Ethiopia

The Economic Report on Africa 2002 shows that, since 1992, the Ethiopian Government has focused on reorienting the economy through market reforms, including a structural adjustment programme. As a result, the State's direct role in economic activity has declined. These reforms, combined with peace and favourable weather conditions for most of the past decade, have produced significant economic outcomes. Indeed, Ethiopia's recent economic performance has been quite encouraging. During 1992-2001, real GDP growth averaged 6% a year. Exports grew by about 5% a year, though there was considerable volatility across years. Annual inflation averaged about 4%. By 2000/01, investment rose to 16% of GDP. These outcomes are much better than those of the 1975-1991 period. The positive trends are expected to continue, with GDP growth of 8.7% in 2000/01 and 7.0% in 2001/02.

Still, Ethiopia remains one of the world's poorest countries, with a per capita income of just $US110 in 2001. Poverty remains deep and severe with nearly half of Ethiopians living below the poverty line, high illiteracy, low school enrolment, and short life expectancy. The structure of the economy remains largely unchanged, with rain-fed agriculture generating nearly half of GDP, more than 85% of employment, and almost all exports. The country remains dependent on a few primary exports that suffer from deteriorating terms of trade, resulting in volatile export earnings. Growth is also constrained by heavy external debt. In addition, Ethiopia has one of the lowest stocks of capital per worker ($441 in 2000) in Africa. The country's road and telephone networks have some of the lowest densities on the continent. Due in part to such under-capitalization, Ethiopia's output per worker of $268 in 2000 was the second lowest productivity level on the continent. The recent war with Eritrea did not help matters.

Moreover, in the past decade, income inequality appears to have increased in both rural and urban Ethiopia. Urban unemployment and urban poverty have increased. In addition, HIV/AIDS will likely be a major constraint on sustained growth. More than 3 million Ethiopians live with HIV/AIDS, and each year about 300,000 die from the disease. The pandemic has increased illness and mortality rates, lowering productivity and raising health care costs. Poor people will be hit especially hard as the disease spreads.

Ethiopia's Government is preparing a Full Poverty Reduction Strategy Paper (F-PRSP). This process provides a good opportunity to focus on alleviating poverty and fostering medium- to long-term development. Among many other issues, the process is expected to map out a strategy for combating HIV/AIDS. In addition, promoting structural change remains a key policy challenge. Similarly, reducing debt through the enhanced Heavily Indebted Poor Countries (HIPC) initiative and using the resulting savings in areas such as education and health could contribute significantly to human development and economic growth.

Medium-term outlook

The Report acknowledges a number of developments in 2000/01 that indicate positive prospects for 2001/02. Peace with Eritrea continues to hold, allowing further cuts in defence spending. The cessation of hostilities also paved the way for the resumption of external assistance. The IMF's Poverty Reduction and Growth Facility for Ethiopia, totalling $110 million over three years, was approved in March 2001. That Facility, combined with the debt relief provided under the enhanced HIPC initiative, will generate additional resources in 2002. In addition, the cereal harvest at the end of 2001 was quite good.

Real GDP is forecast to grow by 7% in 2001/02. It is also expected that, with further recovery in non-agricultural economic activity and relatively high oil prices, the decline in consumer prices in 2000/01 will be reversed. Inflation is projected to rise to 5%. Lower defence spending, higher revenue, and fiscal prudence are anticipated to lower the budget deficit to 8.2% of GDP. In contrast, falling international coffee prices and growing imports will push the current account deficit up slightly, from 5.5% of GDP in 2000/01 to 6.2% in 2001/02. On the policy front, the Government's key strategy is completion of the F-PRSP in 2002.

In summary, the Report notes that Ethiopia has good medium-term prospects - prospects that will be realized if the country:

· Remains politically stable;
· Continues to experiences favourable weather conditions;
· Exploits opportunities from the HIPC initiative and the Africa Growth Opportunity Act (AGOA);
· Implements effective institutional reform; and
· Implements HIV/AIDS control programmes.