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PESA Editorial on Ethiopia: 2H2022/23

PESA Editorial on Ethiopia: 2H2022/23

Ethiopia’s exports have been seemingly unaffected by the shock caused by the COVID-19 pandemic. The country’s total merchandise exports increased to USD 3.9 billion in 2021. Ethiopia has a concentrated export profile and earnings from coffee have continued increasing to USD 1.7 billion (approx. 44.3% of total exports) in 2021. Other top exports from Ethiopia include oil seeds and vegetables. These exports contributed USD 1.0 billion (approx. 25.0% of total exports). Ethiopia’s export earnings from oil seeds have continued increasing to USD 555.8 million in 2021; and earnings from vegetables have continued increasing to USD 430.9 million in the same period. Ethiopia’s trade deficit continued widening beyond the historical medium-term average of -USD 13.2 billion for 2018 to 2020, to -USD 14.0 billion in 2021.

PESA Editorial on Ethiopia: 2H2022/23
PESA Editorial on Ethiopia: 2H2022/23

Total merchandise export earnings have continued increasing which ameliorated the relieved pressure caused by net FDI inflows (foreign capital being invested domestically). Ethiopia’s FDI inflows increased to USD 4.3 billion in 2021. Hence, Ethiopia’s FDI stock has been seemingly unaffected by COVID-19 and continued increasing from an annual average of USD 24.9 billion for 2018 to 2020, to USD 31.6 billion in 2021. This bodes well for Ethiopia as a country that is aiming to attract more foreign investment to develop and diversify its economy away from the reliance on coffee exports. The rising interest from foreign investors has also been driven by the Federal Government of Ethiopia’s privatisation drive which attracted private investment in sectors that were previously nationalised, such as finance and telecommunications. This signifies some progress for the national economic diversification strategy.

PESA Editorial on Ethiopia: 2H2022/23
PESA Editorial on Ethiopia: 2H2022/23

Remittances receipts have grown significantly over the period. Personal remittances received have begun recovering from COVID-19 despite being below the historical medium-term average of USD 440.0 million for 2018 to 2020, at USD 436.4 million in 2021. Personal remittance payments to foreign nationals have continued moderating since the COVID-19 pandemic from an annual average of USD 14.9 million for 2018 to 2020, to USD 14.2 million in 2021. Ethiopia has had net remittance inflows (net remittance receipts from the diaspora) which decreased to USD 422.2 million in 2021. This has affected the current account balance and strength of the ETB over the period.

PESA Editorial on Ethiopia: 2H2022/23
PESA Editorial on Ethiopia: 2H2022/23

The ETB has continued depreciating. In nominal terms, the ETB depreciated by an annual average of -20.9% against the USD for 2018 to 2020. The ETB depreciated by -45.5% to an annual average of ETB 43.8 per USD in 2021. Ethiopia’s current account deficit narrowed below the historical medium-term average. In 2022, Ethiopia’s current account deficit began widening again. In particular, Ethiopia seems to have been affected by the extensive drought affecting the Horn of Africa region and the recently ended conflict between the Federal Government and Tigrayan Peoples’ Liberation Front which have deteriorated its agricultural output and exports. This has offset the positive impact of the rising global price of Arabica coffee which appreciated by 30.4% to USD 2.7 per pound in 2022 (2021: 35.7%; USD 2.0 per lb). In addition, Ethiopia has been affected by the higher fuel and food prices which continued appreciating due to lower global supply following the sanctions against Russian exports after its military exercises in Ukraine. This is also reflected in the projections for Ethiopia’s current account balance.

PESA Editorial on Ethiopia: 2H2022/23
PESA Editorial on Ethiopia: 2H2022/23

In 2023, Ethiopia’s current account deficit is projected to continue widening beyond the historical medium-term average to -USD 5.6 billion (approx. -4.4% of GDP). In the medium-term from 2024 to 2026, Ethiopia’s current account deficit is project to narrow to an annual average of -USD 4.8 billion (approx. -3.1% of GDP). This illustrates a short-lived deterioration in the current account balance due to the current adverse climatic conditions; and the rising cost of crucial food and fuel imports which is primarily driven by the impact of sanctions against Russia. Global food and fuel prices are expected to remain relatively elevated in 2023. However, this could change in the medium-term due to the expected easing of geopolitical tensions and the gradual transition away from fossil fuels. Therefore, Ethiopian authorities are still faced with uncertainty ahead unless they can take advantage of the rising price of coffee and oil seeds to offset the cost of high fuel and food imports. The global price of oil seeds depreciated by -2.2% to USD 1,237.6 per metric ton in 2022 (2021: +42.5%; USD 1,265.8 per MT).

The issue of developing and diversifying the Ethiopia economy has been disrupted by the recently ended conflict and remains an elusive obstacle for the country. Ethiopia still has a significant potential to grow its exports from oil seeds and vegetables. These represent the highest growth potential towards diversifying the Ethiopia’s economy and export earnings. Apart from this, Ethiopia should also deepen its integration in COMESA and increase its intra-regional trade. This will provide an opportunity for Ethiopia’s exports to compete against goods and services of comparable quality from the region. Moreover, Ethiopia can offset the risks with its traditional export markets by increasing its dependence on the COMESA region for its exports.

Siyaduma Biniza

Siya is the Executive Director at PESA.

Siyaduma Biniza

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