Ethiopia - Country Commercial Guide
Market Overview

Discusses key economic indicators and trade statistics, which countries are dominant in the market, and other issues that affect trade.

Last published date: 2020-07-20

Ethiopia has a large domestic market of over 100 million people, making it the second-most populous country in Africa after Nigeria. Over the last decade, Ethiopia has had one of the fastest-growing economies in the world, with an average annual growth rate of 14%. In 2019, Ethiopia’s real Gross Domestic Product (GDP) expanded by nine percent, and growth is expected to fall to 6.3 % in 2020 due to Covid-19, according to the World Bank.

The business climate is undergoing significant changes with broad policy reforms implemented under the leadership of Prime Minister Abiy Ahmed. Government plans to privatize leading state-owned enterprises signal a significant shift toward market-based reforms and new flexibility with respect to economic policymaking. The acute foreign exchange shortage remains the leading challenge for U.S. suppliers, for which there is no quick fix. 

While the economy is growing rapidly, presenting many opportunities, there are also hurdles to doing business in Ethiopia. The 2020 World Bank’s Ease of Doing Business report (EODB) ranked Ethiopia 159th out of 190 countries, an improvement of two positions from 2018. The new leadership has a focused target to improve the country’s ease of doing business ranking and has formed an interministerial committee led by the Prime Minister to improve specific areas of the ease of doing business. The World Economic Forum (WEF) has identified burdensome customs administrative procedures, the high cost of logistics, and access to credit and foreign exchange as major challenges to small and medium-sized enterprises (SMEs) in Ethiopia. 

The agriculture sector has historically been the engine of the Ethiopian economy, but it has recently given way to the expansion of the service sector. The National Bank of Ethiopia (NBE) notes agriculture, industry and services have contributed 33.3%, 28.1%, and 39.8% to GDP respectively during the 2018/19 Ethiopian fiscal year, as opposed to 36.3%, 27% and 39.2% to GDP in 2017/2018. The agriculture sector’s share of GDP shrank by more than 25% between 2005 and 2019, while the service sector’s share grew by 28% during the same period. Industry and the manufacturing sectors’ share gradually rose, expanding their share of GDP over the past ten years. The construction industry, particularly roads, railways, dams, industrial parks and housing development, is the main driver of growth in the industrial sector, contributing more than half of the sector’s growth. Service sector growth is dominated by expansion in communication and transport services, hotel and restaurant businesses, as well as wholesale and retail trading.

In May 2020, Moody’s downgraded Ethiopia’s creditworthiness to ‘B 2’, while S&P and Fitch maintained their ratings of ‘B’ with a negative outlook. These ratings reflect Ethiopia’s deteriorating fiscal position, but prospects for continued economic growth in the short and medium-term and are on par with neighboring Kenya and Uganda.  During 2018/19, the year-on-year inflation rate gathered momentum and rose primarily due to a price increase in food items.  In April 2020, Ethiopian inflation stood at 19% percent. 

Real interest rates in Ethiopia remain largely negative. The minimum bank deposit rate of 7.00%, bond yield of 3.67%, and Treasury bill yield of 3.67% are lower than the annual inflation rate of approximately 15.3 percent. In October 2017, the National Bank of Ethiopia (NBE) devalued the birr by 15 percent relative to the U.S. dollar, thereby reducing overvaluation and enhancing competitiveness.  In April 2020, the official exchange rate of the dollar to birr rose to 33.15 with the birr devaluing by 15% in less than a year.  The birr has continued to follow a steady depreciation, with the NBE following a crawling peg exchange rate policy. The black market exchange rate for the same period was approximately 42.00 Birr per dollar, a premium of 26.6% over the official rate. 

Ethiopia faces a growing trade deficit with total imports increasing on average by 12.5% per year during the previous 10 years. The rise in the trade deficit has been driven by rising imports, which ballooned from $3.6 billion in 2010 to $15 billion in 2018/2019, the peak of Ethiopia’s trade deficit.

Concerned by the widening trade balance, the Government of Ethiopia (GOE) works to suppress imports and has undertaken other macroeconomic measures in recent years, which has resulted in a narrowing of the trade deficit to $12.44 billion in 2018/19. Ethiopia’s total merchandise exports were $2.67 billion in 2018/2019 (a 6% decline from last year, 2017/2018), while imports for the same period were $15.11 billion, a 1% decrease from the previous year. 

