Ethiopia’s Economy Withstands Catastrophic Drought

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The Ethiopian economy has shown unusual resilience in withstanding the last catastrophic drought that hit the country.

The World Bank Group’s 5th Economic Update for Ethiopia pegs its 2016/2017 economic growth at eight per cent.

“This is impressive especially compared to previous drought situations which often resulted in economic contraction,” said Carolyn Turk, World Bank Country Director for Ethiopia, Sudan and South Sudan.

Despite recently facing the worst drought in fifty years, Ethiopia has remarkably maintained positive growth averaging 10.9 per cent for the last 10 years.

The country’s growth momentum will remain and will not be affected by the recent drought since the 2016 rains arrived as expected.

The newly completed Addis Ababa-Djibouti railway line is expected to significantly ease trade logistics and related constraints.

The government’s increased focus on the new Hawassa and Bole-Lemi Phase II industrial parks; increasing capacity in power generation; and completion of transmission lines to neighbouring Kenya and Sudan are also expected to improve export performance and stimulate medium-term growth.

The Update titled Why so idle? Wages and Employment in a Crowded Labor Market reveals that the country also managed to keep inflation under control, helping to avoid the erosion of the purchasing power of wages for workers of all education levels; keep real wages stable; and ensure positive returns on education in urban labour markets.

It also reveals that the performance of Ethiopia’s export sector and the current account balance has however been weak. The chronic current account deficit, including official transfers, remained high at 10.4 per cent of GDP due to the large imbalance in import and export of goods and services.

The report identifies that low commodity prices and appreciating real exchange rate led to a decline in exports of goods and services by 4.1 per cent cent in 2015/16.

“Export of goods contracted significantly over the past two years owing to a weak external environment and a supply shock from the drought that meant foregone agriculture production to exports,” Paloma Casero, Africa Director of the Global Practice for Macroeconomic and Fiscal Management of the World Bank noted.

With exports falling for three consecutive years, Casero added that the overvalued Ethiopian currency limits its export competitiveness and is a concern for the economy.

The Economic Update also finds that the potential negative economic effects of the current unrest could pose a risk to the outlook.

It identifies urban areas as key players in advancing structural change in Ethiopia and analyzes the nature of the country’s urban labour markets.

It recommends, among others, further investment in job and technical training and enhanced use of ICT to inform on job vacancies as some of the ways to make the change more inclusive and contribute to more poverty reduction.

The Update is part of the World Bank’s economic policy dialogue with the government of Ethiopia.


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