country profile ethiopia-ecr

Country Profile 2008

Ethiopia This Country Profile is a reference work, analysing the country's history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit's Country Reports analyse current trends and provide a two-year forecast.

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Comparative economic indicators, 2007

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product(% change, year on year)


Consumer prices(% change, year on year)


Gross domestic product per head(US$)


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5,864.3

Ethiopia 1

© The Economist Intelligence Unit Limited 2008 www.eiu.com Country Profile 2008

Contents

Ethiopia

3 Basic data

4 Politics 4 Political background 6 Recent political developments 9 Constitution, institutions and administration 10 Political forces 13 International relations and defence

15 Resources and infrastructure 15 Population 16 Education 16 Health 17 Natural resources and the environment 17 Transport, communications and the Internet 21 Energy provision

22 The economy 22 Economic structure 25 Economic policy 30 Economic performance 31 Regional trends

32 Economic sectors 32 Agriculture 34 Mining and semi-processing 36 Manufacturing 38 Construction 38 Financial services 39 Other services

41 The external sector 41 Trade in goods 42 Invisibles and the current account 42 Capital flows and foreign debt 44 Foreign reserves and the exchange rate

46 Regional overview 46 Membership of organisations

49 Appendices 49 Sources of information 50 Reference tables 50 Population 51 Government finances 51 Money supply 51 Interest rates

2 Ethiopia


52 Gross domestic product at factor cost 52 Gross domestic product by expenditure 52 Prices and earnings 53 Coffee production and exports, domestic figures 53 Exports 53 Imports cif 54 Main trading partners 54 Balance of payments, IMF series 55 External debt, World Bank series 55 Foreign reserves 55 Exchange rates

Ethiopia 3


Ethiopia

Basic data

1,221,900 sq km

81m (IMF mid-year estimate for 2006)

Population in !000 (1999 official estimates)

Oromiya 21,694 Afar 1,188 Amhara 15,850 Benshangul-Gumaz 523 SNNPR 12,132 Dire Dawa 306 Somali 3,602 Gambella Peoples 206 Tigray 3,593 Harari Peoples 154 Addis Ababa (capital) 2,424

(Addis Ababa and Dire Dawa are municipalities)

Temperate on plateau, hot in lowlands

Hottest months, April-May, 10-30°C; coldest month, December, 5-23°C; driest month, December, 5 mm average rainfall; wettest month, August, 300 mm average rainfall

Amharic, Orominya, Tigrinya, Afar, Somali and others. English and Amharic are mainly used in business

Metric system; also 1 gasha=40 ha, 1 kend=0.5 metres, 1 frasoulla=17 kg

The birr (previously the Ethiopian dollar)=100 cents. The single legal exchange rate is determined by a weekly auction. Average exchange rate in 2007: Birr8.95:US$1; exchange rate on February 29th 2008: Birr9.38:US$1

3 hours ahead of GMT

January 7th (Christmas), January 19th (Epiphany), March 2nd (Battle of Adowa), May 28th (Downfall of the Derg), September 11th (New Year); Good Friday, Easter, Eid el Fitr, Eid el Ahda, Maulid. The Ethiopian calendar has 13 months (see The economy)

Land area

Population

Main regions

Climate

Weather in Addis Ababa (altitude 2,450 metres)

Languages

Measures

Currency

Time

Public holidays

4 Ethiopia


Politics

The federal government of Ethiopia is dominated by the Ethiopian People!s Revolutionary Democratic Front (EPRDF), which evolved from a coalition of Tigrayan-dominated rebel groups that defeated the previous government in 1991 after a protracted civil war. The EPRDF proclaimed a federal republic and scored comprehensive election victories in 1995 and 2000 under its prime minister, Meles Zenawi. The EPRDF and Mr Meles won again in May 2005, but the opposition made significant gains and disputed the result. The regime clamped down hard on the opposition following riots in June and November 2005, and jailed several leaders on treason charges. The trial lasted from December 2005 until July 2007 with opposition leaders all being found guilty of crimes relating to the post-election violence in 2005. However, within days Mr Meles pardoned the defendants in exchange for their accepting some of the blame for the violence. Ethiopia invaded Somalia in December 2006 in support of the weak Somali transitional federal government, and ousted the Union of Islamic Courts, which had control over the capital, Mogadishu, and much of southern Somalia. Delays in deploying the African Union (AU) peacekeeping force (AMISOM) have forced Ethiopia to keep its troops in the country longer than originally planned. The border dispute with Eritrea remains unresolved and there is little prospect of a final resolution anytime soon.

Political background

Ethiopia is the birthplace of both Homo sapiens and coffee, and gave rise to one of Africa!s first civilisations, the Aksumite state, in the second century AD, which adopted Orthodox Christianity and lasted for several hundred years. The modern Ethiopian state was created by highland rulers in the latter half of the 19th century. Ras Tafari Mekkonen became in effect the ruler as crown prince in 1916. He established ascendancy over regional feudal lords and was enthroned as Emperor Haile Selassie in 1930. His modernising ambitions were brought to a halt and he was driven into exile when the army of fascist Italy invaded and occupied Ethiopia between 1936 and 1941. Italy had tried to capture the country in the 19th century, but had been defeated by Ethiopian forces in a famous victory at Adowa in 1896. Italy nevertheless consolidated its holdings on the Muslim coast and the highland plateau, creating the colony of Eritrea. Following Ethiopia!s liberation by allied forces in 1941, Haile Selassie returned from Britain and ruled until his overthrow in 1974.

A federation between Ethiopia and Eritrea was proclaimed in 1952, but in 1962 Ethiopia abrogated the federation and unilaterally annexed the territory, provoking Eritrean separatists to launch a protracted guerrilla war. One year later, Ethiopia became embroiled in a war with newly independent Somalia over the eastern region of Ogaden. Domestic discontent was fuelled by corruption among feudal officials, as well as by rampant inflation and high unemployment, and was brought to a head by revelations of government indifference towards the 1972-74 famine, which cost an estimated 200,000 lives. Peasant revolts followed, underlining the need for land reform. In January 1974

War and imperial demise

Birth of modern Ethiopia

Ethiopia 5


a series of strikes and mutinies in the armed forces prompted the resignation of the prime minister of the previous 13 years. This event marked the beginning of what evolved into a coup by army officers.

Civilian groups lacked the cohesion to mobilise support amid the unrest of 1974, and the embryonic Provisional Military Administrative Council (PMAC, or Derg in Amharic) filled the power vacuum, marking the beginning of 17 years of military rule. The ousting and murder of Haile Selassie in September 1974, and the execution of 57 senior officials, sparked three years of conflict, both within the military and throughout the country. The military government proclaimed Ethiopia a socialist state and by November 1977, after further purges, Colonel Mengistu Haile Mariam had established control of the Derg.

Colonel Mengistu used Marxist-Leninist ideology to legitimise his rise to power, but quickly tired of student intellectuals. Vociferous debate degenerated into violence in 1977-78, provoking the brutal eradication of opposition supporters. At a conservative estimate, 100,000 people were killed and several hundred thousands fled to the US and western Europe, establishing a trend of youth emigration. Meanwhile, some opponents launched a rural rebellion in the northern province of Tigray, forming the nucleus of the movement that was to win power in 1991. The government extended its control through a series of radical measures. Land was nationalised and a network of peasant and urban dweller associations established. Known as kebeles, these have been retained by the EPRDF. However, as the Derg completed its transformation of Ethiopia into a Marxist-Leninist state, support from the Soviet Union wavered, which fatally weakened the regime.

The EPRDF, a newly created coalition dominated by the Tigray People!s Liberation Front (TPLF), launched a decisive assault in early 1991. By May 1991 Sub-Saharan Africa!s largest army had been crushed, and Colonel Mengistu fled to Zimbabwe, where he remains. The victorious EPRDF convened a conference in July 1991 to endorse a transitional charter and Eritrea!s de facto independence. The charter became the legal basis of four years of interim rule under an EPRDF-dominated legislature, with an executive headed by the TPLF leader, Mr Meles.

The transitional government implemented extensive economic reforms and a radical form of devolution along ethnic lines. However, despite this shift to federalism, power remains highly concentrated within a small elite leadership, the legacy of an age-old monarchical system that was followed by Marxist-style totalitarianism. The EPRDF!s strength and legitimacy derives from its inclusion of representatives from all of Ethiopia!s major ethnic groups. Unsurprisingly, the EPRDF triumphed at the first general election, in 1995; Mr Meles was appointed prime minister and the new Federal Democratic Republic of Ethiopia was proclaimed. Mr Meles and the EPRDF emerged similarly victorious in the 2000 ballot, although it was marred by allegations of fraud and a partial opposition boycott.

The red terror

Overthrow of Colonel Mengistu

A shift to federalism masks a powerful centre

The Derg

6 Ethiopia


Eritrea was granted independence in May 1993, but although the separation went smoothly at first, relations between the two countries! leaderships (both of which are Tigrinya-speaking) deteriorated because of a disagreement over border delineation and tension over monetary and trade relations. The dispute erupted into a full-scale war in May 1998, which raged for more than two years. The conflict ended in December 2000, after international mediation, but the two countries remain at loggerheads over their common frontier (see International relations and defence). The unresolved dispute with Eritrea also continues to figure prominently in the domestic political scene. Many continue to blame the EPRDF, and Mr Meles, for allowing "traditional" territories to secede.

Recent political developments

Ethiopia!s political landscape changed profoundly on May 15th 2005, when voters took part in the country!s most democratic election so far and deserted the ruling EPRDF in large numbers. The EPRDF won a comfortable majority, but the party lost more than 150 seats to the two new opposition alliances, the Coalition for Unity and Democracy (CUD) and the United Ethiopian Democratic Forces (UEDF). The opposition also swept to victory in the capital, winning all the seats on the Addis Ababa city council. However, despite the strong showing by opposition parties, they disputed the result and contended that they were the true winners of the election, largely because of fraud at the vote-counting stage. This was partly supported by an EU observer mission, report in September, which confirmed that significant irregularities took place, and that the ballot did not meet international standards. The EU mission nevertheless noted that the election was a considerable improvement on previous contests.

Final election results (no. of seats)

2005 2000

Ethiopian People's Revolutionary Democratic Front (EPRDF) 328 481

Coalition for Unity and Democracy (CUD) 109 3 a

United Ethiopian Democratic Forces (UEDF) 52 9 a

Somali People's Democratic Party (SPDP)b 24 19

Oromo Federalist Democratic Movement (OFDM) 11 0

Benishangul-Gumuz People's Democratic Unity Front (BGPDUF)b 8 6

Afar National Democratic Party (ANDP)b 8 8

Others 7 21

Total 547c 547

a These alliances did not exist in 2000 but some of their constituent parties won seats. b EPRDF allies.

Source: National Election Board of Ethiopia.

Tension mounted in the aftermath of the poll, because of delays in announcing the results and rumours of an opposition victory. Street violence erupted in early June, leading to a harsh clampdown by security forces, which left at least 42 people dead. Peace was restored following EU mediation and an agreement that the National Election Board of Ethiopia (NEBE) would investigate disputed

The war with Eritrea

Tension mounted in the aftermath of the ballot

The 2005 elections prove divisive

Ethiopia 7


results. However, the NEBE declined to follow up most complaints, to the anger of the opposition. The small number of contests that were re-run in August all went in favour of the EPRDF. Tension continued to escalate after the official results were announced in September, and following grassroots consultations, the CUD opted to boycott parliament when it reconvened in October (although the UEDF decided to participate). In response, the EPRDF and its allies stripped boycotting members of parliament (MPs) of their parliamentary immunity.

The CUD called for a new round of public protests in early November 2005, but the regime again responded in a heavy-handed fashion, using the armed forces to suppress protests (leaving several dozen dead) and rounding up thousands of opposition supporters. The entire CUD leadership"including the party!s president, Hailu Shawel, and the mayor-to-be of Addis Ababa, Berhanu Nega"and more than 100 others (including journalists, human rights activists and aid workers) were detained and charged with trying to overthrow the state by violent means, which potentially carries the death penalty.

The long-running trial of key opposition leaders from the CUD accused of fomenting post-election civil unrest, which began in December 2005, drew to a close in July 2007. In the final guilty verdict, 30 CUD leaders were sentenced to life imprisonment (and barred them from voting or standing in elections) and eight others to shorter terms. The judge added that the death penalty (requested by the prosecution) was not warranted. All were deemed responsible for "outrages" against the constitution, and the CUD leader, Mr Hailu, and four others were found guilty of the most serious charge, that of inciting, organising and leading armed rebellion. About 25 of the original defendants (including many civil society representatives) were cleared and freed in April 2007. However, in a surprising twist, the defendants were granted a pardon on July 20th following behind-the-scenes negotiations between representatives of Mr Meles and the prisoners. The pardon was granted on condition that they admit to some responsibility for the post-election violence in 2005. The CUD leadership were deeply divided over the offer, but after intense debate (and a decision to maintain a united front) the defendants accepted the deal. The defendants! full political rights were also restored, with no restrictions on their political activities.

