Ethiopia - Market OverviewEthiopia - Market Overview
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 average annual growth rates ranging from 7% to 12% (depending on data sources). In 2017, Ethiopia’s real Gross Domestic Product (GDP) expanded by 10.9 percent, and is expected to grow by 8.5%, according to the World Bank.
The business climate is undergoing significant changes with significant policy reforms implemented under the new leadership of Prime Minister Abiy Ahmed. Government plans to privatize leading state-owned enterprises, announced in June 2018, signal a greater openness to market based reforms and a new flexibility to 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 2018 World Bank’s Ease of Doing Business report (EODB) ranked Ethiopia 161th out of 190 countries; a drop of 2 rankings from that of last year. The World Economic Forum (WEF) 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 service sector. The National Bank of Ethiopia (NBE) notes agriculture, industry and services have contributed 36%, 25.6% and 39.3% to GDP respectively in 2016/17 as opposed to 36.7%, 16.7% and 47.3%, to GDP in 2015/2016. The agricultural sector’s share of GDP shrank by more than 25% between 2005 and 2016, while the service sector’s share grew by 27% during the same period. The service sector’s share started falling sharply in 2016/17, giving way to the rise of the manufacturing sector. The construction industry, particularly roads, railways, dams and homes, is the main driver of growth in the industrial sector, contributing more than half of the sector’s growth. Service sector growth is mainly dominated by expansion in communication and transport services, hotel and restaurant businesses, as well as wholesale and retail trading.
In February 2018, Moody’s reaffirmed Ethiopia’s credit worthiness at ‘B 1,’ while S&P and Fitch maintained their original rating of ‘B.’ These ratings reflect Ethiopia’s stable outlook and prospects for continued economic growth in the short and medium term and are on par with neighboring Kenya and Uganda. As a result of the 15% currency devaluation of October 2017 inflation rose to double digit levels during the final quarter of 2017 and the first two quarters of 2018. In July 2018, Ethiopian inflation stood at 14 percent.
Real interest rates are largely negative. The minimum bank deposit rate of 5.00%, bond yield of 3.67%, and Treasury bill yield of 3.67% are lower than the inflation rate. The NBE controls the exchange rate and has officially devalued the Birr by approximately 97% against the U.S. dollar between January 2009 and January 2016. 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. As of August 2018, the official exchange rate stood at 27.45 Birr per dollar. The Birr has continued to follow a steady depreciation, with the NBE following a controlled floating exchange rate policy. The parallel black market exchange rate for the same period was approximately 32.00 Birr per dollar, a premium of 16.5% over the official rate.
Ethiopia faces a growing trade deficit with total imports steadily increasing on average by 12.5% per year between 2004/05 and 2016/17. The rise in imports has exacerbated the trade deficit, which ballooned from $3.6 billion in 2010/11 to $13.27 billion in 2016/2017. Ethiopia’s total merchandise exports were $2.67 billion in 2016/2017, while imports for the same period expanded to $15.8 billion.
Private sector access to foreign exchange (U.S. dollars) is severely constrained by a large trade deficit and ambitious government infrastructure projects funded by foreign debt, which enjoy priority in allocation of foreign currency.
According to the NBE annual report, 38% of total imports ($6 billion) was spent on capital goods and 31% ($4.9 billion) on consumer goods. U.S. exports to Ethiopia in 2017 were $877 million accounting for only 7% of Ethiopia’s total imports. Ethiopia’s imports from the US have increased steadily throughout the past decade, representing approximately a fivefold increase from 2007 to 2017.
In 2016/2017, Ethiopia's major exports included coffee (30%), oil seeds (12%), cut flowers (11%), pulses (10%), gold (9%) and chat (qat) (9%). Ethiopia’s total export earnings by value declined by 1% in 2016/2017 from the previous year. Depressed commodity prices is the leading cause of this drop in exports.
Major destinations for Ethiopia's exports in 2016/2017 were: Asia 37% (China accounted for 20%), Europe 32.4% and Africa 21.5%. In FY 2016/2017, Ethiopia’s exports to the US represented 8% of total exports, registering a 1% 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 (63%) followed by Europe (25%), Africa (4%) and the United States (8%). Imports from China accounted for 50.7%, followed by India (11.8%), USA (8%) Kuwait (7.4%), Japan (6.9 percent), and Saudi Arabia (4.7 percent) are the major sources of Ethiopia’s imports. U.S. exports to Ethiopia are primarily aircraft sales, construction equipment, equity investments, real estate, 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 US -Ethiopia bilateral trade figures.
Table 1: U.S. – Ethiopia Bilateral Trade
Unit: U.S. Dollars
|Year||Unit: U.S. Dollars||Ethiopia exports to the U.S.|
Prepared by our U.S. Embassies abroad. With its network of 108 offices across the United States and in more than 75 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.
Source: Department of Commerce, Trade Policy Information Systems, Global trade Atlas and National Bank of Ethiopia
inese 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.
Prime Minister Abiy Ahmed ascended to power on April 2, 2018 through a vote by the House of Peoples Representatives (the lower house of Parliament). The vote followed his selection on March 27, 2018 as Chairman of the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF). The EPRDF and its allies have been in power since 1991. In 2015, the EPRDF and its affiliates won all of the 547 parliamentary seats in national and regional elections. The next parliamentary elections are to take place in 2020.
Ethiopia’s economic development vision is 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 middle-income country by 2025. GTP II envisages 11% average annual economic growth with an improved trade balance and higher foreign reserves. 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 private sector is playing an increased role in the economy under GTP II, despite a continued state-led approach to economic management.
The GOE has investment incentives aimed at attracting FDI, particularly export-oriented projects. U.S. companies that invest in Ethiopia can take advantage of 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 regional bloc, Common Market for Eastern and Southern Africa (COMESA). 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 will also enable Ethiopian insurance and other companies to benefit from 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, and to develop relationships with new leadership across the government.
Ethiopia is the second most populous country in Africa and has one of the fastest-growing economies in the world, which is resulting in an expanding middle class with more purchasing power. U.S. products and services are highly respected among Ethiopians for their quality and dependability. U.S. EXIM bank has approved Ethiopia for long term financing. Armed with U.S. EXIM financing, there are tremendous opportunities for U.S. companies’ participation in Ethiopia’s mega infrastructure projects. EXIM can extend up to $10 Million until it has a fully functional board.Factors of production in Ethiopia such as land, labor, and energy costs are comparatively low compared to other countries in Africa and around the world.
Ethiopia has its own unique calendar year. The Ethiopian calendar has 13 months, 12 months with 30 days each and one month of 5 or 6 days depending on whether the year is a leap year or not. The Ethiopian calendar year begins on 11th September, which is the Ethiopian New Year, and ends on 10th September. The government fiscal year starts on 8th July and ends on 7th July. Both the Ethiopian calendar and fiscal year fall in two Gregorian calendar years. This is important for U.S. companies organizing their visits to Ethiopia. Companies should avoid the Ethiopian New Year as many government officials, offices and key private sector companies are not available. Companies should be aware of the Ethiopian fiscal year when approaching the government to finance goods and services to ensure funding and appropriate approval timeline.
Ethiopia Trade Development and Promotion