Ethiopia

Economic Overview

The Federal Democratic Republic of Ethiopia is at a critical juncture, navigating a complex post-conflict recovery while pursuing an ambitious economic liberalization agenda. After decades of state-led development, the government is undertaking a significant pivot towards a market-oriented economy, a transition defined by both immense opportunity and significant macroeconomic headwinds. The 2025-2026 outlook is shaped by the government's efforts to stabilize the economy, address high inflation, manage a complex debt situation, and attract foreign investment into newly opened sectors.

GDP Size & Growth Trajectory

Despite internal conflict and external shocks, the Ethiopian economy has demonstrated remarkable resilience, maintaining its position as one of the fastest-growing in Sub-Saharan Africa. The economy grew by an estimated 6.4% in the 2023/24 fiscal year.

Looking ahead, growth projections remain robust, though moderated by ongoing challenges. The IMF forecasts real GDP growth of 6.2% for 2025, while the African Development Bank projects a slightly more optimistic 7.1% for 2025, accelerating to 7.5% in 2026. This growth is predicated on continued progress in peace implementation, the positive impact of ongoing reforms (especially in the financial and telecom sectors), and a recovery in agricultural productivity.

Sector Composition

Ethiopia's economy is undergoing a gradual structural transformation, moving from a heavy reliance on agriculture towards a more diversified base.

• Agriculture: This remains the backbone of the economy, accounting for approximately 32% of GDP and, critically, employing over 65% of the labor force. The sector is dominated by smallholder farming of key commodities like coffee, cereals (teff, wheat, maize), and oilseeds. While highly vulnerable to climate shocks (drought), the sector holds immense potential for modernization and commercialization.

• Services: This is the largest and fastest-growing sector, contributing around 40% of GDP. Growth is driven by transport, logistics, and a burgeoning retail and hospitality sector. The recent liberalization of the financial and telecommunications sectors is expected to supercharge growth and innovation.

• Industry: Accounting for approximately 28% of GDP, the industrial sector's growth is a cornerstone of the government's development strategy. This growth is centered on light manufacturing (textiles, garments, leather goods) and construction, much of it concentrated in a network of government-developed industrial parks designed to attract foreign direct investment.

Inflation Trends

Persistent, high inflation is the most significant macroeconomic challenge facing Ethiopia, eroding household purchasing power and complicating monetary policy. Inflation has remained stubbornly high, averaging 29.1% in 2023/24.

The primary drivers of inflation are a combination of factors: high global commodity prices, the pass-through effects of currency depreciation on the parallel market, and, most critically, domestic food supply constraints. Food inflation has been particularly severe, consistently exceeding headline inflation and disproportionately impacting the poor.

The National Bank of Ethiopia (NBE) is attempting to curb inflation by tightening monetary policy and controlling the money supply, but its efforts are hampered by the need to finance a large fiscal deficit.

Fiscal & Monetary Policy Stance

The government's policy framework is a delicate balancing act between pursuing long-term liberalization and managing short-term crises.

• Monetary Policy: The NBE is nominally focused on price stability. However, its ability to conduct independent monetary policy is constrained. The official exchange rate has been kept artificially stable, leading to a wide and distorting premium on the parallel market. Addressing this exchange rate distortion through a managed devaluation is a key, though politically sensitive, component of ongoing discussions with the IMF.

• Fiscal Policy: The government is grappling with a significant fiscal deficit, driven by high defense spending, post-conflict reconstruction needs, and debt service costs. The policy focus is on enhancing domestic revenue mobilization, which remains low as a share of GDP.

Debt Sustainability Indicators

Ethiopia's public debt situation is a primary concern for investors and international financial institutions. The country's total public debt was estimated at 52.6% of GDP in 2023.

In December 2023, Ethiopia formally defaulted on a $33 million Eurobond coupon payment, making it the latest African nation to default on its sovereign debt. This was a strategic decision to force a comprehensive debt restructuring under the G20's Common Framework.

As of 2024-2025, the government is in active negotiations with its official bilateral creditors (including a significant amount owed to China) and private commercial creditors to restructure its external debt. A successful restructuring, coupled with a potential IMF program, is considered essential to restore macroeconomic stability and unlock new concessional financing. The outcome of these negotiations is the single most critical variable for Ethiopia's medium-term economic outlook.