Almost 200 people are killed in post-election violence

The official inquiry into the post-election violence reported in October 2006 and found that almost 200 people had been killed (far higher than earlier estimates), mainly as a result of gunfire. In a controversial judgement, however, the report absolved the security services of using "excessive force", describing their actions as broadly appropriate to the needs of defending national security. The report nevertheless conceded that some human rights abuses took place (without elaborating) and recommended that security forces receive proper riot training. However, the former deputy chairman of the inquiry, Judge Wolde-Michael Meshesha, fled to the UK and denounced the report as a watered down version of the original draft. The death toll was the same, but the draft accused the security services of using excessive force whereas the final version did not. The original chairman of the inquiry, Firehiwot Samuel, has also left the country, and a third

A renewed crackdown on the opposition

Opposition defendants are found guilty of insurrection

8 Ethiopia


member of the inquiry may have followed. Only five of the original ten-strong team were present at the unveiling of the official report, although the new chairman, Mekonnen Disasa, defended the findings.

Prior to its late-July 2007 recess, the Federal Assembly (parliament) declared the empty seats to be officially vacant, pending by-elections to be held in 2008. The same was also to apply to the Addis Ababa city council, which was won by the CUD in 2005, but which has been run by a government-appointed interim administration because too few of those elected were willing to take up their seats. In late 2007 the government announced that by-elections for vacant seats in the Federal Assembly would take place in April 2008, as well as for the city councils of Addis Ababa and Dire Dawa. This represents a second chance for democratic advancement in Ethiopia after the setbacks in 2005.

Important recent events

1998-2000

Economic and political tensions trigger a savage war with Eritrea, which is ended by the Algiers peace agreement of December 12th 2000.

2002

April: The UN Eritrea-Ethiopia Boundary Commission (EEBC) of the Permanent Court of Arbitration, based in The Hague, delineates a new frontier between the two countries.

2003

March: The EEBC says that the disputed town of Badme, under Ethiopian administration for decades, belongs to Eritrea, according to colonial treaties. September: Ethiopia formally rejects the EEBC ruling and border demarcation is suspended indefinitely.

2004

November: The prime minister accepts the EEBC border ruling "in principle", but this does not satisfy Eritrea. Meanwhile, four opposition parties form an alliance under the banner of the Coalition for Unity and Democracy (CUD).

2005

May: The elections attract a high turnout and take place in a calm atmosphere, but tension grows as the announcement of results is delayed. June: Provisional election results give victory to the Ethiopian People!s Revolutionary Democratic Front, but accusations of fraud lead to protests in the capital, Addis Ababa, and a security clampdown. November: Security forces react harshly to opposition protests, leaving scores dead. More than 100 people, including the bulk of the CUD leadership, are jailed and charged with high-level crimes, including treason. December: The trial of imprisoned opposition leaders gets under way after the court refuses bail for detainees.

2006

May: Radical opposition parties, including rebel groups, unite under the banner of the Alliance for Freedom and Democracy (AFD).

By elections announced for vacant seats

Ethiopia 9


October: The official inquiry into post-election violence says that almost 200 were killed, but absolves security agencies of using excessive force. November: The EEBC gives Ethiopia and Eritrea 12 months to resolve their differences or else delineation of the border will be carried out on official maps, if not on the ground. December: Ethiopia invades Somalia in support of the beleaguered transitional federal government and secures a swift victory over the Union of Islamic Courts, although deep uncertainty persists.

2007

January: The UN Security Council cuts numbers for the UN Mission in Ethiopia and Eritrea (UNMEE) for the second time in a year, to 1,700, to put pressure on Ethiopia and Eritrea to find a solution. July: CUD leaders are found guilty of constitutional crimes and fomenting armed rebellion and sentenced to life imprisonment. However, within days the prime minister, Meles Zenawi, pardoned the defendants in exchange for admission that they had not acted appropriately. November: The EEBC closes its doors and declares its mandate to demarcate the border fulfilled. Ethiopia and Eritrea still have not agreed on the border and it is now demarcated only on maps, not on the ground. December: The National Election Board of Ethiopia announces that by-elections for vacant seats in the Federal Assembly (parliament) as well as elections for the city councils of Addis Ababa and Dire Dawa will take place in April 2008"the country!s first elections since the disputed May 2005 general election.

Constitution, institutions and administration

A new constitution was endorsed by a referendum in December 1994 and came into effect in August 1995, establishing the Federal Democratic Republic of Ethiopia. It is based on a bicameral legislature, a ceremonial presidency, and an all-powerful, executive prime minister. There are few checks on executive authority and no mechanism for the smooth transfer of power. Under the 1995 constitution, Ethiopia is a federation of nine states (and two municipal councils"Addis Ababa and Dire Dawa), governed by two federal assemblies: the legislature, known as the Council of Peoples! Representatives (the lower house), and a smaller, supervisory senate, the Council of the Federation (the upper house). The Council of Peoples! Representatives has 547 members elected for five-year terms in single-seat constituencies (a "first past the post" system). The Council of the Federation has 108 members, comprising representatives from the nine federal regions and designated ethnic groups, elected both directly and indirectly. The regions (states) are distinguished primarily along ethno-linguistic lines, with the main ones being Oromiya, Amhara, Tigray, Somali and Afar. The federal constitution allows for the secession of individual regions or linguistic groups but, following the controversial departure of Eritrea in 1993, further splits are unlikely to be sanctioned.

The federal constitution provides for an independent judiciary and the devolution of legal powers, but in practice the executive branch of government is virtually all-powerful. The judiciary is subservient; a trend reinforced by the

The second republic

The judiciary and the cabinet

10 Ethiopia


post-election clampdown in 2005, which has led to the replacement of independent-minded judges by those more friendly to the government. The latest cabinet, named by the prime minister in October 2005, comprises 20 ministers (two more than before), of whom about half are new faces. In line with the principle of ethnic federalism, Mr Meles kept a broad balance between the Oromos, the Amharas, his fellow Tigrayans and various smaller groups, while cementing his own authority. However, most important decisions, especially on economic policy and security, are made by Mr Meles!s inner circle, not by the full cabinet.

Parliaments in each of the nine regional states mirror the federal structure. Other agencies include a powerful central Security, Immigration and Refugee Authority (SIRA), created in 1995, when the functions of the Ministry of the Interior were devolved to the regions. SIRA, as well as the domestic security service and the armed forces, are controlled by senior EPRDF staff. A Federal Revenue Administration Board supervises regional finances. The Disaster Prevention and Preparedness Commission co-ordinates food-security efforts, including famine early warning, the maintenance of food reserves and the distribution of emergency food aid.

Political forces

The EPRDF continues to dominate all the formal institutions of the federal republic. The EPRDF comprises four main components"the Oromo People!s Democratic Organisation, the Amhara National Democratic Movement, the Southern Ethiopia People!s Democratic Movement and the Tigray People!s Liberation Front (TPLF). The TPLF is by far the smallest, but the most influential, having led the war against the Derg and driven the formation of the EPRDF by drawing in non-Tigrayan groups, and of course by providing the prime minister. Mr Meles faced a rebellion from within the TPLF in 2001, because of hardline anger about his peace agreement with Eritrea, but he emerged triumphant after months of feuding and purged his opponents. However, Mr Meles never won back the support of hardline Tigrayan elements, obliging him to move closer to other EPRDF parties to bolster his position. Despite the challenges, Mr Meles has maintained the EPRDF as a united entity and remains firmly in command.

Despite its loss of seats in the 2005 election, the party (and its allies) still commands a solid majority in the Council of Peoples! Representatives. The EPRDF signed a formal alliance in November 2005 with the Somali People!s Democratic Party, the Afar National Democratic Party, the Benishangul-Gumuz People!s Democratic Unity Front, the Gambella People!s Democratic Movement and the Harari National League. Together they hold 371 seats in parliament, just over two-thirds of the total. The EPRDF and its allies also maintained control over all regional parliaments, except in Addis Ababa, which voted heavily for the opposition. However, the prime minister appointed a caretaker admin-istration to run the capital in 2006, pending a new poll, after the opposition could not muster sufficient numbers to assume power. By retaining control of the regions, the EPRDF also maintains its large majority in the Council of the Federation (see Constitution, institutions and administration).

Key agencies

The EPRDF remains dominant

Ethiopia 11


Main political figures

Meles Zenawi

Prime minister and leader of the Tigray People!s Liberation Front (TPLF). Chairman of the Ethiopian People!s Revolutionary Democratic Front (EPRDF) since 1989 and president of the transitional government from 1991 to 1995. He became prime minister after the 1995 general election, and won a third term in 2005.

Seyoum Mesfin

Minister of foreign affairs; key power broker within the TPLF and leading ally of the prime minister. He was re-elected as vice-chair of the TPLF in 2006.

Addisu Legesse

Deputy prime minister, an Amhara and another of Mr Meles!s key allies. He retained his position in October 2005 and was also given the agriculture portfolio.

Bereket Simeon

The former information minister, and an Amhara. He played a key role in the EPRDF!s election campaign, but was dropped from his portfolio in the October 2005 reshuffle to become the prime minister!s public relations adviser.

Kassu Illala

Minister for infrastructure development since October 2001, and a key economic policymaker. His post was expanded in October 2005 to include urban development.

Teklewolde Atnafu

Governor of the National Bank of Ethiopia (the central bank); his role has become more important as the country undertakes comprehensive economic reforms.

Hailu Shawel

Former president of the opposition Coalition for Unity and Democracy (CUD), he was elected to parliament in the disputed May 2005 election. He was one of several CUD leaders who were arrested in November 2005 and charged with treason. Received a full pardon in July 2007 (along with other CUD leaders). Current status of the CUD is unclear as various CUD factions have been fighting for the party name. He announced that he will not contest the April 2008 by-elections for vacant seats in parliament.

Berhanu Nega

A key figure in the CUD, he was nominated by the party in October 2005 to be the mayor of Addis Ababa. He was imprisoned in November 2005 along with other CUD leaders and freed in July 2007.

Beyene Petros

A veteran opposition leader; he stood and won a seat for the United Ethiopia Democratic Front in the 2005 election and remains a prominent figure in parliament.

12 Ethiopia


The opposition staged a remarkable performance in the May 2005 election, with the CUD capturing 109 seats and the UEDF taking 52 seats. The CUD"now superseded by the CUDP"did best in Amhara areas and the UEDF in Oromo areas. Both are alliances of several parties, including local and overseas entities, and both have split over the question of whether or not to participate in parliament. The CUD leadership called for a boycott but a majority of party MPs took up their seats (for fear of losing them).

With the CUD leadership released and pardoned in July 2007, opposition members began the process of regrouping and also dealing with the splits that the detention of its leaders had created. Over time, four main CUD factions have emerged. Two are in parliament, one led by Ayele Chamiso and the other by Temesgen Zewde, and two are based among the diaspora in the US, one led by Mr Hailu (the CUD leader in 2005 and the former official party president) and the other by an alliance between Bertukan Mideksa (the CUD deputy president) and Mr Berhanu"who are opposed to Mr Hailu!s "strong-arm" leadership.

The four factions are currently realigning as new links are forged between parliamentary and diaspora-based groups. In particular, the Temesgen-led faction and the Bertukan/Berhanu-led faction have moved closer together and could establish a formal alliance, while the Ayele-led faction and the Hailu-led faction are considering a similar move. However, there may not be sufficient time to complete the alliance-building process before April. In a significant boost to Mr Ayele!s prospects, the NEBE ruled in January that his parliamentary group, not Mr Temesgen!s, was the rightful heir to the CUD name. The other main opposition parties, including the UEDF and the United Ethiopian Democratic Party-Medhin will hope to benefit from the CUD!s divisions, although the main beneficiary could be the ruling EPRDF.

Ethiopia launched a major military campaign in the Ogaden region (populated mainly by ethnic Somalis) after the rebel Ogaden National Liberation Front (ONLF) killed 74 oil workers (including nine Chinese) at oil-exploration facilities in Abole in April 2007. Following three months of action, the government claimed in August to have significantly reduced the ONLF threat (and to have killed more than 500 rebels), but this has come at the expense of growing accusations of human rights abuses in the region. A UN report in September 2007 warned that food aid was not getting through and called for independent investigations of alleged abuses (although most of the report was not made public). Ethiopia ordered the Red Cross out of the Ogaden in July after the organisation had highlighted the problems, and also told six Norwegian diplomats (out of nine in total) to leave the country in August because of their alleged "support" for rebel forces. Ethiopia fought two major wars with Somalia"in the 1960s and the 1970s"to secure the Ogaden region and will remain committed to holding it, especially given potentially large hydrocarbons reserves in the territory.

