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GDP Growth and Public Finance in Ethiopia: FY2019/20

GDP Growth and Public Finance in Ethiopia: FY2019/20

Real GDP growth in Ethiopia is projected to have declined to 8.5% in 2018/19 from an average of 8.8% from 2015/16 to 2017/18[1]. Although the medium-term outlook remains strong, real GDP is projected to continue declining. The Ethiopian economy has remained resilient despite multiple shocks arising from the prolonged drought, lengthy political instability and economic slowdown in the global economy[2].

 

Figure 1: Real GDP Growth and Inflation in Ethiopia (2015/16-2021/22)

Real GDP Growth and Inflation in Ethiopia (2015/16-2021/22)

Sources: IMF 2018, Ethiopia 2018 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018.

The slight decline in growth is due to the impact of the El Niño-related drought affecting agricultural output from 2015/16 to 2016/17. The drought was concentrated in the crop producing regions in the north and western parts of Ethiopia, leading to a significant shortfall in food availability. As a result, the current account gap remained wide due to a weaker exports and rising imports of drought-affected food, inputs, and capital goods. Export income declined in spite of the significant growth in export volumes because the prices of coffee and oil seeds by decline by 16.0% and 33.0% respectively[3]. Coffee and oil seeds constituted an average of 26.2% of total export earnings in Ethiopia from 2015 to 2017[4].

 

Figure 2: Sources of Government Revenue in Ethiopia (2015/16-2021/22)

Sources of Government Revenue in Ethiopia (2015/16-2021/22)

Sources: IMF 2018, Ethiopia 2018 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018.

Ethiopia also faced the challenge of civil unrest since early-2015 due to regional and ethnic tensions.  This led to a nine-month state of emergence from October 2016 until June 2018[5]. On 17 October 2018 violence in Addis Ababa and other parts of the country resulted in civilian deaths and injuries, and damage to property[6]. Political uncertainty affected mainly horticulture, tourism, and investor sentiment. This undermined the positive of growing foreign direct investment and remittance flows from the diaspora. FDI increased from an average of USD 2.6 billion in 2015 to USD 4.0 billion in 2017, then declined to USD 3.3 billion in 2018 as investor sentiment responded to the political uncertainty[7].

 

Figure 3: Government Revenue and Expenditure in Ethiopia (2015/16-2021/22)

Government Revenue and Expenditure in Ethiopia (2015/16-2021/22)

Sources: IMF 2018, Ethiopia 2018 Article IV Consultation. Notes (*) Figures from 2018/19 onwards are projections from the IMF, 2018.

Total government expenditure has increased to support economic growth in the short-term. Total government expenditure growth increased from an annual average rate of 18.4% from 2015/16 to 2017/18, to 21.1% in 2018/2019. This is in-line with fundamental economic theory that government spending to support GDP growth by increasing public spending to boost domestic demand during economic downturn. The increase in government spending was largely due to increased government spending in capital spending. Capital expenditure growth increased from an annual average of 11.5% from 2015/16 to 2017/18, to 21.1% in 2018/19[8]. On the hand, recurrent expenditure growth decreased from 25.2% for 2015/16 to 2017/18, to 21.2% in 2018/19[9]. As a result of the fiscal stimulus spending, in the context of slow GDP growth, the fiscal deficit widened from an average of -2.5% of GDP for 2015/16 to 2017/18, to -3.7% in 2018/19[10]. However, the fiscal deficit is projected to narrow again in the medium-term as the Federal Government of Ethiopia (FGE) moderates its spending as GDP growth recovers.

 

Figure 4: Government Expenditure Composition in Ethiopia (2015/16-2021/22)

Government Expenditure Composition in Ethiopia (2015/16-2021/22)

Sources: IMF 2018, Ethiopia 2018 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018.

The FGE is expected to continue public investment in industrial parks, energy and transport infrastructure in order to attract private investment. In addition, services exports should be sustained by growth in air transport due to sustained investment and route expansion by Ethiopian Air Lines (EAL) over the medium term. The FGE has continued its reliance on external debt despite increasing its reliance on domestic borrowing to finance public investment. Domestic public debt has increased from an annual average of 25.5% of GDP from 2015/16 to 2017/18, to a projected 28.8% of GDP in 2018/19; whereas external public debt increased from 29.5% of GDP to 32.3% of GDP during this period[11]. This illustrates the FGE’s increased domestic borrowing in spite of its continued reliance on external debt which is prudent fiscal policy.