Table 1: Key Macroeconomic Indicators (2023-2026F)

Market Size & Demand Potential

Ethiopia represents one of Africa's largest and most compelling "frontier" consumer markets. Its sheer scale and demographic profile create a powerful, long-term demand story.

Population Size and Demographics

With a population exceeding 126 million, Ethiopia is the second-most populous country in Africa. Its demographic structure is a classic "pyramid," characterized by a massive youth cohort. Approximately 60% of the population is under the age of 25, creating a demographic dividend that will fuel the labor force and consumer market for decades to come.

Urbanization and Consumer Hubs

The country is undergoing steady urbanization, though from a low base. The urban population is estimated at around 23%. This concentrates purchasing power in key cities, with the capital, Addis Ababa, serving as the primary economic and commercial hub. Other significant urban centers include Dire Dawa, Adama, and Hawassa.

Consumer Spending & Market Access

While per capita income is low, the sheer size of the population creates a significant aggregate market. Consumer spending is heavily concentrated on necessities like food and beverages. The growth of a formal retail sector is still in its early stages, presenting a major opportunity for investors in modern retail infrastructure, supply chain logistics, and consumer goods manufacturing.

The liberalization of the telecom sector is the key enabler for accessing this market at scale. The expansion of mobile internet and digital payments is creating new channels for e-commerce and direct-to-consumer business models.

Business Environment

The Ethiopian government's "Homegrown Economic Reform Agenda" is explicitly aimed at improving the business environment and shifting the economy's growth driver from public investment to the private sector.

Ease of Doing Business & Regulatory Reforms

Ethiopia has historically ranked low on global ease of doing business indices. However, the government has made a concerted effort to streamline bureaucracy. Key reforms include:

• New Investment Law (2020): This landmark legislation opened up previously closed sectors of the economy to foreign investment, including telecommunications, banking, and logistics.
• Digitization of Business Registration: The government has launched an e-business portal to digitize the process of obtaining a business license, significantly reducing the time and cost of starting a business.
• "Single Window" for Trade: A new electronic single-window system for customs clearance and trade facilitation is being implemented to reduce bottlenecks at border posts.

Company Registration Process

The Ethiopian Investment Commission (EIC) is the primary government body responsible for facilitating foreign investment. The process for establishing a business involves obtaining an investment permit from the EIC, followed by company registration with the Ministry of Trade and Regional Integration (MoTRI). While digitization is improving the process, navigating the bureaucracy can still be complex and often requires the assistance of local legal and business consultants.

Tax Regime

The standard corporate income tax rate in Ethiopia is 30%. The government also levies a Value Added Tax (VAT) at a standard rate of 15%. A key incentive for priority sectors is the exemption from customs duties and other taxes on the importation of capital goods and construction materials.

Political Stability & Governance

Ethiopia's political landscape is complex and fluid, defined by a transition from a decades-long authoritarian system toward a more pluralistic, but still centralized, model.

Political Environment

The country is a Federal Democratic Republic. The ruling Prosperity Party, which emerged from the former ruling coalition (EPRDF), holds a dominant position in government. Prime Minister Abiy Ahmed, who came to power in 2018, has overseen the country's ambitious reform agenda.

The most significant political event in recent years was the Tigray War (2020-2022), a devastating conflict between the federal government and the Tigray People's Liberation Front (TPLF). A peace agreement, known as the "Cessation of Hostilities Agreement," was signed in Pretoria, South Africa, in November 2022. The successful implementation of this peace deal is the single most critical factor for national stability and economic recovery.

While the main conflict has ended, significant security challenges remain, including ethnic tensions and conflicts in the Amhara and Oromia regions. These ongoing security issues can disrupt supply chains and pose risks to business operations outside of major urban centers.

Rule of Law & Investor Protection

The legal framework for investor protection is improving. The 2020 Investment Law provides guarantees against expropriation and allows for international arbitration to resolve disputes. However, the judicial system is still developing and can be slow. Contract enforcement remains a concern for investors.

Infrastructure Readiness

Upgrading Ethiopia's infrastructure is a central pillar of the government's development strategy.