The opposition made a strong advance in 2005

Other conflicts

Opposition groups active after leaders released

Ethiopia 13


International relations and defence

A formal peace agreement between Ethiopia and Eritrea was signed in the Algerian capital, Algiers, on December 12th 2000. The 3,500-strong UN Mission in Ethiopia and Eritrea (UNMEE)"now cut by half"established a 25-km temporary security zone (TSZ) in April 2001. A key aspect of the peace agree-ment was the creation of the neutral Eritrea-Ethiopia Boundary Commission (EEBC) of the Permanent Court of Arbitration, based in The Hague. The commission was charged with delimiting and demarcating the common frontier, based on colonial treaties and in accordance with international law. The two countries agreed in advance that the decision of the EEBC would be binding. The EEBC announced its initial ruling in April 2002, and its final ruling in March 2003, confirming that the town of Badme, a flashpoint for the 1998-2000 war, which had been under Ethiopian administration for decades, belonged to Eritrea. This proved unacceptable to Ethiopia, mainly for domestic political reasons. It accused the EEBC of having made "a totally illegal, unjust, and irresponsible decision" and refused to implement the ruling. This brought tentative plans to demarcate the border to a halt. Ethiopia continues to refuse to implement the EEBC ruling"although has now accepted it "in principle""and instead seeks talks with Eritrea. For its part, Eritrea consistently refuses to take part in negotiations or mediation attempts and believes that the EEBC ruling should be implemented in full and without delay. The impasse appears insoluble and will probably require regime change in one or either country to pave the way for a settlement.

In November 2006, the EEBC gave both sides 12 months to resolve their differences or else the border ruling would be effected on official maps, if not on the ground, and in late November 2007 the EEBC ceased operations and declared its mandate fulfilled. The EEBC-set border has not been demarcated because of Ethiopia!s reluctance to hand over the town of Badme and Eritrea!s refusal to start new talks, but will nevertheless be used on official maps. There were fears that the EEBC!s closure could serve as a spark for renewed conflict, especially as both sides have amassed forces on either side of the UN-monitored TSZ (and within the zone in Eritrea!s case) but there have been no new damaging developments. However, war by miscalculation remains a serious risk, even though war by premeditation does not appear imminent. The UN Security Council has cut UNMEE!s numbers by half to 1,700, although it has extended its mandate to July 2008.

Ethiopia lost access to the port at Assab owing to the 1998-2000 war with Eritrea and was obliged to shift the bulk of its international trade to Djibouti, which now handles about 98% of Ethiopia!s traffic. This makes the relationship with Djibouti a critically important one. Bilateral relations remain solid, but some disagreements over transit regulations persist.

Ethiopia shares a long southern and eastern border with Somalia (and breakaway Somaliland), and remains deeply involved in the affairs of its neighbour. The two countries fought a war over territory in the 1960s and again in the 1970s. Ethiopia!s relationship with Somalia has always been complex

Djibouti handles most Ethiopian trade

Ethiopia is deeply involved in Somalia

The dispute between Eritrea and Ethiopia is deadlocked

EEBC is dissolved, but the border issue is far from settled

14 Ethiopia


because Ethiopia!s Somali province is populated by ethnic Somalis. Ethiopia fears that the rise of an ethnic Somali nation would threaten its own territorial integrity. As a result, Ethiopia has covertly manipulated Somali factions to its own advantage, and has given strong backing to the breakaway entities of Somaliland and Puntland. The new president of Somalia, Abdullahi Yusuf Ahmed (the former Puntland president), who was elected by the Nairobi-based parliament in exile in October 2004, has a close relationship with Mr Meles. However, Ethiopia is unlikely to support Mr Ahmed!s goal of reversing Somaliland!s de facto independence.

In December 2006, after months of growing tension, Ethiopia invaded Somalia in support of the beleaguered transitional federal government (TFG) in its conflict with the Union of Islamic Courts (UIC). The UIC took over most of southern Somalia during 2006, including Mogadishu and the port of Kismayo, leaving the TFG isolated at its base in Baidoa. The Ethiopian-led invasion was swift and apparently successful, with the lightly armed Islamists proving no match for Ethiopia!s war machine. The Islamists were routed within ten days, with many driven into wooded areas near the Kenyan border (which was sealed to prevent them fleeing). The TFG was installed in Mogadishu for the first time.

However, the sense of victory was short-lived and Mogadishu saw the worst fighting for a decade at various times during 2007. The militants quickly began a campaign of guerrilla warfare against TFG and Ethiopian troops, prompting violent responses from both. The deployment of an 8,000 strong AU peace-keeping force approved in early 2007 is progressing slowly, with only 3,400 troops from Uganda and Burundi having arrived in the capital by early 2008. At present, few other African countries are willing to send troops to the region. As a result, Ethiopia has had to remain in Somalia much longer than it was planning on and has also accepted that its mission to establish stability in the country has failed.

Ethiopia!s regional diplomacy has in recent years focused partly on building stronger ties with Sudan and Yemen in order to isolate Eritrea. After a meeting between the leaders of Ethiopia, Sudan and Yemen in 2002, the leaders signed a charter formalising tripartite co-operation at a second gathering in Addis Ababa in December 2003. However, Sudan and Yemen reject the accusation that the alliance is expressly anti-Eritrean. Relations between Ethiopia and Sudan improved in 2003, when Ethiopia agreed to settle a border dispute and hand back land that it had occupied for seven years, while Sudan offered better access to Port Sudan. Ethiopia!s relations with Egypt are sometimes unsettled, owing to disputes over Ethiopia!s use of water from the Blue Nile.

The war with Eritrea in 1998-2000 strained US-Ethiopian relations, but the situation was transformed after the September 11th 2001 terrorist attacks on the US, when Ethiopia emerged as a key ally in the war against global Islamic terrorism, particularly as a result of its proximity to lawless Somalia. Military and intelligence co-operation has increased, and joint operations have been undertaken by Ethiopian forces and the 1,800-strong US Combined Joint Task

US-Ethiopia ties are close

Ethiopia, Sudan and Yemen have a tripartite alliance

Ethiopia goes to war against Somalia's Islamists

Ethiopia 15


Force-Horn of Africa, based in Djibouti. The US is also training Ethiopian forces in counter-terror tactics. Ethiopia!s failure to comply with the EEBC!s ruling on the border with Eritrea poses a threat to the relationship, although the country!s strategic value to the US in the war against terrorism is helping to shield the country from international pressure. The invasion of Somalia to oust the UIC, which was backed by the US, helped to further cement relations.

The EPRDF doubled the size of its armed forces to fight the 1998-2000 war against Eritrea, mobilising an estimated 250,000 men. Casualty figures are estimated at 123,000 Ethiopians killed, principally in the two major assaults in February-June 1999 and May-June 2000. The post-war period has been marked by lower defence spending and demobilisation (unlike in Eritrea), and the size of the army fell to an estimated 150,000 in 2007.

Military forces, 2007a Army 150,000

Air force 2,500Total 152,500

a Ethiopia's navy, berthed in Djibouti from 1991, was auctioned off in 1996 to an unknown buyer.

Source: International Institute for Strategic Studies, The Military Balance 2007.

Resources and infrastructure

Population

Ethiopia!s population was 81m in 2006, according to the IMF (or 72.7m, according to the World Bank), making it Sub-Saharan Africa!s second-most populous nation (after Nigeria). According to World Bank estimates, the population grew by 2.2% a year in 1990-2004, and is expected to grow by 2.9% a year in 2004-20. The full impact of the HIV/AIDS epidemic is uncertain, although prevalence of the disease appears lower than earlier thought (see Health). The population is still overwhelmingly rural, with only 16% living in towns (World Bank, 2004), of which Addis Ababa, the capital, is by far the largest. Several hundred thousand Ethiopians have settled in the US over the past two decades, concentrated largely around Washington DC and Los Angeles. Considerable numbers also live in the EU. Ethiopia!s population is youthful, with 44.8% under 15 years old (World Bank, 2004); a similar proportion to the rest of Sub-Saharan Africa.

The federal constitution divides the country into nine states and two muni-cipalities, primarily on the basis of ethnicity, although none of the regions is entirely homogenous and some have considerable diversity. The Oromo are the largest group, and are dominant in central/southern areas, followed by the Amharas and Tigrayans in the north. Other large ethnic groups are the Somali, in the south-east, and the Afar, in the north-east. The government recognises 64 distinct ethnic groups. Amharic and English remain the de facto languages of state, although greater emphasis is now being placed on regional languages in schools and the official media. Regions are free to choose their own language of administration, although several have kept Amharic for reasons of

Post-war demobilisation

A young and growing population

16 Ethiopia


convenience. Despite the state!s traditional association with Orthodox Christianity, the Ethiopian population is split fairly evenly between Christians and Muslims. The post-1991 administration made progress in establishing official parity of esteem and recognition between Christians and Muslims.

Education

Education is a priority under the country!s growth and development policy, and spending (including recurrent and capital) more than doubled from Birr2.1bn (US$248m) in 2000/01 (13.7% of total outlays) to Birr6.4bn in 2005/06 (22% of total outlays). As a result, enrolment rates have risen strongly, to 61% at primary level and 28% at secondary level (World Bank, 2005). However, secondary and tertiary education, in particular, remain inadequate for the development of a solid skills base. The government is pinning considerable hopes on an "e-learning" initiative that will link the entire school network, and help to overcome disadvantages associated with a lack of good roads and the absence of traditional telecommunications services.

Education statistics (%)

Adult literacy rate Male 50Female 23Gross school enrolment Primary 61Secondary 28Tertiary 17

Source: UN Development Programme, Human Development Report 2007/2008.

Health

With 84% of the population living in rural areas, the provision of health services is a major challenge. Spending on health has picked up in absolute terms under the government!s anti-poverty drive but, unlike education, now consumes a smaller proportion of the budget, from 5.1% in 2000/01 to 4.5% in 2005/06. According to the World Bank, total annual health expenditure was only US$5 per person in 2003, compared with an average of US$36 per person for Sub-Saharan Africa as a whole. The poor level of health provision is reflected by the low life expectancy at birth of just 52 years in 2005. The government!s health sector development programme aims to expand formal health services to reach the entire population by 2008, from about 50% in 2005, by opening hundreds of new medical centres and by employing and training thousands of new staff.

HIV/AIDS

The HIV/AIDS pandemic is a serious problem in Ethiopia, although the prevalence rate of the disease is lower than previously estimated. According to UNAIDS, the joint UN programme on HIV/AIDS, between 420,000 and 1.3m adults and children were affected in 2005, the same level as in 2003, giving a prevalence rate of between

Education is a development priority

Health service provision is poor

Ethiopia 17


0.9% and 3.5% (for adults aged 15-49), compared with a mid-range estimate of 4.4% of adults in 2003. Annual deaths, of an estimated 38,000 to 130,000, although large, are also lower than earlier estimates. An even brighter picture emerges from the Ethiopia Demographic and Health Survey (2005), which estimates the prevalence rate of HIV/AIDS among the 15-49 age group at just 1.4%. The survey confirmed, however, that HIV/AIDS is worse among women (1.9%) than men (0.9%) and worse in urban areas (6%) than rural ones (1%). The latest figures seem encouraging, but because earlier estimates were inaccurate, it is still hard to determine whether the incidence of the disease is rising or not. The higher urban prevalence, coupled with rural to urban migration, is a source of concern. HIV/AIDS therefore remains a threat to development, especially as it mostly strikes young adults, the most productive members of society, thereby depleting the skills base and human capital. In an attempt to limit the damage caused by the disease, the government in early 2005 started an official programme of free, anti-retroviral drug treatment for infected persons (funded by the US). However, according to UNAIDS, just 7% of those in need are receiving anti-retroviral therapy.

Natural resources and the environment

Although Ethiopia has abundant natural resources, much agricultural land is unproductive, water shortages remain endemic, and major rivers are prone to seasonal flooding. Agricultural land in densely populated areas of the highlands has been deteriorating steadily in recent decades. An acceleration of de-forestation has led to severe soil erosion in regions where people are dependent on marginal, rain-fed agriculture. In response, the government has embarked on a series of environmental initiatives, including a National Conservation Action Plan, which includes measures for selective reforestation. An Environmental Protection Agency has been created, and Ethiopia is taking tentative steps towards establishing a biodiversity strategy.

