Implications of World Bank Economic Report for Ethiopia

                                                                                       Zeryihun Kassa

The World Bank Report illuminates the outstanding performance of Ethiopian economy over the last nine years since 2004. It shows Ethiopia has a lion economy in Africa propelling at a pace the East Asian tigers have done.

Nine Years of Epic Economic Feat

The World Bank Report says “Ethiopia has experienced strong and generally broad-based real economic growth of around 10.6% on average since 2004 - 2011.”

Thursday (13 October 2012) saw the launching of the World Bank Report on Ethiopia’s Economy at the Sheraton Addis.

Most often some try and contest Ethiopia’s annual growth report assuming the government may cook data to portray exaggerated picture of the reality. Yet, no credible international institution has denied the fast powering economy of the country.

Here is another testimony by the World Bank that illuminates the strong showing of the state of the economy for a little less than a decade: “The growth over the last nine years,” the report read, “was far beyond the growth rates recorded in aggregate terms for Sub-Saharan Africa, which is 5.2% - less than half of Ethiopia’s average real GDP growth rate during that period.” It seems currently Ethiopia is the increasingly growing, non-oil tiger economy in Africa.

The report indicates Ethiopia’s growth appears to have been inspired by the East Asian experiences namely those of countries like China, Korea and Taiwan. It is reported to have been induced by a mix of factors: agricultural modernization, the development of the export sectors, strong global commodity demand, and government-led development investments, among others.

Growth is estimated to likely stay around that remarkable margin up until 2016.

Poverty Reduced by 9.1%

The growth over the 5 years spanning from 2004/5 to 2009/10 has lifted around 2.5 million citizens out of poverty, thereby bringing down people under the poverty line from 38.7% to 29.6%, which is a 9.1% decrease.

The report further estimates, given inflation kept tamed, Ethiopia is highly likely to make its target of the Growth and Transformation Plan (GTP) reducing the poverty by another 7.4%.

The national poverty line here is less than US$0.6 per day. The report suggests it is so important for Ethiopia to take the inflation down to maintain the hard-won reduction in poverty.

Export on the Rise

The World Bank Report appreciates the country’s strategy of increasing exports to facilitate growth as it is the development pattern of recently successful countries particularly in East Asia. Ethiopia’s export products showed growth of 14.8% in 2011/12.

Boosting the export sector is appropriate, the report noted, given the current limited size of the country’s domestic market.  Considering the composition of the export by commodity, still coffee continues to be the largest export while Gold closely follows behind. Despite recent decline in volume of coffee export, trends suggest it will rebound. Ethiopia is also diversifying its export with rising sale of oil seeds, flowers, live animals, fruits and vegetables.

The growth in export of goods, the report says, is to a good extent driven by volume growth across a variety of product groups which is a result of recent efforts to increase and diversify the export base.

However, the increase in annual import goods by 33.5% in 2011/12 alone indicates the overall import/export development resulted in a significantly bigger trade deficit, which stood at 7.9 billion US Dollars in 2010/11.

Inflation Still a Threat

Though headline inflation rate in October 2012 was 15.8%, it was over 33% in 2011. Currently inflation is declining slowly.

The reduction in inflation, according to the World Bank Report, is down to the tightening fiscal stance and monetary base growth induced by the government of Ethiopia.

The hope is, in spite of its persistence, inflation will remain in a descending trend.    

Ethiopia’s Economic Growth vis-à-vis China, South Korea

The World Bank Report shows interesting comparisons of Ethiopian development experience to China and Korea which depicts Ethiopia is well on track. Yet, the country has to significantly boost its domestic savings and exports performance while keeping inflation down to single digit.

Although there are few peculiarities between them, by and large, Ethiopian economy is following the two fast tracking economies-the Republic of China and South Korea.

Based on policies observed in China in the 1990s, the comparison depicts, there are a series of “quick-wins” that could be used to increase the potential for FDI inflows into Ethiopia.

According to the Report, Ethiopia’s fiscal performance appears to be adequate given the current state of the economy and financing requirements for development.

 Opportunities for more growth

The current state of the economy is a plus for investment in Ethiopia. Besides the strong political stability and investment incentives are luring. Yet still there are rooms for improvement to become a major destination of global investment.

The cheap abundant labour, the size of the population and cheap electric power are some of the appeals to FDI and massive local investment, given the government sorts out some logistic doldrums that somehow hampers the progress.

The impressive annual economic growth that endures for nearly a decade is another incentive to bring in much-needed FDI in a way it further fuels the already fast-paced economic development.

No doubt, I assume, if the country sustains this growth momentum for a couple of decades, Ethiopia will become a shining gem in the horn of Africa.

Challenges of the Economy

Among the challenges the World Bank Report surfaced, one is the poor saving rate of the country.

The Report says “Even though Ethiopia achieved high income growth it is striking that the country has not reached the subsistence level beyond which people start to save in earnest.” Therefore, it is essential to considerably increase the domestic saving.

The other challenge is the logistics problems that most often complicate things for investors. Indeed, the World Bank Report and investors attending the launching of the report admired the incentives Ethiopia has offered. Yet they see a number of gaps specially related with customs regulations and other logistic matters.

One such example is the cost of shipping from china to Djibouti and the cost of shipping from Djibouti to Addis Ababa is the same which is odd given the big disparity in distance. Participating investors asked the government to fill in the gaps so that the investment climate for both domestic and foreign companies will be much smoother.