Ethiopia’s Economy in 2021
2 January 2021
How low would economic growth be?
The Coronavirus pandemic and the heightened level of natural disasters across the world prompted people from across the globe to be a bit superstitious about the year. Downtoearth.org reported that there was an increase of at least 27 percent in natural disasters in the first half of 2020 than recorded during the same time in 2019.
2020 is now officially gone; but the crises and anxieties it has brought are far from over.
Particularly for Ethiopia, the already staggering ill effects of the pandemic’s economic and financial repercussions are set to linger into 2021, if what Economists predict is going to come true. Claiming its share of the unexpected shock the COVID‐19 pandemic brought upon the global society, Ethiopia ended the previous fiscal year registering its worst GDP growth in a decade.
Locust invasion destroyed over 200,000 hectares of land, adding insult to the already injured country where over 16.5 million people are in need of urgent assistance.
The three years old feud between the federal government and the Tigray People’s Liberation Front (TPLF) matured into a deadly conflict that claimed the lives of thousands and destroyed key infrastructure in the region.
“I have never been uncertain in my entire life as 2020, a year when I considered shutting down my business and waiting until the dust settles. Though I was facing problem after problem, I managed to remain afloat despite making no profit,” says Amanuel Mengistu, a Businessman who is an Economist by profession.
“Given these circumstances, 2021 has to be a year of recovery,” the businessman hopes. However, his hopes ride against the tides of scientific predictions by the International Monetary Fund (IMF) and Economists.
In its latest regional economic outlook, IMF forecasted that Ethiopia’s GDP would flatten at zero percent in 2021. Despite the economic slowdown in the last fiscal year, the Ethiopian government is adamant that a sizeable economic growth is within reach as it predicted a 6.6 percent growth in 2020/21. However, economists stand on the opposite end of such assertions, arguing that it does not reflect the reality on the ground. The government’s latest prediction is higher than the 10 percent GDP growth registered last fiscal year.
Patrick Heinisch, economist, argues that the situation has worsened since the IMF made its predictions in October.
“Indeed, the fallout in the 2nd quarter of FY 2020/2021 may be significant. Besides the Tigray military operation, the 2nd quarter is going to see the economic effects of the second Corona wave,” the expert notes.
Despite assessing that the situation has gotten even worse after the IMF predictions, however, Patrick keeps optimistic views by predicting that the economy is expected to gradually recover in 2021.
“Overall GDP growth could reach between 1.5 and 2 percent in the current FY, slightly more than the IMF predicted,” Patrick predicts.
Another optimistic view about the future ahead for Ethiopia’s economic situation can be found in Cepheus Capital’s third quarter report for 2020. The report states economic activity indicators in the last five months showed mostly positive growth prospects, with signs of a V-shaped recovery emerging even in COVID-hit areas such as tourism, government revenue, and industrial park exports.
While there remain uncertainties regarding the Tigray conflict’s ultimate resolution, its apparent short duration and limited geographic scope imply minimal macro impacts, according to Cepheus. Accordingly, it hoped that the economic outlook would remain favorable with respect to the budgetary stance, banking activity, and balance of payment flows.
Cepheus predicted Ethiopia’s economy will grow by 4.1 percent in 2021, with the agricultural sector showing no growth, while industry and service sectors are predicted to grow by 9% and 4%, respectively.
For other economists though, things are more worrying than these positive predictions. Ayele Gelan is a notable member of experts with such a view.
“The economy is stuck and it is like a lorry stuck in mud. Let's face it; these are not normal times; this is not a normal economy. Multitudes of negative shocks, backlogs of cumulative policy errors, all compounding,” says Ayele Gelan, who expects the economic growth to be below zero. “IMF’s 0 percent prediction is even an exaggerated rate of growth,” he states.
In simple words, economic growth measured by GDP signals a boost in domestic production, which may result from an increase in marginal productivity and consumer spending. If there is political or economic uncertainty, however, economists assess consumer and investor confidence takes a blow leading to economic decline or flattening under the worst case scenario.
“Optimism of consumers and businesses is an engine of economic growth. If investors and consumers believe that next year will be bright, then it becomes really bright,” says Ayele, who argues this is what policymakers in Ethiopia fail to understand.
Another economist who goes along with Ayele’s views is Gutu Tesso (PhD). For him, positive predictions of a sizeable growth are nothing but hope.
“Agricultural sector, which contributes a third of Ethiopia’s GDP, is at its worst shape due to locust invasion and fall in crop production that is caused by political uncertainty in high-yield areas like Gondar, Wollega, Arsi and Bale, among others. The hike in price of major food items, for instance, shows there has been a fall in productivity in the agricultural sector and drop in crop production,” says Gutu.
Let alone the negative forecasts, argues Patrick, realization of the zero percent growth prediction by the IMF would set in motion a huge setback for the country.
“In fact it means that per capita GDP growth would be negative given Ethiopia’s high population growth of 2.6%. Much of Ethiopia’s progress regarding poverty reduction would be undone. It is not clear if we would see a significant effect on unemployment,” he explained.
IMF estimates global growth to contract by –4.4 percent in 2020, but only recover by 5.2 percent in 2021. Of all African countries, it is only Ethiopia whose economy is forecasted to witness a fall in real GDP.