Lake Tana, Ethiopia!s largest lake, has 37 small islands, most of which shelter monasteries and churches, some dating back to the 13th century. The lake is the source of the Blue Nile, although the river running out of the southern end of the lake is called the River Abay, before it turns into the Blue Nile when it enters Sudan. Despite Ethiopia!s association with severe drought, the country is well-endowed with water resources, mostly unused. Part of the problem is that Nile-related developments are subject to long-standing treaties with other states, and Egypt, in particular, has sought to block all developments that may affect its downstream share of the river!s water. Ethiopia!s mineral resources are underdeveloped, although the past few years have seen increased private foreign interest in the mining of gold and other precious metals (see Economic sectors: Mining and semi-processing), as well as oil and gas exploration.

Transport, communications and the Internet

Ethiopia!s inadequate and unreliable transport infrastructure continues to be a significant barrier to economic growth, and access to ports, markets and services is limited. This is especially true of the road network, which carries about 95% of passenger and freight traffic. The spindly network of poorly

Abundant natural resources, but much land is unproductive

Transport infrastructure is inadequate and unreliable

18 Ethiopia


maintained roads radiating out from Addis Ababa to the provinces is largely a legacy of the Italian occupation during the 1930s. The two main roads going north through the highlands have suffered from decades of neglect and heavy wear from military and food convoys. The 1998-2000 border war with Eritrea had a paradoxical effect, spurring new road construction north to Tigray and Djibouti, while eroding highways through heavy use.

The rehabilitation of road infrastructure is a core element of the economic reform programme, implemented under the first Road Sector Development Programme (RSDP I; 1997-2002), RSDP II (2003-2007) and RSDP III (2007-2010). The Ethiopia Roads Authority (ERA) notes that after ten years the road network is now 42,429 km long"of which 13% is asphalted"providing a density of about 39 km per 100 sq km, which is still low, even by African standards. The ERA envisages significant expansion of the network under RSDP III, including the construction of 7,800 km of new roads and the rehabilitation or upgrading of a further 4,000 km. Total costs of RSDP III are estimated at Birr35.2bn, of which a significant portion is set to come from donors. The programme!s main components are to rehabilitate and upgrade key federal roads, and to build regional link roads. The project also aims to raise local capacity for road construction, management and maintenance, and to create the conditions for private-sector participation. However, local firms face a shortage of heavy construction equipment and a lack of skilled labour. Several major road construction projects are under way although some are behind schedule.

The combination of poor public transport and heavy congestion limits access to public services and constrains economic activity. The government plans two mass transit schemes"the Awara-Addis Ababa railway and the West-East busway"if private-sector partners can be found.

The Eritrean port of Assab was the principal port of entry and exit for Ethiopian trade until May 1998, when the border conflict resulted in the diversion of all Ethiopian cargo to Djibouti. The port initially lacked sufficient handling equipment and warehousing capacity to cope with the increase in traffic, and road links to Ethiopia were in need of upgrading, although significant progress has been made on both fronts. Renovation of the road via Galafi was completed in October 2003, but an EU-funded project to develop a second corridor via Ali Sabieh has been delayed. Djibouti currently handles 98% of Ethiopia!s trade and is likely to remain the principal outlet in the medium term, although use of Berbera port in Somaliland is set to increase (see Economic sectors: Other services).

Ethiopia!s only railway, which is jointly owned by the Ethiopian and Djiboutian governments, is the 850-km link from Addis Ababa to Djibouti, via the eastern market centre of Dire Dawa. It carries 700,000-800,000 passengers and 200,000-250,000 tonnes of freight per year, 2.6% and 3.8% respectively of total national traffic. The railway has suffered from weak management, poor maintenance and a lack of commercial focus, and is in urgent need of rehabilitation to improve capacity, reliability and safety. In 2004 the two governments invited a private operator to take over and renovate the system and, in March 2006, awarded a 25-year contract to Comazar (South Africa).

Djibouti replaces Assab as the key port

The railway is offered to a concessionaire

Ethiopia 19


However, Ethiopia and Djibouti terminated Comazar!s deal in June 2007 (ostensibly because Comazar missed a deadline to submit detailed proposals) and started the search for an alternative operator to take on the 25-year concession. A month later, in July, Ethiopia and Djibouti signed a Memorandum of Understanding with a Kuwaiti firm, Fouad Alghanim, to become the concessionaire. Fouad Alghanim is a diversified firm with no particular experience in the railway sector, but it is undertaking major investment in power generation and water desalination in Djibouti.

Given the poor state of the road and rail networks and the long distances to be covered, air transport is particularly important in Ethiopia. Addis Ababa, boosted by its status as Africa!s diplomatic capital (it is the home of the African Union), and its pivotal location between Asia, the Middle East and Africa, has become a major regional hub for air traffic. Activity is centred on Bole International Airport, one of only five in Africa to enjoy Category 1 status, which allows for direct flights to the US. Facilities at Bole improved in early 2003 with the opening of a new passenger terminal and runway, which cost US$135m and quadrupled the airport!s capacity. A new cargo terminal costing US$35m opened in 2006, with a capacity of 250,000 tonnes per year, and is helping to relieve delays experienced by horticulture exporters. There are smaller international airports at Dire Dawa and Bahir Dar. The national carrier, Ethiopian Airlines (EAL), is the key player in the market and has significantly expanded passenger and cargo services in recent years. With a fleet of more than 25 aircraft, EAL serves 49 international and 30 domestic destinations, and enjoys a sound reputation.

Despite economic liberalisation, television and radio remain under government control. As part of its policy for devolution, the government is encouraging broadcasting in local languages and the formation of regional radio stations. The print media reach only a small fraction of the population, which is unsurprising, given the high levels of poverty, low literacy rates and limited newspaper distribution. The many official government and party newspapers espouse predictably anodyne views. Private weekly and monthly newspapers and magazines have flourished since 1991. Many are in the Amharic language, and their sales are concentrated overwhelmingly in the capital.

Ethiopia!s record on press freedom is relatively poor, however, and the government has harassed and imprisoned scores of independent journalists and editors in recent years. The situation has worsened significantly since the general election in May 2005 and the subsequent crackdown on the opposition. According to the annual press freedom rankings from Reporters sans frontières, a France-based non-governmental organisation, Ethiopia crashed from 111th position in 2004 to 150th position in 2007 (out of 169 countries). Ethiopia!s score slid from 37 to 75 between 2004 and 2006, on a scale where zero is totally free and 100 totally controlled.

Ethiopia!s telecoms and information technology systems are among the world!s least developed, constituting a serious impediment to economic activity and foreign investment, although networks are expanding fairly briskly. According to

Media still in state hands

Telecommunications coverage is relatively poor

Air traffic volume is growing

Press freedom has deteriorated

20 Ethiopia


the International Telecommunications Union, Ethiopia had 725,000 fixed lines and 867,000 mobile lines in 2006"up from 610,300 and 410,600 respectively in 2005"giving a teledensity of just 20 telephones per 1,000 people. This compares with 107 per 1,000 in Sub-Saharan Africa as a whole. Services are concentrated in Addis Ababa, which has the highest teledensity.

Mobile-phone penetration is particularly low by regional standards, although it is expanding rapidly. The service was launched in 1999 by the state-run monopoly provider, the Ethiopian Telecommunications Corporation (ETC), in partnership with a Swedish company, Ericsson. The government confirmed in October 2007 that it had no plans to license a second mobile-phone operator, to compete with the ETC, at least until a major, US$1.5bn, infrastructure programme currently under way is completed in 2010. The government aims to increase the number of fixed and mobile-phone subscribers from an estimated 3.6m in 2007 to 10m by 2010.

Telecommunications 2003 2004 2005 2006Fixed-line phones 404,800 484,400 610,300 725,000 Per 100 people 0.58 0.67 0.79 0.91Mobile phone subscribers 51,300 155,500 410,600 867,000 Per 100 people 0.07 0.21 0.53 1.09

Internet users 75,000 113,000 164,000 n/a Per 100 people 0.11 0.16 0.21 n/aInternet subscribers 9,500 12,200 17,700 25,700 Per 100 people 0.01 0.02 0.02 0.03

Source: International Telecommunication Union.

The government views information and communication technology (ICT) as a key weapon in the war against poverty. The ETC launched broadband Internet in April 2005, as part of a three-year US$40m joint venture with foreign private partners. The service is now available in Addis Ababa and eight other towns, at speeds of up to eight megabytes per second. This is thought to have increased the number of Internet users in Ethiopia to nearer 500,000. Ethiopia!s new fibre-optic link to Sudan was officially inaugurated in August 2007. Ethiopia plans a second link, via Djibouti, but despite two years of negotiations the two sides have been unable to agree a tariff structure. Ethiopia is also considering another fibre-optic link, via Somaliland.

Broadband Internet access is a boon for business (although the service is expensive), enabling vastly improved communications and networking, and also the development of a retail Internet market and other related service activities. It will also help to attract foreign direct investment. However, the project is geared as much, if not more, to the social sector, including the "school-net" and "health-net" initiatives. The plans call for all schools and health centres to be connected to the Internet by 2008, which will significantly boost their effectiveness. To help facilitate the roll-out of modern technology, the World Bank approved a US$25m loan for ICT development in September 2004.

The ETC invests in broadband Internet

Government maintains hold on mobile-phone sector

Ethiopia 21


Energy provision

Ethiopia is poor in energy resources, with the exception of hydroelectricity. Approximately 98% of power is generated from hydroelectric sources, and there is enormous untapped potential along the rivers draining from the central highlands. However, reliance on hydroelectric power has left the country vulnerable to drought. Extensive power cuts occurred in 2003, to the detriment of domestic and business consumers, although the subsequent improvement in rainfall has alleviated the problem.

The Ethiopia Electric Power Corporation (EEPCo), the state-run monopoly provider, is pushing ahead with several major electricity projects, including new hydroelectric dams (to raise generating capacity) and new transmission lines (to increase national coverage and provide export outlets to neighbouring states). Electricity interconnections with Djibouti and Sudan are scheduled for com-pletion by early 2009, and plans for a link to Kenya are also advancing. The World Bank board is due to meet in December to consider a US$41m loan for the Ethiopia-Sudan interconnector, including US$32m for the construction of transmission lines from Bahir Dar to Meteme (to link with the Sudanese network at Gallabat) and US$8m for institutional and capacity building at EEPCo. Work on the Ethiopia-Djibouti connection, costing about US$45m on the Ethiopian side (and mostly funded by the African Development Bank) is under way after EEPCo signed construction contracts in September 2007. In addition, EEPCo secured a US$140m loan in October from the China National Machinery and Equipment Import and Export Corporation, to help to expand the national grid and link new generating and transmission facilities.

To cope with rising demand at home and abroad, EEPCo and chosen contractors are currently building four major dams, costing about US$1.5bn in total, that are due for completion by the end of 2008 or early 2009. These are Beles (460 mw), Gilgel Gibe II (420 mw), Tekeze (300 mw) and Amerti Neshi (100 mw). The four dams will raise national capacity from approximately 800 mw at present to over 2,000 mw. Next in line is the massive Gilgel Gibe III station (1,870 mw), costing up to US$2bn, which is due to open in 2011/12: work started in September 2007. Salini of Italy is playing a key role (as contractor and co-financier) in Beles, Gilgel Gibe II and Gilgel Gibe III, while Chinese contractors are building Tekeze. Several other dams are at the pre-feasibility stage, including Mendia (2,400 mw), Kara Dobi (1,700 mw) and Border (1,600 mw).

Electricity generation (m kwh unless otherwise indicated; fiscal years ending Jul 7th)

2004/05 2005/06 2006/07 Year Year 1 Qtr 2 Qtr 3 QtrHydroelectric power 2,525 2,857 804 803 824Thermal power 54 39 9 14 12Total power 2,579 2,896 813 817 836 % change, year on year 11.6 12.3 14.2 15.0 14.8

Sources: National Bank of Ethiopia; Ethiopia Electric Power Corporation.

Ethiopia relies heavily on hydroelectricity

Ethiopia invests heavily in the electricity sector

22 Ethiopia


The vast majority of Ethiopia!s energy needs are met from natural sources. Tree-felling for firewood has denuded vast tracts of highland woodlands in just one generation, greatly exacerbating soil erosion. Around Addis Ababa and other towns, firewood and charcoal are relatively scarce and expensive, leaving kerosene as the main cooking and lighting fuel. Consumers have been hit hard by the steep rise in world petroleum prices, although these are partly offset by government fuel subsidies.