Transport: Logistics as the Gateway

Given that Ethiopia is a landlocked country, logistics and transport infrastructure are of paramount strategic importance. The Ethiopia-Djibouti corridor is the country's economic lifeline, handling over 95% of its import-export trade.

• Addis Ababa-Djibouti Railway: This modern, 752-kilometer electrified railway is a game-changer for the corridor. It has dramatically reduced cargo transit times from several days by road to as little as 10-12 hours by rail, significantly lowering logistics costs.
• Road Network: The government has invested heavily in expanding and upgrading its road network, which remains the primary means of domestic transport.
• Ethiopian Airlines: The national carrier is Africa's largest and most successful airline. Its hub at Bole International Airport in Addis Ababa is a critical passenger and cargo gateway for the entire continent.

Industrial Parks: A "Plug-and-Play" Solution

A cornerstone of Ethiopia's industrialization strategy is its network of specialized, government-built industrial parks. These parks are designed to provide a "plug-and-play" environment for foreign investors, overcoming the country's main infrastructure deficits. Parks like the Hawassa Industrial Park (focused on textiles) and the Bole Lemi Industrial Park (various manufacturing) offer investors access to:

• Pre-built factory sheds
• Dedicated, high-quality power and water supply
• On-site customs clearance and logistics services
• Wastewater treatment plants

Energy Sector

Ethiopia has vast renewable energy potential, particularly in hydropower. The Grand Ethiopian Renaissance Dam (GERD), one of Africa's largest infrastructure projects, is set to more than double the country's electricity generation capacity once fully operational. This will provide a source of cheap, abundant, and clean energy, which is a major draw for energy-intensive industries. However, grid reliability outside of the industrial parks can still be an issue.

Telecommunications & Digital Infrastructure

This sector is the single most exciting story of Ethiopia's liberalization drive. For decades, the sector was a state monopoly under Ethio Telecom.

• Market Liberalization: In 2021, the government issued the first private telecom license to a consortium led by Safaricom (Kenya), which launched its network as "Safaricom Ethiopia" in 2022. This ended one of the world's last major telecom monopolies.
• Mobile Money: The entry of Safaricom and its globally acclaimed M-Pesa mobile money platform is set to revolutionize the country's nascent digital payments landscape.
• Impact: The competition is driving rapid network expansion, lowering data costs, and accelerating the adoption of digital services, creating the foundational infrastructure for a modern digital economy.

Sector-Specific Opportunities

Ethiopia's reform agenda is creating compelling investment opportunities across several key sectors.

1. Telecommunications

The ongoing liberalization of the telecom sector remains a primary attraction. The entry of Safarcom has created opportunities throughout the value chain, including in building and leasing tower infrastructure, providing value-added services, and developing digital applications. The government has also indicated its intention to issue a third telecom license and to partially privatize the incumbent, Ethio Telecom.

2. Financial Services

Following the telecom sector, the government announced the landmark decision to open the banking sector to foreign competition in 2022. After decades as a closed market, foreign banks are now permitted to establish subsidiaries, open branches, or acquire stakes in domestic banks. This is a transformative opportunity for international financial institutions to enter one of Africa's largest and most under-penetrated banking markets.

3. Manufacturing (Industrial Parks)

Ethiopia's strategy of using industrial parks to attract investment in light manufacturing remains a key priority. With a large, low-cost labor force and duty-free access to major markets (historically including the U.S. via AGOA, though currently suspended), the country is positioned as a competitive hub for:

• Textiles and Garments
• Leather and Footwear
• Pharmaceuticals
• Agro-processing

4. Agriculture

With its vast arable land and favorable climate, agriculture offers immense potential. The focus is on moving from subsistence farming to commercial agriculture. Key opportunities exist in:

• Coffee: Ethiopia is the birthplace of Arabica coffee, and the sector is a major source of export revenue.
• Horticulture: The flower and vegetable export industry has been a major success story.
• Agro-processing: There is a significant need for investment in food processing and value-addition to reduce post-harvest losses and supply the growing domestic consumer market.

5. Tourism

Ethiopia has a rich and unique cultural heritage, including ancient historical sites like Aksum, Lalibela, and Gondar. The country's "Land of Origins" branding highlights its unique history. With the restoration of peace and stability, the tourism sector offers significant potential for recovery and growth, particularly in eco-tourism and cultural tourism.