the lack of high-value exports such as minerals or petroleum, annual deficits in the merchandise trade account have exceeded US$1 billion since the late 1990s. The deficit for 2002–3, the latest year for which figures from the National Bank of Ethiopia are available, was estimated at US$1.5 billion.
Balance of Payments: Ethiopia has experienced large deficits in its current account since at least the late 1990s. The services sector has shown consistent surpluses, reflecting revenues from Ethiopian Air Lines and to a lesser extent from tourism and shipping services, having risen from US$114 million in 1998–99 to an estimated US$159 million in 2002–3. Similarly, transfers of funds from official donors and remittances from nationals living abroad have been strong, amounting to US$502 million in 1998–99 and more than US$1 billion in 2003–3. These surpluses, however, have not been enough to offset large shortfalls in merchandise trade and debt-service payments. In 1998–99, the current account deficit was US$510 million. It fell to US$262 million in 2000–2001 before rising to an estimated US$397 million in 2002–3. These deficits have been covered by credits and loans from international lending institutions and by debt forgiveness.
External Debt: According to the International Monetary Fund and the World Bank, Ethiopia’s total external debt, including debt owed to multilateral, bilateral, and private creditors, totaled more than US$10 billion in the late 1990s. By the end of 2001, the debt had fallen to US$5.7 billion and required the equivalent of almost 19 percent of total export earnings in debt-servicing payments. The National Bank of Ethiopia estimated external debt for 2003–4 at US$6.6 billion.
Foreign Investment: Foreign investment by private firms in Ethiopia is quite low. Since coming to power in 1991, the Tigrayan-led government has been slow to open the country to foreign investors. Trade liberalization measures enacted in the mid-1990s were short-circuited by the war with Eritrea from 1998–2000. In 2003 the government promulgated new regulations to stimulate foreign investment, among them a lowering of the required investment minimum by foreign firms from US$500,000 to US$100,000. Constraints on investment include poorly developed transportation and communications systems and troubled financial institutions. Some sectors, such as banking, remain wholly or partially off-limits to foreign investors.
Foreign Aid: During the post-World War II era, Ethiopia received small amounts of economic development aid from such countries as the United States and Sweden. Such aid disappeared under the military regime except for food aid during the mid-1980s. Large aid inflows began in the early 1990s aimed at reconstruction and political stabilization but declined during the war with Eritrea. The post-2000 period, however, has seen a resumption of large disbursements of grants and loans from the United States, individual European nations, and Japan, and from the World Bank, the European Union, and the African Development Bank. In 2001 these funds totaled US$1.6 billion. In 2001 Ethiopia qualified for the World Bank-International Monetary Fund-sponsored highly indebted poor countries (HIPC) debt reduction program, which is designed to reduce or eliminate repayment of bilateral loans from wealthy countries and international lenders such as the World Bank. In Ethiopia’s case, the program aims to help stabilize the country’s balance of payments and to free up funds for economic development. A noteworthy advance toward these goals came in 1999, when the successor states to the former Soviet Union, including Russia, cancelled US$5 billion in debt contracted by the military government in and after the later 1970s, a step that cut Ethiopia’s external debt in half. HIPC relief is expected to total almost US$2 billion.
Currency and Exchange Rate: Ethiopia’s currency is the birr, which is divided into 100 cents. In October 1992, the government initiated a long, gradual devaluation of the birr, allowing its value to decline from the old rate of 2.07 birr per US$1 to an average of 8.78 birr per US$1 in 2003. As of late March 2005, the exchange rate was 8.65 birr per US$1.
Fiscal Year: Ethiopia’s fiscal year (FY) begins on July 8 and ends on July 7.