The economy

Economic structure

The Ethiopian economy is highly dependent on agriculture (virtually all of it rain-fed), which accounted for 46% of GDP in fiscal year 2004/05 (July 8th-July 7th), and 43% in 2006/07, according to official sources. About 80% of the population gain their livelihood directly or indirectly from agriculture, including livestock. Coffee is the main cash crop, but its share of total export earnings slipped from 50-60% in the 1990s to about 35-40% subsequently because of lower world coffee prices and growing sales of other commodities such as oilseeds, khat (a mild stimulant), leather and gold. Flower sales are also growing quickly.

There are two growing seasons in Ethiopia: the primary, meher, harvest late in the year, which accounts for 90% of annual cereal production, and the secondary, belg, harvest during March-May, which accounts for 10%. Nonetheless, the belg harvest is crucially important for the avoidance of a food deficit in the marginal eastern and northern highland regions. Agricultural activity is uneven in geographical distribution. A grain surplus is produced largely in central and western regions. The northern highlands are far more vulnerable to variations in rainfall. Coffee growing is prominent in central and southern areas. Pastoralism predominates in the eastern and south-eastern lowlands, notably among the Afar and Somali peoples. Geographical barriers to inter-regional trade are accentuated by the fact that all main roads converge on Addis Ababa, where agricultural distribution and marketing are concentrated. Current roadbuilding schemes are designed to facilitate inter-regional transfers.

Origins of gross domestic product, 2006/07a (% of total)

Agriculture & allied activities 43.0

Industry 12.5Services 38.2GDP at factor cost (incl taxes less subsidies) 100.0

a Fiscal year ending July 7th; provisional figures.

Source: Ministry of Finance and Economic Development.

The services sector expanded rapidly in the 1990s after the overthrow of the former military government, the Derg. Services accounted for almost 40% of GDP in 2006/07, according to the latest official figures, including trade, hotels and restaurants (14.7% of GDP), real estate and renting (7.6% of GDP), public

Traditional sources of energy still dominate

The economy is dependent on agriculture

The services sector is second most important to GDP

Ethiopia 23


administration and defence (3.7% of GDP), transport and communications (5.2% of GDP) and financial services (1.9% of GDP). The services sector has kept pace with the booming farm sector in recent years, growing by 12.8% in 2004/05, 13.4% in 2005/06 and 13.5% in 2006/07.

Measuring time: the Gregorian and Ethiopian calendars

Ethiopia uses a calendar in which the year begins on September 11th and contains 12 months of 30 days plus a 13th month of five days (six in a leap year). The Ethiopian calendar (EC) is based on solar cycles and is the traditional calendar of the Ethiopian church. The EC is roughly seven years and eight months "behind" the Gregorian calendar; 1999 EC began in September 2006. However, the Ethiopian fiscal year begins on July 8th, and all domestic economic statistics are produced on an annual July 8th-July 7th basis; 1998 EC in National Bank of Ethiopia (central bank) statistics therefore refers to July 8th 2005-July 7th 2006. Hourly time in Ethiopia is conventionally expressed as beginning at 6 am Western time; 1 am is thus equivalent to 7 am in the West, 6 am to 12 noon etc. However, all businesses and ministries use the conventional 24-hour clock.

The 13 months of the year are as follows:

Meskerem"Sep 11th-Oct 10th Tekemit"Oct 11th-Nov 9th

Hidar"November Tahsas"December

Tir"January Yekatit"February

Megabit"March Maiza"April

Ginbot"May Sene"June

Hamle"July Nehasse"August

Paguemen�Sep 6th-11th

Main economic indicators, 2006/07a GDP growth (%) 11.1Consumer price inflation (%) 17.2

Current-account balance (US$ m) -1,019Merchandise exports fob (US$ m) 1,172Merchandise imports fob (US$ m) -5,124

Exchange rate (av; Birr:US$) 8.95Population (m) 74.1

a Fiscal year ending July 7th.

Sources: Ministry of Finance and Economic Development.

Industrial growth has been robust in recent years, driven by agro-processing. According to official figures the sector grew by 9.4% in 2004/05, 10.2% in 2005/06 and 11% in 2006/07, and accounts for around 12% of GDP. In 2006/07 the breakdown of GDP was: manufacturing (4.8% of GDP); construction (5.3% of GDP); utilities (2% of GDP), and mining (0.4% of GDP). Manufacturing is concentrated around Addis Ababa and Dire Dawa, but the government hopes

Industry registers steady growth

24 Ethiopia


to extend activity to regional capitals such as Mekelle and Bahir Dar, and ultimately to smaller centres, as part of the official policy of agriculture-led industrialisation.

Comparative economic indicators, 2007 Ethiopiaa Sudana Kenya a Ugandaa Tanzaniaa

GDP (US$ bn) 17.4 49.2 27.3 12.0 14.2

GDP per head (US$) 210 1,278 729 387 358

GDP per head (US$ at PPP) 685 2,155 1,556 1,020 1,055

Consumer price inflation (av; %) 17.2 8.2 9.8 b 5.7 7.0b

Current-account balance (US$ bn) -1.6 -2.5 -1.1 -0.2 -1.5

Current-account balance (% of GDP) -9.1 -5.0 -4.0 -1.7 -10.9

Exports of goods fob (US$ bn) 1.2 8.9 3.8 1.6 2.1

Imports of goods fob (US$ bn) -4.8 -7.5 -7.6 -2.8 -4.6

External debt (US$ bn) 2.6 29.5 6.6 1.5 4.3

Debt-service ratio, paid (%) 2.3 2.6 5.7 1.9 1.8

a Economist Intelligence Unit estimates. b Actual.

Source: Economist Intelligence Unit, CountryData.

Private consumption forms by far the largest component of demand-side GDP, accounting for around 80% of the total for the last few years. Government consumption has been falling in recent years, accounting for 19% of GDP in 2002/03 and just 12.4% of GDP in 2005/06. Private investment has remained above public investment in recent years, steadily accounting for around 11% of GDP, while public investment has been between 8-10% of GDP over the last five years. The resource balance has steadily worsened in recent years, climbing to 24% of GDP in 2005/06 from 15% in 2002/03, as surging imports widened the trade deficit.

Real GDP growth (% change unless otherwise indicated; fiscal years ending Jul 7th)

2004/05 2005/06 2006/07 % of GDPa

Agriculture, forestry & fishing 13.5 10.9 9.5 43.0

Industry 9.4 10.2 11.0 12.5

Construction 7.5 10.5 10.9 5.3

Manufacturing 12.9 10.6 10.5 4.8

Utilities 7.9 8.8 13.6 2

Mining 4.1 7.1 6.1 0.4

Services 12.8 13.4 13.5 38.2

Wholesale & retail trade 13.1 17.5 17.7 12.2

Real estate & business services 7.4 14.4 15 7.6

Transport & communication 19.2 5.7 7.5 5.2

Public administration & defence 11.6 6.4 9 3.7

Hotels & restaurants 11.6 19.6 25 2.5

Financial intermediation 24.2 33.4 2.5 1.9

Other services 11.4 8 10.8 5.2

Total valued added 12.7 11.8 11.3 93.7

Taxes less subsidies 1.9 -1 8.4 6.3

Total GDP 11.8 10.9 11.1 100.0

a 2006/07.


Private consumption is largest part of GDP by expenditure

Ethiopia 25


Economic policy

Sweeping economic reform, based on liberalisation, has been undertaken by the Ethiopian People!s Revolutionary Democratic Front (EPRDF) regime since it assumed power in 1991. Ethiopia!s reforms are also based on "local ownership" of the process, which means, in practical terms, that land remains in public ownership and that powers have been devolved to the woredas (districts). The government adopted fairly typical IMF and World Bank programmes in the 1990s, although the IMF suspended disbursements temporarily in 1997 because of disagreements over the pace and scope of financial sector reforms, which remains a key area of policy conflict. The government has opened up banking to the local private sector, and appointed foreign, private managers to state banks, but continues to bar foreign ownership or the introduction of foreign banks. Donors and the government also remain in disagreement over official land tenure policy, which bars private ownership (while allowing the leasing of land in urban areas). Relations between Ethiopia and major donors were strained by the 1998-2000 Eritrean war but were soon rebuilt, with Ethiopia emerging as a "model" performer in the battle against poverty. However, the crackdown on the opposition since the disputed election in May 2005 has renewed tension, and although donors have not suspended support, they have switched from funding the federal government budget in favour of local-level initiatives under the protection of basic services (PBS) programme.

The framework for reforms is provided by the sustainable development and poverty reduction programme (SDPRP), which ran from 2001/02 to 2005/06, and its successor, the plan for accelerated and sustained development to end poverty (PASDEP), which runs from 2006/07 to 2010/11. The government!s strategy has several key components, including macroeconomic adjustment, structural reforms, better governance, food security; and a belief in "agricultural-development-led industrialisation". The SDPRP and PASDEP are also geared towards poverty alleviation and meeting the millennium development goals (including a halving of poverty) by 2015. In particular, the PASDEP envisages achieving the following:

• sustained economic growth of 7% a year through massive investments in key anti-poverty sectors, rising to 10% a year at the end of the programme;

• a sustained rise in agricultural productivity and production, with crop output climbing from about 15m tonnes/year (t/y) to 38m t/y; and

• a particular focus on the textile, leather and floriculture industries, in an effort to boost exports.

Total investment under the programme is projected to be a massive Birr342bn (US$36.5bn) including Birr233bn in capital spending and Bir109bn in recurrent outlays. Donor funding will be sought to cover 30-40% of the amount, and private-sector participation will also be encouraged. The largest sectoral outlays are earmarked for education (19%), health (19%), agriculture (14%), roads (13%), water (12%), energy (12%), housing (5%) and telecommunications (5%).

The government undertakes economic reform

Reforms are refocused towards poverty alleviation

26 Ethiopia


The PASDEP is overly ambitious, however, and will not be realised in full. Moreover, raising agricultural productivity requires more than mere investment, and may prove difficult in the absence of significant land reform to bring about larger-sized plots and secure ownership (which is not on the government!s agenda).

The severe drought in 2002/03 temporarily stalled reform efforts, but Ethiopia got back on track and completed the three-year poverty reduction and growth facility (PRGF) programme in September 2004, six months later than originally envisaged. Key measures undertaken in the final year of the PRGF, which focused on the financial sector, included:

• initiating a restructuring programme for the Commercial Bank of Ethiopia (CBE), the dominant market player;

• starting a similar restructuring programme for the National Bank of Ethiopia (NBE; the central bank); and

• achieving full compliance with the regulation that governs banks! provisioning for non-performing loans.

Despite the success of the PRGF, the IMF warned that far deeper reforms are needed in coming years, particularly to encourage private-sector activity. The Fund highlighted Ethiopia!s continued vulnerability to exogenous shocks (principally drought and world commodity price fluctuations) and noted that poverty indicators are still among the worst in the world. Achieving food security and diversifying exports remain key challenges. The IMF also calls for continued macroeconomic prudence and more ambitious structural reforms (especially in agriculture, industry and the financial sector) in order to raise productivity, improve competitiveness, enhance resilience to shocks and bring about faster growth.

Ethiopia has not had an IMF programme since the PRGF was completed in 2004. With substantial support from other donors, including the World Bank and many bilateral donors, there is little reason to believe a new programme will be agreed in the future. Donor co-operation in Ethiopia has been successful, and the endorsement of an IMF programme is largely unnecessary, as other donors are working closely with the government amid a high amount of technical assistance and mutual consultation. However, the IMF will remain engaged with Ethiopia through its annual Article IV consultations and co-operation with the country!s largest donors. Advice from the Fund is largely welcomed by the government and in many instances has been followed in policy reform efforts"such as the reduction of subsidies on petroleum products and limiting domestic borrowing.

The IMF has been vocal is its long-standing recommendation that Ethiopia accelerate structural reforms to boost agricultural productivity and create the conditions needed for the emergence of a dynamic private sector that can complement development efforts. The contribution of the private sector remains relatively small, although some positive steps have been taken, including a resumption of the privatisation programme, an easing of the

Ethiopia completes the PRGF programme

Structural reforms are needed to boost the private sector

The IMF's role in Ethiopia is low key

Ethiopia 27


regulatory burden, and the introduction of a competition policy. In addition, the introduction of the Ethiopian Commodity Exchange (ECX) in January 2008 should help to improve the marketing of agricultural products.

Fiscal consolidation, within the context of improved tax collection and a switch in spending towards the social sectors, remains a fundamental aspect of the economic reform programme. Nevertheless, government finances"especially capital spending"would not be sustainable without large infusions of donor funds, and headline deficits remain high.

Ethiopia has made slow, but steady progress in lifting domestic revenue, although efforts were hampered by the 2002/03 drought. According to official figures, domestic revenue ranged from 16-17% of GDP during 2002/03 to 2006/07. Measures undertaken to enhance tax collection include the imposition of value-added tax; a strengthening of the large taxpayers! unit, which accounts for 75% of federal revenue; the expansion of branch offices to the regions; a crackdown on contraband trade; and the introduction of taxpayers! ident-ification numbers. Foreign grants remain a vital source of supplementary revenue and reached 6.7% of GDP in 2002/03 (because of emergency drought aid) before subsiding to an average 4.7% of GDP between 2003/04 and 2006/07.