In September 2019, the administration of PM Abiy Ahmed launched its new economic policy strategy termed the Home Grown Economic Reform Agenda, designed to eliminate macroeconomic imbalances and lay the foundation for sustainable and inclusive growth. The reform aims to transition the Ethiopian economy from a public sector-led model to one that is driven by the private sector. In December 2019 the IMF approved a program for Ethiopia of nearly $3 billion in support of the Home Grown Reform, which according to government sources will require a total of $10 billion of new funding.

The Ethiopian birr is a non-convertible currency, and private sector allocation to foreign exchange (U.S. dollars) is determined by the National Bank of Ethiopia (NBE). The NBE operates within the context of a large trade deficit and the need to meet sovereign debt obligations stemming from government infrastructure projects funded by foreign debt, which enjoy priority in the allocation of foreign currency.

According to the NBE annual report, 33.3% of total import spending ($5.03 billion) was on capital goods and 28.3% ($4.27 billion) on consumer goods. U.S. exports to Ethiopia in 2019 rose to $1.5 billion, a 14% increase from that of the previous year, accounting for 10% of Ethiopia’s total imports. Ethiopia’s imports from the United States have increased steadily throughout the past decade, representing approximately a fivefold increase from 2007 through 2019.

In 2018/2019, Ethiopia’s major goods exports included coffee (28.7%), oilseeds (14.5%), chat (11.4%), pulses (10.2%), cut flowers (9.6%), leather and leather products (4.4%) and gold (1%). Ethiopia’s total export earnings by value declined by 6% in 2018/2019 from the previous year. Depressed commodity prices are the leading cause of this drop in exports.

Leading destinations for Ethiopia’s exports in 2018/2019 were: Asia 41.6, Europe 25.4% and Africa 20.8%. In FY 2018/2019, the United States was Ethiopia’s leading export market representing 11.3% of total exports, registering a 2% increase from the previous year. Ethiopia primarily exports coffee, leather, and leather products to the United States.

The vast majority of Ethiopia’s imports come from Asia (62.3%) followed by Europe (21.4%), the United States (10%), and other countries in Africa (6.2%). Imports from China accounted for 26% of Ethiopia’s total foreign supplies. U.S. exports to Ethiopia increased by 1.4%, a consecutive three-year increase. U.S. exports to Ethiopia are primarily aircraft sales, construction equipment, agricultural machinery, farming, and engineering services.

Aircraft and aviation parts represented a majority of total U.S. exports to Ethiopia.
Many U.S. companies based in the United Arab Emirates (UAE) do business in Ethiopia using Dubai as an intermediary export platform due to proximity and availability of reliable air shipping and air services. Please refer to the following table of U.S. -Ethiopia bilateral trade figures.

Table 1:  U.S. – Ethiopia Bilateral Trade

Unit: U.S. Dollars

Year

U.S. Exports to Ethiopia

U.S. Imports from Ethiopia

2009

266,866,655

112,911,249

2010

773,159,838

127,946,985

2011

689,890,633

144,417,834

2012

1,274,672,068

183,126,469

2013

688,507,736

193,566,884

2014

1,668,912,927

207,209,040

2015

1,555,249,376

310,269,077

2016

826,095,277

236,229,022

2017

877,154,121

291,458,720

2018

1,308,252,189

444,834,941

Source: Department of Commerce, Trade Policy Information Systems, Global trade Atlas and National Bank of Ethiopia

During the past ten years, bilateral trade between the United States and Ethiopia grew significantly in both directions, with U.S. exports to Ethiopia rising over six-fold while Ethiopia’s exports to the U.S. similarly increasing nearly four-fold during the period stretching between  2009 to 2018.

Chinese companies, supported by Chinese export trade and project finance agencies, are active in Ethiopia and aggressively pursue projects in the infrastructure and textile sectors. Indian and Saudi Arabian firms are mainly involved in the agricultural sector. Many Indian companies have also begun to invest in the government-sponsored industrial textile parks. Dutch companies play a prominent role in the floricultural industry and Turkish companies are increasingly engaged in manufacturing, particularly textiles and garments, as well as in construction.

