ETHIOPIA

Key conditions andchallenges

Table 1

2023

Population, million

126.5GDP, current US$ billion

171.3

GDP per capita, current US$1353.5

International poverty rate ($2.15)

a27.0
a65.0

a90.9

Lower middle-income poverty rate ($3.65)
Upper middle-income poverty rate ($6.85)
Gini index

a35.0

School enrollment, primary (% gross)

b85.5

b65.0

Total GHG emissions (mtCO2e)216.4

Life expectancy at birth, years

Source: WDI, Macro Poverty Outlook, and official data.
a/ Most recent value (2015), 2017 PPPs.
b/ WDI for School enrollment (2022); Life expectancy(2021).

Growth surged from 6.4 percent in FY22
to 7.2 percent in FY23, supported bygood harvests and steady service sector
growth. However, growth remains lower
than before COVID-19, and compoundedshocks since 2019 made it more difficult
to translate economic growth into poverty
reduction. Reflecting slow reform implementation, growth is expected to drop to
7 percent in FY24 and over the medium
term. Urgent reforms implementation is
critical to restore macroeconomic stability
and create enabling environment forstructural transformation.

Ethiopia’s state-led and public-investment-intensive development model supported growth rates of nearly 10 percent
between 2004 and 2018, among the world’s
highest, and drove significant gains inpoverty reduction. Despite these achievements, the country’s development modelyielded negligible improvements in structural transformation and productivity
growth while contributing to macroeconomic imbalances: debt vulnerabilities, fiscal constraints, depleted liquidity buffers,
and foreign-exchange shortages. The 2019
Home-Grown Economic Reform Agendasought to prioritize reforms that would address macroeconomic distortions, unlock
greater private sector participation andmarket orientation. However, implementation was slowed amid multiple
shocks—including the COVID-19 pandemic, major conflict in the north, andsoaring
globalfoodandenergy
prices—that exacerbated macroeconomic
vulnerabilities. This has slowed growth toabout 6 percent since FY20.
In recent months, the government hasannounced a revival of the 2019 HGER
to target macro-financial measures to stabilize the macroeconomy and reduce
macroeconomic vulnerabilities; introduce
structural reforms to alleviate businessconstraints to create an enabling environment for private sector investment; andimplement sectoral policies to address

sector-specific institutional and market
failures and enhance productivity.
The combination of climatic shocks, disease outbreaks, armed conflict, and economic shocks have made difficult to continue reducing poverty at the pace observed before 2019. Poverty rates are estimated to have stagnated at around the level observed in 2016. Food insecurity has also worsened, due to global food and energy price shocks and the disruptions tograin supply due to the war in Ukraine.

Recent developments
Growth picked up to 7.2 percent in
FY23 (ending June 2023) from 6.4 percent in FY22 as good harvests supported
agricultural sector growth despite protracted drought in pastoral areas. Service sector dynamism also contributed
to growth, while the manufacturing andconstruction sectors were negatively affected by worsening foreign exchange
shortages, restrictions on non-essential imports, and the suspension of preferential
US market access.
The current account deficit narrowed to 2.8
percent of GDP in FY23 from 4 percent of
GDP in FY22, due to strong service exports
and lower imports related to foreign exchange shortages. It was largely financed
through foreign direct investment and thedrawdown of foreign exchange reserves. A
two-year debt suspension agreement with
the G20 Official Creditors’ Committee inNovember 2023 helped ease external financing pressures, but its continuity isFIGURE 1 Ethiopia / Gross foreign exchange reserves

FIGURE 2 Ethiopia / Actual and projected poverty rates andreal private consumption per capita

Million US$4,500

Poverty rate (%)

Months of imports
3.0Real private consumption per capita (constant LCU)

100

14000

90

4,000

2.5

3,500
3,000

2.0

2,500

1,500

70

10000

60

8000

50

1.52,000

12000

80

1.0

40

6000

30

4000

20

1,0000.5

5000
Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21 Jul-22 Jul-23
In million US$ (lhs)

20001000.00
2010 2012 2014 2016 2018 2020 2022 2024 2026

In months of imports (rhs)

Source: National Bank of Ethiopia.

International poverty rate

Lower middle-income pov. rate

Upper middle-income pov. rate

Real priv. cons. pc

Source: World Bank. Notes: see Table 2.