Total spending fell from 29.1% of GDP in 2002/03, a drought year, to 25.1% of GDP in 2003/04. From 2004/05 spending began to edge back upwards, reaching an estimated 27.6% in 2006/07. Within this overall picture there has been a marked shift in resource allocation towards poverty alleviation, and a related shift from recurrent to capital spending. Total poverty-related outlays (both recurrent and capital) rose from 12.6% of GDP in 2002/03 to an estimated 15.2% of GDP in 2005/06.

Government finances (% of GDP; fiscal years ending Jul 7th)

2005/06 2006/07a

Total revenue 21 23.3

Domestic revenue 16.9 17.3

Tax 12.2 12.5

Grants 4.1 6.0

Total spending 25.4 27.6

Deficit (cash basis) -4.4 -4.3

Net domestic borrowing 3.1 2.5

Net foreign borrowing 1.3 1.7

a Estimates.


The headline budget deficit (including grants) climbed to 8.1% of GDP in 2002/03 because of drought, before easing to 3.2% of GDP in 2003/04. Since then the shortfall has been on the rise as the government has tried to meet its ambitious development targets, reaching 5.2% of GDP in 2005/06. The shortfall is being met by a mixture of foreign and domestic borrowing of roughly equal proportions. The budgetary situation will remain manageable so long as donors remain engaged.

Fiscal reforms are a key part of the reform agenda

Donor funds keep the budget deficit manageable

28 Ethiopia


Donors and the government have endorsed progress under the PBS programme, noting that funding was being successfully channelled to regional and sub-regional (woreda) administrations in a transparent manner, free from political and ethnic bias, and was leading to improved service delivery. The PBS was a vehicle set up by the World Bank in 2006 to protect social programmes"especially health, education, support for farmers and water supply"after donors suspended direct budget support for the government in the wake of political violence following the May 2005 election (April 2006, Economic policy). Instead, social funding was redirected to local-level government, under the three-year PBS programme (2006-08), although dedicated project funding was not affected by the row.

To date, the PBS programme has secured approximately US$800m from donors, including US$215m from the World Bank, US$205m from the UK!s Department for International Development and US$200m from the European Commission. Other contributors include the African Development Bank, the Canadian International Development Agency, and the Netherlands, Ireland and Germany. The government is providing counterpart funding of about US$1.7bn. To build on the PBS, the World Bank is currently working towards a new, full country assistance strategy (CAS), intended to start in 2009, which will probably contain a PBS component. Both the PBS and the CAS are designed to support the government!s PASDEP programme, which runs from 2006/07 to 2010/11.

Monetary policy in Ethiopia is not highly developed, reflecting the overall state of financial markets, but has been disciplined and is geared to exchange-rate stability and low inflation. The authorities have been successful in recent years in limiting the rate of depreciation of the birr against the US dollar and keeping core inflation (excluding volatile food prices) at a low level. In 2002, in response to subdued economic activity and low inflation at the time, the NBE lowered the rate on savings deposits to 3% (from 6%). All banks adjusted their deposit and lending rates in line with the NBE!s move. Monetary policy was tightened in 2006 by doubling the reserve requirement for commercial bank holdings at the NBE, from 5% to 10%"in order to try to curb excess liquidity"and lifting the minimum savings rate from 3% to 4% (and thus the lending rate from 7% to 8%) in order to make credit more expensive. However, real interest rates are still negative, given high inflation, which is likely to keep demand for credit high. The minimum savings rate is legally fixed"and remains at 3%"but other rates are determined by the rudimentary market. Overall, money supply growth remains relatively brisk and growth in narrow money (M1) increased from 16.4% in 2005 to 23.4% in 2006. The IMF has warned that policy needs to be tightened, especially given the high levels of liquidity and credit extension, in order to contain import demand and inflationary pressure.

The first wave of privatisation in the mid-1990s led to the sale of about 160 small and medium-sized enterprises for about US$400m (80% of which, by value, went to foreign investors), including state concerns in tea, tobacco, bottling, brewing, meat processing and leather tanning, as well as the Lega Dembi gold mine"by far the largest sale, at US$175m. However, the planned second wave of privatisation from 2001"involving 114 firms, including larger

Privatisation slowly gains new momentum

Monetary policy stays fairly disciplined

The PBS programme is deemed a success

Ethiopia 29


enterprises"stalled initially for a variety of reasons, including policy disagreements within the EPRDF over the sale of "strategic national assets", continued wrangles over the allocation of land titles by regional authorities and ongoing restrictions on foreign investment in several sectors of the economy (such as banking). To help revive the privatisation process, the government in 2004 announced the creation of a new body"the Privatisation and Public Enterprises Supervising Authority (PPESA)"which is autonomous and charged with guiding state-owned enterprises to commercial viability before the introduction of private capital. Privatisation gathered new momentum in 2005 and 2006, and PPESA informed parliament in May 2006 that of the 22 firms put up for sale in the previous 12 months, 11 deals had been concluded and four were pending"although most were small or medium-sized. Privatisation of large firms"such as the Ethiopia Telecommunications Corporation, the Ethiopian Electric Power Company or the CBE"will take longer to materialise, as the government considers them to be "strategic" assets.

Ethiopia has the ninth-best regulatory environment for business in Sub-Saharan Africa (out of 46 states), according to the latest Doing Business index from the World Bank. However, the country continues to rank fairly low in the global stakes, in 102nd position (out of 178 states). In the East Africa region, Ethiopia was ahead of Uganda and Tanzania but behind Kenya (which has a larger and more sophisticated private sector). The World Bank index attempts to measure the regulatory environment but does not take account of other vital aspects affecting business conditions, such as macroeconomic performance, infra-structure and corruption.

Business environment indicators in selected Sub-Saharan African states

Ease of doing

business a Starting a

businessbRigidity of

labour lawscRegistering

propertybProtecting

investorsdPaying

taxes e Container

export costf Enforcing contractsb

South Africa 35 31 42 23 8.0 37.1 1,087 600

Kenya 72 44 21 64 5.0 50.9 1,955 465

Ethiopia 102 16 34 43 4.3 31.3 1,617 690

Uganda 118 28 3 227 4.0 32.3 2,940 535

Tanzania 130 29 63 119 5.0 44.3 1,212 462

Sub-Saharan African average - 56 43 105 4.3 68.0 1,660 643

OECD average 31 15 28 6.0 46.2 905 443

a Rank out of 178 countries. b Time taken in days. c 0=minimum rigidity, 100=maximum rigidity. d 0=minimum protection, 10=maximum protection. e % of gross profit. f US$.

Source: World Bank, Doing Business in 2008.

Of the ten components that comprise the Doing Business index, Ethiopia performed best on paying taxes (29th in the world), dealing licences (58th), closing a business (70th), enforcing contracts (77th), employing workers (89th) and getting credit (97th). Ethiopia performed less well than its overall ranking on starting a business (106th), protecting investors (107th), registering property (147th) and trading across borders (150th). Ethiopia!s good ranking on paying taxes (third in Sub-Saharan Africa) stems from the relatively low tax burden, equivalent to 31.3% of gross profits (comprising a profits tax of 26.8% and other taxes of 4.3%), which compares favourably to both the regional average (68%)

Low taxes are the best aspect of the regulatory environment

30 Ethiopia


and the OECD average (46.2%). However, some local taxes (on small businesses and rental income) were raised in July 2007.

Ethiopia!s weak ranking in registering property (29th in Sub-Saharan Africa) reflects the strict land-tenure rules in place, which prohibit the ownership of private land. Leasehold is allowed, but numerous procedures need to be followed. The country!s low position in trading across borders (31st in the region) derives from being landlocked (which raises the time and cost of trade), although documentation requirements are close to the regional average (but almost twice those in the OECD). Ethiopia has taken steps to improve the regulatory environment in recent years, but the World Bank noted that no significant new improvements had been implemented in the past 12 months. Prospects for 2008 are better, owing to the planned introduction of a new commercial code, which will address some of the issues highlighted in the World Bank report.

Ethiopia!s score in the latest, 2007, Corruption Perceptions Index, produced by Transparency International (a Berlin-based non-governmental organisation) was unchanged from last year, at 2.4"on a scale where zero is totally corrupt and 10 totally clean. Thus, perceived corruption is still rampant in Ethiopia, and the inclusion of new countries in the index meant that Ethiopia slipped down in the world league table to 138th place (from 130th last year), on a par with Cameroon, Pakistan, Paraguay and Syria. Ethiopia is not known for routine, bureaucratic corruption, but relationships between prominent businesspeople and politicians, often one and the same, remain opaque.

Economic performance

Ethiopia!s GDP growth rate remains strongly determined by the performance of rain-fed agriculture, which can be volatile, but a series of good harvests has fuelled rapid economic expansion in the past few years. Rising farm output of both food and cash crops has underpinned performance in the secondary sector, especially agro-processing, and the wider service economy. The economy has also gained from policy reform initiatives and rising investment, while good rainfall has also ensured that hydroelectric dams"the main source of power"remain full. According to the latest figures from the Ministry of Finance and Economic Development, the economy contracted by 3.5% in 2002/03, because of severe drought, before averaging growth of 11.7% per year between 2003/04 and 2006/07, as food crop harvests continued to increase and investment across a range of sectors rose strongly. Political unrest and tension following the May 2005 election appears to have had little impact on the wider economy. Neither have high oil prices served as a dampener, although rapid economic growth has pushed the current account on the balance of payments strongly into deficit because of soaring import demand.

Corruption remains a serious deterrent to business

Good harvests drive rapid economic growth

Ethiopia 31


Gross domestic product (% real change; fiscal years ending Jul 7th)

Annual average 2006/07 2002/03-2006/07GDP 11.1 8.7

Sources: IMF; National Bank of Ethiopia; Ministry of Finance and Economic Development.

Inflation is mainly influenced by shifts in food prices (which have a 60% weighting in the national consumer price index), which in turn are determined by weather patterns. Inflation leapt from an average of 1.6% in 2002 to 17.8% in 2003 because of the severe drought, but fell back to 3.3% in 2004 as food production recovered. However, inflation was high at 11.6% in 2005 and continued to rise to 13.6% in 2006 and 17.2% in 2007. This reflects the surge in world oil prices, leading to higher local fuel prices (after the government cut back on costly subsidies)"as well as rising food prices, despite consecutive good harvests. The strength of food prices can be explained by several factors: higher overall demand (driven by rising household income); government policies that seek to maintain healthy producer prices (to encourage production); donor purchases for emergency relief; and market inefficiencies, such as a poor transfer of information from one regional market to another.

Inflation (% change)

Annual average

2007 2003-07

Consumer pricesa 17.2 12.7

a National price index.

Sources: Central Statistical Authority; National Bank of Ethiopia.

Regional trends

Ethiopia!s regional governments have a considerable degree of economic autonomy under the constitution, which limits the federal government!s influence on economic policy to monetary matters, land ownership, foreign trade and investment, interstate commerce and nationwide transport. All other economic powers are devolved to the regions, including taxation. In practice, however, the regions remain politically subservient to"and financially dependent on"the central government, although they have assumed greater economic autonomy in recent years under the government!s policy of financial decentralisation. They handle a growing share of the national budget (sur-passing the federal government!s share for the first time in 2005/06) and play a key role in attracting investment, both local and foreign, and providing social services. The capital, Addis Ababa, remains the dominant economic city and the only one with a wide tax base. Dire Dawa is the second most important commercial centre.

Food prices are the main determinant of inflation

The regions' economic powers are growing

32 Ethiopia


Economic sectors

Agriculture

Agriculture accounted for 47% of GDP in fiscal year 2005/06 (July 8th-July 7th), and employs about 80% of the labour force. Within agriculture, crops comprised 30% of GDP, livestock 9% and forestry 4%. Production remains mainly at a peasant, smallholding level, which makes it difficult to measure accurately. Ethiopia!s highlands are highly fertile (at least in non-drought years), enabling the country to support a large population, but long-term output is potentially threatened by inefficient land tenure (including frequent subdivision of holdings), soil degradation and climate change. The vast majority of farming is rain-fed, leading to a perpetual cycle of drought and plenty. The most recent severe drought in 2002/03 left 13.2m people (one in five of the population) dependent on emergency food support.