 

Figure 5: Gross Government Debt in Ethiopia (2015/16-2021/22)

Gross Government Debt in Ethiopia (2015/16-2021/22)

Sources: IMF 2018, Ethiopia 2018 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018.

Although the fiscal deficit has widened due to the fiscal stimulus spending increase, public debt has not increased. Instead public debt has moderated from an annual average of 57.5% of GDP from 2015/16 to 2017/18, to 56.6% of GDP in 2018/19[12]. This is largely due to the FGE financing most of its recent spending through domestic debt. Although public debt has not increased, debt-servicing costs have increased considerably. Debt-servicing costs increased by an annual average rate of 29.9% from ETB 7.2 billion (approx. 3.0% of total government revenue) in 2015/16 to ETB 11.6 billion (approx. 4.0% of total government revenue) in 2017/18[13]. In 2018/19 debt-servicing costs are projected to continue increasing to ETB 14.4 billion (approx. 3.9% of total government revenue)[14]. In the forward-looking medium, public debt and debt-servicing costs are projected to moderate as the FGE reduces its fiscal stimulus and reduces external debt.

 

In the forward-looking medium term, public spending growth is projected to moderate from 21.1% in 2018/19 to an annual average of 14.6% from 2019/20 to 2021/22[15]. As a result, the fiscal deficit is projected to narrow from -3.7% of GDP in 2018/19 to an average of -3.0% of GDP from 2019/20 to 2021/22[16]. As the FGE moderates its public spending in the forward-looking medium term external public debt is projected to decline from 28.6% of GDP in 2019/20 to 25.0% of GDP in 2021/22[17]. Meanwhile, domestic public debt is projected to remain stable and only decrease slightly from 28.8% of GDP in 2018/19 to an annual average of 28.9% of GDP from 2019/20 to 2021/22[18]. However, debt-servicing cost are projected to increase from ETB 17.8 billion (approx. 4.3% of total government revenue) in 2019/20 to ETB 29.9 billion (approx. 5.3% of total government revenue) in 2021/22[19]. Therefore, the shift towards dependence on domestic public debt is at a high debt cost than external debt. This means that the FGE will face increasing pressure to source cheaper financing for its public infrastructure investments due to rising debt-servicing costs. Nonetheless, debt-servicing costs are still sustainable given that they are a small portion of total government revenue.

 

The FGE has intervened briefly to support sustainable GDP growth, which was affected by the prolonged drought, domestic political instability and economic slowdown in the global economy. The increased public spending boosted aggregate demand resulting in an improvement in GDP from an annual average of 7.7% in 2017/18, to projected 8.5% in 2018/19[20].  Even though public spending should decrease in the medium term, the FGE is expected to continue devoting a significant share of its annual budget towards capital expenditure. However, though the FGE will face increasing pressure to source cheaper funding beyond rebalancing its public debt towards increased dependence on domestic debt. Although the rebalancing of public debt towards domestic debt has improved public debt sustainability, it has resulted in increasing debt-servicing costs.

 


[1] IMF 2018. Ethiopia 2018 Article IV Consultation Report, International Monetary Fund: Washington D.C.  Available At: https://www.imf.org/ [Last Accessed: 8 July 2019].
[2] MoFEC 2018. Annual Public Sector Debt Portfolio Report for the Year 2017/18, The Ministry of Finance and Economic Development: Addis Ababa. Available At: http://www.mofed.gov.et/  [Last Accessed: 29 May 2019].
[3] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[4] UNCTADStat 2019. UNCTADStat Database, United Nations Conference on Trade and Development: Geneva. Available At: https://unctadstat.unctad.org/ [Last Accessed 25 July 2019] [5] HRW 2019. Ethiopia Events of 2018, on the Human Rights Watch Website, viewed on 24 July 2019, from https://www.hrw.org/.
[6] Lupahla, I. 2019. History of Conflict and its Impact on Ethiopian Development, Political Economy Southern Africa: Johannesburg. Available At: https://politicaleconomy.org.za/ [Last Accessed: 18 August 2019].
[7] UNCTADStat 2019. UNCTADStat Database, ibid.
[8] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[9] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[10] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[11] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[12] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[13] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[14] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[15] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[16] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[17] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[18] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[19] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.
[20] IMF 2018. Ethiopia 2018 Article IV Consultation Report, ibid.

 


Ishmael Lupahla

Former Junior Regional Analyst

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