Economic Development in Ethiopia: A General Understanding of Ethiopia’s Growth in the 21st Century

Over the past 15 years, the Ethiopian economy grew an average of 10% per year, one of the greatest rates in the world. Even if the economy of this country is primarily carried by agriculture, the importance of secondary and tertiary sectors has been increasingly growing during the last years.

Figure 1.1 Evolution of GDP and sectoral composition of Ethiopia, 2011-2030.

Source: CHERU F, The Oxford Handbook of the Ethiopian Economy, OUP Oxford, London 2019.

In 2019, Abiy Ahmed Ali’s government adopted the National Economic Reform Agenda and a Ten-Year Plan of National Development (2020-2030) to promote sustainable development according to the 2030 UN SDG Agenda. It seems that Addis Ababa is trying to heavily emphasize large-scale infrastructure investments such as roads, rail, and energy to attract foreign investments. In particular, the government is particularly focused on China, which is heavily investing in the country. In this regard, a remarkable point has been reached in 2024 with Ethiopia’s entry into BRICS+ group, which would suggest an even stronger cooperation between the two political actors.

Ethiopia has successfully positioned itself as an attractive investment destination to companies from China, Turkey, India, and other emerging economies. According to the Ministry of Finance of the Federal Democratic Republic of Ethiopia, factors in favour of economic development are connected to the prioritization of the government in fostering industrialization and the manufacturing sector. In fact, with the Growth and Transformation Plan (GTP II & III), the country experienced a rapid urbanization and construction of huge road networks. In 2023, the construction sector contributed to 73.9% of industrial sector growth. Many analysts even observed that the rise of industrial parks could create considerable business opportunities in construction and cement production. These special zones are extremely important for the revival of the Ethiopian economy and could guarantee the African country a rapid modernization. As it demonstrates the construction of several parks in the cities of Hawassa, Dire Dawa, Kombolcha, Meqelle and Adama, China is the most significant contractor for infrastructure projects and almost all the industrial structures are built by Chinese companies.

Figure 1.2 Industrial parks in Ethiopia constructed between 2015 and 2018.

Source: IPDC 2016.

In particular, cement production is a growing sector in Ethiopia. In 2017, the seventeen most considerable firms in the industry had an installed capacity of more than 16.7 million tons, putting Ethiopia among the top three cement-producing countries in Africa.

Other key areas of manufacture include textile, and leather products. Considering that Ethiopia offers competitive labor costs, abundant cotton reserves and preferential trade agreements (such as the AGOA, for example), textile could represent an attractive for foreign investments.

Figure 1.3 GDP By Economic Activity at Constant Prices (in millions of Birrs).

Source: Author’s computations from National Bank of Ethiopia, Annual Report 2022-2023.

So, the policy of the Ethiopian government to focus on a rapid industrialization would suggest to foreign firms investing in strategic sectors such as garment, construction and manufacturing. However, a relevant growing sector in the country is represented by sustainable energy production too. In fact, in the past twenty years alone, the country’s annual energy output has risen from 360 MW to 4,200 MW.

Ethiopia has recently discovered that it has significant potential for geothermal energy production in the Rift Valley and has recently completed, with the decisive support of foreign companies, the construction of one of the largest hydroelectric power plants in Africa, the Gilgel Gibe III dam. Moreover, the ambitious mega-project of the Grand Ethiopian Renaissance Dam (GERD) is going to be the largest hydroelectric plant in the continent and will enable Addis Ababa to position itself as an energy hub for the Horn of Africa by 2025. Wind energy and solar energy have been identified as potential attractive investments in Ethiopia too. With the intent of becoming a major power exporter in East Africa, the Ethiopian Electric Power Corporation has implemented different wind and solar power projects in several parts of the country.

Figure 1.3 Electric power potential in Ethiopia.

Source: Author’s computations from National Bank of Ethiopia, Annual Report 2022-2023.

We can easily understand that Ethiopian economic diplomacy focuses on differentiation of economy, relying on industrialization and natural resources to attract foreign capitals. Following this conception, the country even adopted a gradualist approach to financial reform and promoted liberalization of key sectors. In this regard, “Digital Ethiopia 2025” demonstrates the willingness to pursue this economic policy to enhance the use of technologies and multimedia sector. Consequently, telecommunication has undergone important changes in recent years. Once totally state-owned, the telecom industry is now experimenting with significant privatizations. The Ethiopian government has encouraged foreign participation and advocated for the improvement of the deficient service coverage of the country. While challenges still exist, the ongoing reforms and the opening of the stock market present substantial opportunities for investors looking to participate in the country’s digital transformation.

Figure 1.4: Source: Author’s computations from National Bank of Ethiopia, Annual Report 2022-2023.

In general, we can claim that the Ethiopian market represents a promising business opportunity in the Horn of Africa. However, there are still considerable risks in investing in Ethiopia. The most important of which concerns the political instability acquired in 2020 in Tigray region. Even if peace agreements are being implemented, instability in certain regions could affect investment climates.

Figure 1.5 Corruption perception index in Ethiopia (2012-2023). Red lines indicate a worsening in corruption while green ones indicate an improvement in corruption dealing. Using last year’s performance, the country has slightly worsened.

Source:  Author’s computations from Transparency International, annual report 2023.

A serious problem that could have a negative impact on doing business in Ethiopia is corruption. In fact, Ethiopia suffers from issues linked to a high perception of corruption that could lead to mismanagement of several entrepreneurial activities.

According to Index Economic Freedom, Ethiopia faces remarkable problems in freedom to trade too. Lack of access to financing precludes entrepreneurial growth, and the investment environment is undermined by political, and security challenges and lacks transparency. Moreover, the overall rule of law is weak in Ethiopia. Judicial effectiveness, which is fundamental for ensuring that laws are fully respected and that appropriate legal actions are taken against violations, is not reliable. This weakness in the judicial system can create significant risks for investors and businesses, as it undermines the protection of property rights, enforcement of contracts, and fair resolution of disputes.

Economic analysts also highlighted several additional challenges facing Ethiopia’s economy, including high inflation rates, complex bureaucracy, and low purchasing power. These factors create a difficult environment for both consumers and businesses. The high inflation, which is hovering around 40%, erodes the value of the local currency and reduces the purchasing power of households, making it harder for people to afford basic goods and services.

Furthermore, the country’s complex bureaucracy creates inefficiencies that hinder business operations and foreign investments. Navigating through layers of regulation, paperwork, and delays often increases costs and discourages entrepreneurial activity.

The presence of state-owned enterprises (SOEs) continues to play a critical role in the Ethiopian economy. These SOEs are often less efficient due to the lack of competition and their control over key sectors, such as energy, banking, and telecommunications, limits opportunities for foreign and private investment. However, as previously mentioned, the role of these state-owned enterprises is gradually changing in recent years, driven by reforms proposed by the government.

Additionally, the burden of public debt, which stands at around 46.4% of GDP, poses a significant challenge. This level of debt can constrain government spending and make the country vulnerable to external shocks, as it may need to allocate substantial resources toward debt servicing rather than investing in development or improving infrastructure. High public debt also affects investor confidence, as it signals potential fiscal instability.

However, recent political openings are a testimony to the will of the local government to embark on a modernization path. The strategic position of this African country and its great development potential in secondary and tertiary sectors makes it an interesting place to bet on.

To conclude, investors looking to invest in Ethiopia should adopt a long-term vision, as the country still faces underdevelopment challenges and a delicate political framework. Nevertheless, its growth prospects could lead to important gains and results in the years to come.

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