Ethiopia's main food crops

Some 80% of food production consists of cereals, mainly maize, teff, barley and sorghum. Teff, a fine highland grain, forms the staple diet of many Ethiopians and is used to make injera bread. Sorghum is the principal lowland crop. Pulses and oilseeds are also grown extensively. The sparsely populated southern and eastern regions are largely pastoral. The livelihood of pastoralists has been seriously damaged by successive droughts since the late 1990s and pastoralists have not benefited much from the better rains in the last three seasons, which fell largely on cropping areas.

Despite the recovery in agriculture since the 2002/03 drought, Ethiopia continues to suffer from a structural food deficit, but there are plans to end reliance on food aid in the long term. As part of this process, about 5m of the 8m people needing assistance were switched to the new, productive safety nets programme (PSNP) in 2005 and 2006. This innovative approach involves a switch from direct food aid to a mixture of food and cash aid (either via direct grants or public works programmes), and will cost about US$200m a year over five years. It is intended to stimulate the development of local markets and enable internal trading between surplus and deficit localities, facilitated by an expanding road network. In December 2006 the World Bank approved funding of US$150m for the second phase of the PSNP, which started in 2007. One element of the programme is to build a portfolio of drought-financing instruments, including an Ethiopia-specific contingency fund, a contingency credit with the World Bank/IMF, and weather-based insurance schemes. It is hoped that a combination of all of these will limit the need for annual emergency appeals to extreme circumstances only. The World Bank notes that the government!s original plan, for the PSNP to end food aid dependency after five years (2005-09), is too optimistic, and that the programme will need to run for at least ten years to have a chance of meeting its target.

Food security remains fragile

The productive safety nets project

Ethiopia 33


Ethiopia!s restrictive land tenure system is a major point of controversy. All land is owned by the state, giving farmers little incentive to invest in vital productivity improvements. However, the government continues to resist calls to allow private ownership on the grounds that it would lead to the sale of land to speculators and encourage rural-urban migration, which has been relatively constrained in Ethiopia. The government is seeking a compromise and, after successful trials, started to roll out a new "certification" programme in January 2005, granting specific leasehold rights. The rights being conferred on farmers may not be sufficient to encourage investment, particularly as the government retains the ultimate authority to deal with any land as it sees fit, although a compensation scheme is also promised, to deal with cases of expropriation.

Coffee originated in Ethiopia and has long been the country!s main export, although, uniquely in Sub-Saharan Africa, domestic consumption is high and accounts for a significant proportion of the crop. Earnings hit a peak of US$420m in 1997/98, about 70% of export receipts, but the collapse in world prices pushed sales down to US$165m in 2002/03, just 34% of total exports. Earnings recovered gradually to a provisional US$354m in 2005/06 (35% of total exports).

To help to sustain the rebound in the sector, the government overhauled the institutional framework for coffee in 2005, separating the production and marketing departments of the Ethiopian Coffee and Tea Authority into the Agriculture Development Department and the Coffee, Tea, Spices and Cotton Marketing Department, respectively. Growers and the state also want to increase coffee value-added, by undertaking more processing in Ethiopia, and by finding new, high-value outlets for the country!s premium varieties.

Khat (known as chat in Ethiopia) is a mild stimulant harvested from a shrub, catha edulis, the fresh leaves of which are chewed, principally in Somalia and Djibouti. Consumption is also rising in Ethiopia, and 1 tonne is shipped to the UK every day. Chat is a major source of revenue in south-eastern areas, with the bulk of the crop being ferried out by air and truck on a daily basis, as the leaves lose their potency within 24 hours of being picked. With farm-gate prices of US$9/kg, chat is much more valuable than coffee, and the bushes can be harvested up to three times a year. Chat export earnings rose to a record US$100m in 2004/05 (in third place behind coffee and oil seeds), but sales slipped to US$89m in 2005/06. The drug is legal in some Western countries (such as the UK), but not the US, but has a damaging effect on long-term users.

The export-based horticulture sector, consisting mainly of flowers, is growing rapidly in Ethiopia, attracted by good growing conditions and government investment incentives (including a five-year tax holiday and cheap land leases). Flower exports grew from US$13m in 2004/05 to US$23m in 2005/06 and could earn US$100m a year within the next few years, according to the Ethiopian Horticultural Producers and Exporters! Association (EHPEA). Ethiopia now has about 40 flower producers"up from just three in 2001"including foreign investors from the Netherlands, Germany, India and Israel. Golden Rose, a

Coffee earnings fluctuate in line with world prices

The government rolls out partial land tenure reform

Horticulture is a new boom sector

Khat is important for many farmers

34 Ethiopia


private firm that is majority-owned by UK-based Rina Investment, is the largest producer. The sector has faced a shortage of storage facilities and air freight capacity, but the opening of new cargo terminal at Bole airport in 2006"and the acquisition of new freight planes"is helping to correct this problem. Other challenges in the sector include poor infrastructure (roads, power and telecommunications), a shortage of construction materials, delays in securing crucial imports, and limited access to bank financing.

Ethiopia is one of the largest livestock producers in Africa, with about 35m cattle, 25m sheep and 18m goats, according to a survey in 2003. The sector accounts for almost 10% of GDP and employs over 30% of the agricultural labour force. Activity has picked up since the government ended its monopoly on livestock trading in 1999, thereby encouraging local and foreign private investment in ranches, meat-processing companies and abattoirs. Livestock and livestock by-products are export earners: sales of leather and leather products jumped from US$44m in 2003/04 to US$75m in 2005/06, while exports of meat and live animals climbed even faster, from US$10m to US$46m over the same period. Saudi Arabia is the main market for meat and live animals, although sales to Egypt started in 2005 following investment in new and upgraded abattoirs.

The sector remains underexploited, according to the Livestock Marketing Authority, but will benefit from a 20-year development plan being implemented by the government and the African Development Bank. Apart from the challenge of low world prices for animal products and vulnerability to drought, the sector faces a number of other problems, including a high level of illegal crossborder trade in live animals; periodic import bans imposed on health grounds by key Middle Eastern buyers; unreliable supplies because of weak links between buyers and pastoralists; a scarcity of bank credit; and poor transport infrastructure.

Mining and semi-processing

Mining accounts for only 0.5% of GDP, mainly centred on the extraction and sale of gold. In 1997 the government awarded the licence to operate the country!s largest existing gold deposit, at Lega Dembi, to a Saudi-owned conglomerate, MIDROC, for US$175m. Production started in 1998, and reached about 4 tonnes in 2002. Total gold exports, including a small amount from artisanal miners, have risen steadily in recent years, from US$35m in 2001/02 to a new peak of US$65m in 2005/06, partly as a result of the improvement in world prices. Several firms are engaged in exploration, and production could reach 20-30 tonnes/year with sufficient investment.

The Ministry of Mines and Energy reports that 55 private firms are active in the sector and have acquired nearly 80 separate licences. In the latest deal, in December 2007 an Indian firm, Sainik Coal Mining, signed a contract with the mines ministry to extract potash"a key ingredient in fertiliser"on a 10-sq-km portion of the Dallol depression in Afar region in the north-east. Sainak also acquired exploration licences to search for other potash deposits, as well as for magnesium and calcium. One possible complication, however, is that the mine site is close to the Eritrean border. In a separate development, BHP-Billiton, an

Livestock sector grows in importance

Gold attracts foreign investment

Ethiopia 35


Australia-based global mining giant, is said to be talking with the government about a potential US$100m potash investment in the north-east.

Production of non-metallic minerals"such as limestone, clay and marble for the construction sector, and salt for household use and the leather tanning industry"is also important. Ethiopia is currently assessing the viability of coal reserves at Yaya, in Oromia with a view to the possible establishment of a US$300m coal-to-fertiliser complex. The government has long sought to develop the Yaya reserves"and first issued a tender for a feasibility study for a coal-to-fertiliser plant in 1997"but their viability has never been confirmed. The Ethiopia Privatisation Agency is considering the sale of the country!s sole tantalum mine, at Kenticha in the south, which produces about 100 tonnes/year (t/y), earning US$10m. Output is currently all sold to China. South African, Chinese and British firms are believed to be interested in the acquisition, although the price is uncertain. Ethiopia hopes to double tantalum production after allowing small-scale miners to compete in the sector in 2007.

With world oil prices remaining at a high level, the search for other oil and gas reserves in Ethiopia is intensifying. Malaysia!s state oil firm, Petronas signed an agreement in June 2005 covering a large block in the south-eastern Somali region, giving it exclusive exploration and development rights for an initial four-year period, extendable to 25 years. Petronas also continues to explore in the western Gambella region of Ethiopia, but a first test well drilled in May 2006 turned out to be dry"a second is planned. White Nile (a British-Sudanese group) signed an exploration agreement for a block in the south-west (next to Petronas!s Gambella concession) in July 2005; Pexco (a private Malaysian firm) won an exploration in the south-east Ogaden basin (where Calub is situated) in October 2005, for an initial payment of US$1m; and two other small firms"Afar Exploration and South West Energy"also won concessions in 2005.

In a boost to oil exploration, White Nile signed another deal with the mines ministry in January 2008, covering a 30,000-sq-km block in the south-west, in the Omo and Chew Bahir basins. The deal follows a two-year study jointly undertaken by White Nile and the government, indicating significant potential in the region, as the basins are an extension of the southern Sudan oil belt. White Nile paid a US$1m signature bonus and pledges to invest a minimum of US$8m over the next four years (and contribute US$200,000 annually to local community development). The firm says that US$50m capital is available for investment in the event of a large enough find. White Nile joins the handful of other explorers in the country"and was followed by US-based Inter Global, which has secured acreage in the north-east"but activity in the prime, south-eastern Ogaden region remains at a standstill after last year!s attack on Chinese and Ethiopian oil workers at Abole by the Ogaden National Liberation Front (ONLF).

The long-delayed development of known gas reserves at Calub and Hilala, in the volatile Ogaden region in the south-west, is at last proceeding more than 30 years after the resource was identified. There have been numerous develop-ment proposals put forward over the years (a Chinese firm was commissioned to lay basic on-site infrastructure in the 1990s), but all have been thwarted for

Searching for oil in Ethiopia

The development of gas reserves in the Ogaden begins

36 Ethiopia


financial or technical reasons. The surge in hydrocarbons prices in the past five years, however, has rendered the project increasingly viable. Following a new government tender in 2006, Petronas won the bid in August of that year, and, after a further year of talks, sealed a final petroleum development agreement and production-sharing contract with the government in July 2007. Apart from the Calub and Hilala blocks, which hold estimated reserves of 4trn cu ft (113bn cu metres) the deal also covers two adjacent, unexplored but promising blocks (B11 and B15), which could add to the reserve tally.

Petronas plans to invest a total of US$1.9bn in the project, including a gas-processing plant and a pipeline to the coast (either to Djibouti or to Berbera in Somaliland), which is likely to take at least three years. As a sign of its intent, Petronas firm paid the government US$80m in September 2007 for works already undertaken by the state. Petronas will also pay 35% income tax and a 3% royalty fee, and will reserve 5% of annual production for the government. The major rebel attack by the ONLF in April, on Chinese-led oil exploration facilities near Abole, in the Ogaden, which killed 74 people, highlights the risk of operating in the region, and the ONLF has vowed to stage more attacks (warning developers to stay away), but, following a major military campaign in July 2007, the government now thinks that the region is secure.

Manufacturing

Manufacturing accounted for a relatively small 3.3% of GDP in 2005/06 (rising to 5.3% of GDP with the inclusion of small-scale and cottage industries), which is a similar level to previous years. The sector is dominated by food (especially flour products, vegetable oil, and sugar), beverages (soft drinks and beer) and textiles/garments. The bulk of production is concentrated in the capital, Addis Ababa"especially in the southern suburbs"followed by Dire Dawa in the east. In an attempt to boost production, the government embarked on a first wave of privatisation in the mid-1990s involving small and medium-sized entities, but the sell-off process stalled and the bulk of the sector (especially large firms) remain in state hands. However, a new wave of privatisation gained momentum in 2005 and 2006.

Ethiopia has four sugar refineries, at Wonji, Shoa, Metahara and Fincha, all owned by the state. Production totals about 275,000 t/y, about 85% of domestic consumption. Fincha is the largest (85,000 t/y) and the newest (built in 1999) and produces the higher-quality sugar needed for the soft drinks sector. The government is seeking private involvement in the sugar sector and plans to increase production to fully satisfy local demand and generate a surplus for export. In 2006 the government unveiled an ambitious plan to invest Birr16bn (US$1.8bn) in the sugar sector over the next six years, with the aim of raising production of processed sugar to 1.5m t/y, of which 1m t/y would be earmarked for exports.

