Ethiopia Economic Note

Through Q4 Ethiopia has seen deterioration of its foreign exchange reserves and a climbing inflation rate – both undermining its position as Africa’s growth poster boy. This has prompted dramatic monetary adjustments by the country’s Central Bank.

In early October the National Bank of Ethiopia (NBE) announced that it would be devaluing the Ethiopian birr by 15%, taking the official dollar rate from 23.4 ETB/$ to 26.91 ETB/$ overnight. The decision was aimed at reining in inflation, which has more than doubled from 6.1% in January to 13.6% in November, and propping up export competitiveness. It is the first time since 2010 that the NBE has intervened in the currency’s value. Simultaneously the Bank hiked the interest rate to 7% from 5%, again marking the first serious adjustment since 2010.

Financial services have also seen a shake up. A fresh directive places restrictions on FX issuance by commercial banks which must allocate 40% to so-called ‘priority applications’ such as servicing mega projects or importing fuels for manufacturers. Aside from this, a controversial decision to cap commercial lending growth to 16% of outstanding loans for all sectors has raised concern. Though the limit has been lifted for manufacturers, Asoko’s discussions with those in the industry suggest this has already created a ‘credit crunch’ for private entities across non-exporting sectors.

Landmark projects such as the Grand Ethiopian Renaissance Dam, two newly announced geothermal projects and revitalisation projects for the sugar industry have, alongside these policies, contributed to crowding out of credit and FX. Data from the NBE suggest FX reserves amount to just 2.4 months of imports.

A challenging market environment has not helped. Prices fetched for some of Ethiopia’s core export commodities such as coffee and gold have yielded mixed results. Meanwhile back-to-back droughts at home have impacted heavily on local production and paved the way for increased imports of foodstuffs. Exports, then, account for just 4.5% of GDP against 20.3% for imports at the time of writing.

Whether this adjustment will yield the desired results in the form of export earnings, and sustainable lending is largely dependent on government resolve to access alternative sources of finance. Well into the latter half of Ethiopia’s second Growth and Transformation Plan (GTPII), spending on large scale infrastructure projects has pushed public debt to more than $40 billion. This is set to hit $45 billion before the end of 2018.

It should be noted, however, that Ethiopia’s growth remains resilient and is set to clock 7.6% for 2017 despite a challenging year. Export growth and foreign investment remain key ingredients for this success and are unlikely to tail off in the near term. December’s official visit by the IMF’s Christine Lagarde has also spotlighted the country’s progress, with the Managing Director endorsing a positive outlook for the economy going into the new year.