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    Ethiopia 10-Year Forecasts

    July 29, 2022 - Fitch Solutions Sector Intelligence


      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Ethiopia 10-Year Forecasts

      • 29 Jul 2022
      • Ethiopia
      • Economy

      Key View

      • Ethiopia will remain one of the main engines of economic growth in East Africa across our 10-year forecast period.
      • Increasing productive capacity, building on an already-strong infrastructure project pipeline (particularly in hydropower, road and rail) and reforms to the business environment will drive growth over the coming years.
      • However, deeply entrenched ethnic divisions will pose persistent risks to the outlook, threatening policymaking and leading to sporadic instability.

      We believe that Ethiopia will continue to post robust growth rates in the long term, remaining one of the fastest-growing economies in East Africa. We forecast average real GDP growth of 6.5% between 2022 and 2031. While this marks a slowdown from 9.1% over 2011-2020, we believe that growth will become more sustainable and supported by greater strength in the private sector in the long term. We believe that steady growth in the agriculture sector, the largest exporting sector in Ethiopia, will support the economy in the long term.

      At the same time, the manufacturing sector will see rapid growth in the coming years – albeit from a low base – on the back of public investment, generating increasing export output and demand for local labour. The infrastructure sector will continue to serve a vital role in Ethiopia, given a solid project pipeline, particularly in the road, rail and power sub-sectors. While growth in these sectors has historically been highly dependent on the government and financed through heavy uptake of loans – particularly through bilateral arrangements with Chinese financial institutions – we expect a boost in private sector activity in the coming years, with wide-reaching reforms and privatisation of state-owned enterprises (SOEs) to improve transparency, draw in investment and reduce pressure on the government’s fiscal accounts.

      A Key Outperformer
      Sub-Saharan Africa - Real GDP Growth, %

      e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions

      However, elevated political risk in Ethiopia will pose persistent threats to the growth outlook in the coming years. Prime Minister Abiy Ahmed’s political reform plan has opened up space for contestation by Ethiopia’s many ethnic minorities and caused divides among the ruling elite. While our core view is that the prime minister will succeed in navigating this transition, this may be a bumpy process, with periods of intensified violence spooking investors (the Tigray conflict since November 2020 has tarnished the country's reputation as an attractive destination for foreign investment, which will take years to restore).

      Agriculture And Manufacturing Will Boost Productive Capacity And Labour Demand

      The agricultural and manufacturing sectors will be key contributors to economic activity over the long term. Agricultural exports, particularly coffee and horticulture, have long been an important source of foreign currency inflows for Ethiopia. According to the World Bank, two-thirds of Ethiopia’s population is employed in agriculture. While this figure has steadily dropped since 2004 as a result of greater economic diversification, we expect that production in the coming years will overall increase given a greater share of higher-income commercial farming compared to low-yielding subsistence farming.

      Meanwhile, government efforts to target growth in the manufacturing sector, particularly textiles, will yield results in the coming years, despite headwinds from the country's temporary removal from the US' African Growth and Opportunity Act. A number of industrial parks housing multiple manufacturing units have begun operation in recent years – as of 2020, 19 public and private industrial parks had been built – and we expect overall production in such parks to rise, supported by increasing investment by foreign firms drawn to Ethiopia’s cheap electricity and labour costs. This will drive further economic diversification and provide additional opportunities for export earnings in the long term.

      Power And Transport Developments To Draw In Investment And Improve Operating Environment

      After multiple years of heavy investment, infrastructure development will remain a key driver of economic growth in the coming years. Power, road and rail projects will dominate, supported by larger investments. The Grand Ethiopian Renaissance Dam will be the flagship hydropower project, significantly boosting power capacity in the long term. Meanwhile, continuing construction of a network of rail projects, including the Awash-Weldiya Railway line, which will be connected to the Addis-Ababa railway line, will improve links to Djibouti’s port. Regional integration will also boost prospects for infrastructure expansion. The peace deal between Eritrea and Ethiopia agreed in July 2018 opened up the possibility of Ethiopia diversifying its port traffic to Eritrea. According to the Ministry of Foreign Affairs, Eritrea is currently renovating the port facilities at Massawa and Assab with a view to facilitating Ethiopian shipment. This will reduce the reliance on Djibouti for shipping.

      Greater Intraregional Integration Offers Upside Risks To Growth

      Horn Of Africa - Map Of Region


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