MPO1Apr 24contingent on reaching agreement with theInternational Monetary Fund on an economic reform program.
Fiscal space narrowed further amid declining revenues and donor flows. Ethiopia’stax revenues (with a tax-to-GDP ratio of
6.8 percent in FY23) are insufficient to fundessential spending and growth-enhancing
investments and anchor fiscal sustainability. To contain fiscal deficits, public spending has been steadily cut, falling to 10.8
percent of GDP in FY23 (less than half thelevels in the early 2000s). With limited financing options, the deficit narrowedfrom 4.2 percent of GDP in FY22 to 2.5
percent of GDP in FY23, and was financed mainly through domestic borrowing, including from the central bank. The
public debt-to-GDP ratio continued to decrease in FY23 as external disbursements
remained constrained.
Inflation remains high, reaching 28.7
percent in December 2023, with large
contributions from non-food inflation
due to the phasing out of fuel subsidies,monetary financing of the deficit, andwidening premiums in parallel currency
markets (that reached over 100 percent
in recent months). Overlapping crises–persistent droughts and a surge in global

food, fuel, and fertilizer prices– have also
contributed to inflation.
Against this backdrop, poverty is expected
to have remained stagnant, which combined with high population growth has led
to a ceaseless increase in the already large
number of poor people in the country—by2023, 31.5 million people lived below the$2.15/day poverty line.

Outlook
Growth is projected to drop to about 7 percent over the medium term amid slow
progress in reform implementation. Although still a high level of growth, the continuance of policy distortions, including asignificantly overvalued exchange rate, constrains Ethiopia from translating thisgrowth into tangible improvements in productivity and job opportunities for people.
Although fiscal and current account deficits
narrow over the medium term, Ethiopia willremain severely constrained by a shortage ofdomestic and external financing. Inflation isprojected to decline gradually, as monetary financing declines in line with narrowing fiscal deficits. The implementation

TABLE 2 Ethiopia / Macro poverty outlook indicatorsof critical macroeconomic and structuralreforms under discussion would help address macroeconomic distortions and improve the quality of growth.
A shift in Ethiopia’s economic model towards a private sector led and more market oriented one is urgently needed to address mounting macroeconomic vulnerabilities, restart a stalled structural transformation and create jobs. Addressing the significant distortions in the foreign exchange
market is critical to restore productivityled growth, improve resource allocation,
and alleviate external payment risks. Debt
treatment and the resumption of official
external flows will also be crucial to ease
external financing pressures. However,any intensification in conflicts would complicate reform implementation and affectforeign exchange inflows.
Substantial poverty reduction in the medium term would require strong performancein the agricultural sector, which employs
over 70 percent of the labor force, as well as
dynamism in other sectors. Additional
shocks could push millions more intopoverty and increase further spatial inequalities and mitigating this risk requires,among other things, an acceleration of reforms to rebuild fiscal and social buffers.

(annual percent change unless indicated otherwise)

Real GDP growth, at constant market prices
Private consumption
Government consumption
Gross fixed capital investment
Exports, goods and services
Imports, goods and services

2020/21
6.3
3.0
12.2
7.6
5.5
2.0

2021/22
6.4
4.5
1.5
11.0
11.7
10.8

2022/23e
7.2
6.1
-16.0
11.2
-0.8
-4.1

2023/24f
7.0
6.1
0.6
10.7
6.5
11.2

2024/25f
7.0
6.1
4.8
6.3
6.1
1.2

2025/26f
7.0
6.1
5.0
6.4
6.1
1.2

Real GDP growth, at constant factor prices
Agriculture
Industry
Services

6.3
5.57.3
6.3

6.4
6.0
4.8
7.9

7.2
6.3
6.9
8.0

7.0
6.0
7.0
7.9

7.0
6.0
7.0
7.7

7.0
5.9
7.1
7.7

Inflation (consumer price index)
Current account balance (% of GDP)

20.2
-2.7

33.7
-4.0

32.6
-2.8

28.5
-2.4

23.2
-1.7

17.6
-1.3

Fiscal balance (% of GDP)
Revenues (% of GDP)
Debt (% of GDP)
Primary balance (% of GDP)

-2.8
11.2
56.6
-2.2

-4.2
8.3
54.4
-3.6

-2.5
8.2
42.7
-1.9

-2.0
7.5
36.1
-1.5

-1.8
7.0
31.8
-1.4

-1.8
6.8
29.8
-1.5

25.6
62.7
89.7

25.4
62.2
89.5

24.9
61.4
89.1

24.4
60.6
88.6

24.0
59.8
88.2

23.5
59.0
87.8

3.5
14.5

2.3
14.0

2.5
13.5

2.6
13.0

2.5
12.4

2.7
11.9

a,b

International poverty rate ($2.15 in 2017 PPP)a,b
Lower middle-income poverty rate ($3.65 in 2017 PPP)a,b
Upper middle-income poverty rate ($6.85 in 2017 PPP)
GHG emissions growth (mtCO2e)
Energy related GHG emissions (% of total)

Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD.
Notes: e = estimate, f = forecast. Growth projections reflect limited available information, and are subject to revision as better data becomes available.
a/ Calculations based on 2010-HICES and 2015-HICES. Actual data: 2015. Nowcast: 2016-2023. Forecasts are from 2024 to 2026.
b/ Projection using annualized elasticity (2010-2015) with pass-through = 0.7 based on private consumption per capita in constant LCU.

MPO

2Apr 24