Neighboring Kenya, for instance, is expected to see an economic growth rate of 4.7 percent in 2021, up from 1 percent in 2020. Rwanda’s economy, which grew by 2 percent in 2020, is projected to rebound relatively quickly in 2021, lifting real GDP by 6.9 percent year on year.
Experts say Ethiopia’s current situation is like no other.
“In many countries, there are different major factors determining economic growth; but in Ethiopia, the key factor for GDP growth is peace and stability, which determines everything including supply, demand, trade, investment and overall production,” Tadessse Tilaye, an Investment Consultant says.
“Investment, be it local or foreign, is unthinkable in 2021 as investor confidence has been eroded due to political uncertainty, a situation which may lead to an increase in unemployment rate and disruption of local supply chains that may result in a high inflationary pressure. So if the country becomes stable, it will be a year of a slight recovery from the crisis that we faced so far, but the chance of that happening is also very low as there is no end in sight for the political crisis,” explains Tadesse.
Patrick, on the other hand, expects investment to grow by almost 10 percent.
“Subdued economic activity and high inflation constrain private consumption growth which we expect at only around 2%. Although Ethiopia does not have the fiscal space to provide a protracted stimulus, together with support from donors and international organizations government consumption may see an increase of more than 5 percent compared to 2020/2021. Exports and imports are both expected to grow at around 4 percent,” he states.
Experiences of traders indicate that consumer confidence, a key economic indicator, fell in Ethiopia last year due to the dynamic situation in the country.
“Consumer confidence started to fall after the discovery of the first case of Coronavirus and then it worsened following the instability in Addis Ababa and Oromia due to the assassination of singer Hachalu Hundessa. And when it began to bounce back, the conflict in Tigray started and it has been falling ever since,” says Amanuel.
“Though there has been improvement after the federal government controlled Mekelle, I am not really sure consumer confidence will normalize as peace and stability is yet to be ensured throughout the country,” the businessman fears.
Gutu argues that fresh draw backs in the health front would exacerbate the negative impacts of peace and security problems.
“The service sector, which accounts for almost 40% of the economy, is not likely to recover from the impacts of COVID-19 in 2021, even without taking into account the discovery of new variants of the virus that lead to the closure of airports and slowdown of the global recovery of the airline industry. Tourism sector will see another worst year due to the virus and the conflict that is negatively impacting the image of the country,” he analyses.
Gutu says the industry sector is in trouble due to political instability and raw material shortage drawn out of the disruption of global supply chains and forex crunch. “Big industries in North Ethiopia, including Tigray, have gone out of operation and some are damaged; so, either they will try to recover or produce less,” he stresses.
“The forex shortage will deter industries in relatively stable areas from producing more, while as global supply chains are yet to be rebuilt after being disrupted due to COVID-19, some factories might take time to get back on their feet,” he explains.
Not only big industries but also marginal economic actors that include small and medium enterprises, street vendors and others engaged in informal sector, may not recover from repercussions of COVID-19, experts fear.
While many economists agree on the ultimate importance of ensuring peace and stability at any cost in order to make 2021 better than its almost spooky predecessor, Tadesse suggests the government emphasize boosting food production, which he thinks is key to bring the economy back on track.
“As a short-term policy, policymakers must now make the agricultural sector a priority as it can employ more people than any other segments of the economy without requiring much foreign capital. More financing should be provided to youth engage in crop production, which could lead to surplus that is instrumental to control inflationary pressure and ensure market stability,” says Tadesse.
The government has also announced its intention to avert supply side problems to control inflation and avoid major economic woes. “We want to ensure a ‘quality’ economic growth, as opposed to the type of growth that we had registered over the last decade, which has left us with a surge in demand while supply problems remain unchanged,” said Fitsum Assefa, Planning and Development Commissioner, during Ethiopia CEO Forum held at Sheraton Addis two weeks ago.
“We want growth that comes from a source that really addresses our supply side problems in agriculture, manufacturing and other sectors. This helps us build a resilient economy,” she adds.
Commercializing the tree planting initiative adopted by the government is also another area that should be taken into consideration, according to Tadesse. “The tree planting initiative must be commercialized and it can really be a source of employment opportunities for thousands. It will enable us create agri-businesses that could export timber and woods, besides fulfilling the local market,” Tadesse suggests.
Gutu, for his part, believes financial institutions should play a big role in the economic recovery.
“2021 is not the year to make profits. Instead, financial institutions should gear up to provide very affordable loans to businesses, especially for small and medium enterprises. And to improve the investment climate, the reforms put on paper should be translated to actual work. Bureaucratic hurdles should be eased as much as possible while a concerted effort should be exerted to rebuild Ethiopia’s already damaged image due to internal conflicts and war,” Gutu recommends.
Nonetheless, for Ayele, the key to the economic recovery in 2021 should be boosting both confidence of investors and consumers. “Economic behavior is a self-fulfilling prophesy. If there are reasons for people to worry, then they do not spend. Investors wait for calm times, or else they go elsewhere. It is the same with consumers. It is these fundamentals that the government has to follow and nurture,” he concludes.
In the short term, Patrick recommends, Ethiopia should take measures to mitigate the effects of the pandemic on the economy by increasing government expenditure. To support medium and long term economic growth, he recommends “once the pandemic fades away, the country’s priorities are outlined in the 3-year IMF program (Extended Credit Facility 2019-2022): elimination of exchange rate overvaluation, consolidation of the public sector while increasing social spending, reducing inflation, encouraging private sector-led growth.”
By Samson Berhane