The Ethiopian People’s Revolutionary Democratic Front (EPRDF), a coalition of four ethnic based, regional parties, and its allies held power from 1991 until its dissolution in 2019. In 2015, the EPRDF and its affiliates won all of the 547 parliamentary seats in national and regional elections. Prime Minister (PM) Abiy Ahmed came to power in April 2018 through a vote by the House of Peoples Representatives (the lower house of Parliament). The vote followed his selection in March 2018 as chairman of the ruling EPRDF. Following his appointment as chairman of the EPRDF and Prime Minister of Ethiopia, the executive committee of the EPRDF—a coalition of four ethnic parties—decided by majority vote to dismantle that party structure and form a new party without ethnic affiliation, the Prosperity Party (PP), in December 2019. Most members of the former EPRDF joined the newly formed Prosperity Party. With the spread of COVID-19, the August 2020 election has been postponed to a date not determined as of publication. Due to COVID-19 in March 2020, the government of Ethiopia declared a five-month state of emergency during April – September 2020 with restrictions in support of social distancing taking effect immediately. While the state of emergency instituted restrictions, as of June 8, 2020 Ethiopia has not implemented a lockdown.

The Government of Ethiopia’s economic development vision has been historically encapsulated in the government’s Growth and Transformation Plan (GTP). The growth objectives of the first phase, GTP I (2011-2015), were revised to formulate GTP II (covering 2016-2020). GTP II lays out a plan for dramatic structural transformation, shifting from an agrarian economy to one more geared towards manufacturing and services, with the overarching goal of making Ethiopia a lower-middle-income country by 2025. GTP II envisages 11% average annual economic growth with an improved trade balance and higher foreign reserves. Since PM Abiy’s rise to power, however, there has been a diminished public commitment to the GTP II. The GOE is also committed to building a climate-resilient green economy and reaching U.N. sustainable development goals. Ethiopia will focus on mitigating greenhouse gas emissions by expanding electric power generation from renewable sources for domestic and regional markets. The GOE now aims for the private sector to play an increased role in the economy under the Home Grown Reform plan spearheaded by the Abiy administration for the coming three years (2020-2023) to transition the economy to a private sector-driven model.  

The GOE has investment incentives aimed at attracting FDI, particularly export-oriented projects. U.S. companies that invest in Ethiopia benefit from tariff and duty-free incentives through Ethiopia’s eligibility for the African Growth & Opportunity Act (AGOA) trade preference program, now extended until 2025, and Ethiopia’s membership in the Africa Continental Free Trade Agreement (AfCFTA).

Political risk for international investors can be mitigated through products offered by the African Trade Insurance Agency (ATI), which Ethiopia joined in 2016. ATI provides specialized services that cover political and trade risks. ATI also enables Ethiopian insurance companies to facilitate the sale of goods on a letter of credit, while limiting trade and political risks related to losses due to nationalization, breach of concession agreements, import or export embargoes, inconvertibility or transfer risks, political violence, terrorism, confiscation, license cancellation, and sabotage.

The top five reasons why U.S. companies should consider doing business in Ethiopia are:
•    Now is the moment for U.S. companies to pursue opportunities that have arisen following Ethiopia’s sweeping political and economic reforms. Ethiopia is now beginning to liberalize its economy and privatize many sectors, allowing U.S. firms to participate in areas previously closed to international participation. 
•    Ethiopia is the second-most populous country in Africa, with over 70% of the population under the age of 30, and has one of the fastest-growing economies in the world, which is resulting in an expanding middle class with greater purchasing power.
•    U.S. products and services are highly respected among Ethiopians for their quality and dependability.
•    U.S. Exim bank supports financing exports to Ethiopia and has an expanded capacity to finance transactions beyond $10 million following the

May 2018 seating of a quorum of its board. The Development Finance Corporation (DFC), which in October 2019 became the successor agency of OPIC, is also increasingly engaged in and delivering project finance to Ethiopia. DFC is prioritizing the financing of projects in Ethiopia. With these financial tools, U.S. firms are now better equipped to mitigate risks and pursue projects in Ethiopia. 
•    Factors of production in Ethiopia such as land, labor, and energy costs are low relative to African and other global markets.