In the non-food sector, Matador (a large, family-owned Slovakian firm) joined forces with the Ethiopian state-owned Addis Tyre Company (ATC) in mid-2004, taking a 61% stake in the new joint venture"Matador Addis Tyre (MAT)"and assuming management control. In other recent ventures, the US$25m Ethio-Iran

The manufacturing sector remains small

New developments in the non-food sector

Ethiopia 37


Aluminium Factory at Sululta, 25 km from Addis Ababa, opened in December 2005, with the intention of making Ethiopia self-sufficient in aluminium; and the Indian Kadila group opened a new US$9m pharmaceutical factory, 20 km south of Addis Ababa, in 2006, to produce medicines used in the treatment of tuberculosis and malaria. Ethiopia hopes to achieve a rapid rise in the production and export of shoes, helped by the planned opening of the country!s largest shoe factory in mid-2008. The US$29m venture is being undertaken by Sheba Tannery (a subsidiary of the state-sponsored Endowment Fund for the Rehabilitation of Tigray, or Effort), and aims to produce 2m pairs a year, more than doubling national production from six existing plants (two state-owned and four private).

Leather production is important in Ethiopia, and export earnings rose by 11% year on year to US$75m in 2005/06. The sector was largely liberalised in the 1990s, and the private sector owns most of the 20 tanneries. Although most leather is exported, local processing (in the form of shoe manufacturing) is expanding. The government, with help from the UN Industrial Development Organisation, plans to invest US$7m in new shoe factories over the next five years. Ethiopia produces some of the world!s finest leather (from the highland cabretta sheep), although most output is of much poorer quality. As with other sectors, the government is seeking foreign expertise and investment, and in mid-2005 handed management of the largest state tannery, Ethiopia Tannery, to a British firm, Pittards, a long-term buyer of Ethiopian leather, for a five-year period.

Ethiopia!s garment sector has grown rapidly from small beginnings, spurred by duty-free access to US markets under the terms of the African Growth and Opportunity Act (AGOA), passed in 2001. Garment sales under AGOA rose from US$1.8m in 2003 to US$3.5m in 2005. Garment exports to the EU are of a similar amount. The government is seeking private and foreign investment to boost activity in the sector, and is also looking for buyers for state-owned garment factories, with mixed results. Better linkages between the textile and cotton sectors are also required, according to an International Labour Organisation study in 2005.

Fifteen years after the Ethiopian People!s Revolutionary Democratic Front came to power, the private sector is dominated by two interlocking conglomerates: one set of companies is associated with an Ethiopian-Saudi entrepreneur, Mr Moudi, and the other with members of the ruling party or regional government bodies. The predominance of party-owned companies in key sectors is bitterly resented by independent private entrepreneurs. The World Bank notes that party-owned enterprises enjoy preferential access to contracts, physical infrastructure and administrative services. In order to "level the playing field", the Bank has worked with the government devising new competition policies.

Leather and textiles

Private industry is dominated by leading politicians

38 Ethiopia


Construction

The construction sector has seen rapid growth since 1991, including large state-driven projects and smaller private ones. Hundreds of commercial buildings have been constructed throughout Addis Ababa, and in provincial centres such as Dire Dawa, Mekelle and Bahir Dar. Private firms with close links to the ruling party (and the Saudi-owned conglomerate, MIDROC) have been particularly successful in winning contracts, as have Chinese outfits, leading to complaints by some European competitors of unfair competition"although the govern-ment denies that non-commercial considerations apply. A Chinese firm, Sinohydro, has been particularly prominent, winning the US$226m contract for the Tekeze dam in 2002, in a joint venture with a local construction firm, Sur, which has links to the ruling elite. In 2004, Sinohydro formed a US$100m joint venture with the Ministry of Defence-owned Lalibela Engineering, to carry out construction activities throughout the country. Chinese firms are also involved in the construction of the Addis Ababa ring road, and have won contracts in housing, water supply and telecoms. An Italian firm, Salini, is a key player in dam construction, carrying out works funded by the Italian government.

The building boom"including road construction, hydroelectric dams and housing"put pressure on cement supplies in 2006, leading to shortages and higher prices. Current production of 1.67m t/y from three existing plants"Mugar (900,000 t/y), Mesobo (700,000 t/y) and Dire Dawa (72,000 t/y)"is not enough to satisfy demand, which is estimated at 2.4m t/y. Imports will fill the gap in the short-term, pending the development of new capacity. Several projects are in the pipeline.

Financial services

The regime has approached financial liberalisation extremely cautiously. The sector was nationalised following the 1974 revolution, giving the Commercial Bank of Ethiopia (CBE) a virtual monopoly on retail banking. Local private-sector banks have been allowed to operate since the mid-1990s, but foreign banks remain barred. The government has resisted IMF pressure to open up the sector, believing that local institutions are not yet strong enough to compete. The National Bank of Ethiopia (NBE; the central bank) was established in 1964. Since 1991 the NBE has held Treasury-bill auctions and has overseen the gradual liberalisation of foreign-exchange markets. Moves to legalise market-determined foreign-exchange trading in private- and state-sector financial institutions began in 1997. Regular foreign-exchange auctions were replaced by an interbank market in October 2001.

The CBE remains the dominant market player, but faced financial meltdown a few years ago as its level of non-performing loans (NPLs) passed the 50% mark, because of unregulated lending to state-owned companies. Restructuring of the CBE was a key aspect of the IMF-backed reform programme in 2001-04. An independent audit was carried out in 2003 and a private management contract was awarded to the UK!s Royal Bank of Scotland for an initial two-year period. This was later extended by six months to February 2006. Other measures

A building boom

A nascent private financial sector

The CBE dominates commercial banking

Ethiopia 39


adopted included a timed programme to cut the share of NPLs to 20% of total loans, a rise in the capital-adequacy ratio, the establishment of an audit committee and the transfer of lending authority from the bank!s board to its management. The CBE!s gross profits rose to Birr1.2bn (US$133m), in 2006/07"an all-time high, according to the firm!s latest accounts.

Eight local private banks have been established since liberalisation in the mid-1990s: Dashen, Awash, Abyssinia, Wegagen, NIB, United, Lion, and Access. They have taken an increasing share of business and accounted for about 30% of outstanding credit in 2006/07, up from 10% in 1999/2000, according to the NBE. Most of Ethiopia!s private banks recorded significant profit rises in the 2006/07 financial year (ending July 7th), reflecting the booming economy. Dashen Bank, the largest private bank, reported a 41% rise in net profits, to Birr188m (US$21m), in 2006/07, compared with the previous year, which is a record for a private bank in Ethiopia. Dashen has been Ethiopia!s "Bank of the Year" for the past five years, according to a UK-based monthly, The Banker. Other banks that recently reported sharply higher profits were Wegagen (up by 57%, to Birr111m), NIB (up by 33%, to Birr76m) and United (up by 46%, to Birr48m). In all cases the higher profits were derived from significant increases in deposit mobilisation and lending. Most also reported a decline in NPLs as a proportion of total loans (United was best, with a 3% ratio, whereas Dashen recorded a 6% ratio) although this mainly reflects the rise in overall lending, not an absolute fall in bad debts. The environment for private banks became more challenging in 2007 following the introduction of new rules governing boards of directors and the imposition of stricter reserve requirements.

A formal stockmarket has not been legislated for, although informal equity markets, based on private share placements, existed before the 1974 revolution, and have become commonplace. However, the government launched a new Ethiopian Commodity Exchange (ECX) in January 2008, which when fully operational will feature a central trading pit in Addis Ababa, warehouses in several locations and electronic boards throughout the country to transmit market information to the local level. The ECX will initially start trading in four commodities: maize, wheat, sesame and beans"to be followed by teff and coffee. Trading will initially be restricted to physical goods in warehouses, but trading in futures contracts is also envisaged when the market becomes more sophisticated. There are hopes that the ECX may also evolve into Ethiopia!s first stockmarket.

Other services

Ethiopia has enormous tourism potential, based on its wealth of historical and natural sites. Visitor numbers jumped by 23.5% in 2005, to 227,000, and tourism earnings climbed by 18%, to US$134.5m, according to the Ethiopia Tourism Commission. The rate of increase is surprising in view of the widespread unrest that took place after the disputed election in May 2005 (which led to a high number of cancellations, according to reports at the time), but reflects Ethiopia!s strong attractions, good air links and the country!s relative stability compared

No official stockmarket yet

Private banks build market share and profits

Ethiopia attracts rising numbers of visitors

40 Ethiopia


with the last three decades of the 20th century. It is likely that business and conference traffic to Addis Ababa accounts for the majority of arrivals"but the northern tourist route, taking in the famous rock-hewn Ethiopian Orthodox churches in Lalibela, continues to attract a rising number of visitors (18,000 in 2005). Ethiopia gained a new tourist attraction in 2005 with the return from Italy of the ancient Axum obelisk that had been taken by fascist troops in the 1930s.

Hotel construction, especially in the capital, is gathering pace. For many years the Addis Sheraton and Addis Hilton were the only two hotels offering international standard service. However, a joint venture between the Kuwaiti Al Kharafi construction group (60%) and French hotel group, Accor (40%), plans two hotels, a four-star Novotel and a three-star Ibis, in Addis Ababa!s Meskel Square: construction started in early 2007 after planning delays. The Strandwood Hotel Group of Ireland and local partners plan a new, four-star hotel in the capital"the Emerald Addis Hotel"which is due to open in 2008. Ethiopia has high hopes for tourism, and aims to raise visitor numbers to 500,000 by 2010, and to become one of Sub-Saharan Africa!s top-ten destinations by 2020. However, the sector remains constrained by a deficit in both the quantity and the quality of hotels and other tourism infrastructure and services, especially outside the capital. Regional instability along Ethiopia!s borders also remains a deterrent.

Landlocked Ethiopia relies on Djibouti port for about 98% of its international trade, although such heavy dependence leaves it vulnerable to factors beyond its control. Moreover, the two countries remain in dispute over several issues, including Ethiopia!s request for "through-bill of landing", to give cargo more straightforward and quicker passage to dry inland ports. Djibouti had previously promised to implement the scheme, but has delayed doing so because of pressure from its own traders, who fear being excluded from their profitable middle-man role. To try to reduce reliance on Djibouti, Ethiopia reached agreement with neighbouring Somaliland in 2005 to increase the use of Berbera port. Somaliland is the relatively peaceful northern part of Somalia, which has declared de facto independence, although it has not recognised by the international community. However, Ethiopia and Somaliland legalised bilateral trade in August 2003 and established customs posts. Berbera will be used for both goods and fuel"the port has an oil terminal"although the quantities are likely to remain small in the short term, pending new investments at the port and in the limited road network linking Somaliland with eastern Ethiopia.

Djibouti port main gateway into Ethiopia

Ethiopia 41


The external sector

Trade in goods

Ethiopia depends heavily on coffee, its main export, but earnings are vulnerable to shifts in world prices. Coffee receipts crashed from a peak of US$420m (70% of total export earnings) in fiscal year 1997/98 (July 8th-July 7th) to US$165m in 2002/03 (34% of total earnings). However, income recovered strongly to US$335m in 2004/05, and US$354m in 2005/06 (35% of total earnings), because of the rebound in world prices and higher production (see Economic sectors: Agriculture). Coffee may never regain its former prominence, however, as a result of rising exports of other goods. Oilseeds have emerged as the second most valuable export, because of high sales of sesame to China, with earnings from the sale of these up from US$125m in 2004/05 to US$211m in 2005/06. Khat (a mild stimulant known as Chat in Ethiopia, sold mainly to Djibouti and Somalia), is third in the earnings league, although sales edged down from US$100m in 2004/05 to US$89m in 2005/06. Other key exports include leather and leather products, gold, pulses, and live animals and meat. Exports of horticultural products (especially flowers) are growing rapidly from a small base, with sales rising from US$22.8m in 2004/05 to US$35.6m in 2005/06. Total exports have grown rapidly in recent years, reaching US$847m in 2004/05 and an estimated US$1bn in 2005/06, according to provisional data from the National Bank of Ethiopia (the central bank), spurred by rising coffee prices and increased sales of other commodities.

Foreign trade 2005/06a (% of total based on Birr values; fiscal year ending Jul 7th)

Exports fob Coffee 35.0Oilseeds 21.1Khat 8.9Leather & leather products 7.5Gold 6.5Others 21.0Imports cif Machinery and transport equipment 33.7Manufactures 18.9Fuel 14.7Chemicals 10.0Others 22.6

a Official estimates.

Source: National Bank of Ethiopia, Ministry of Finance and Economic Development.

Ethiopia!s import needs are vast and have risen rapidly"from US$1.7bn in 2001/02 to US$3.6bn in 2004/05, and US$4.6bn in 2005/06. The surge in imports reflects several factors, including higher purchases of capital equipment (for donor-backed projects and for new aircraft by Ethiopia Airlines), the rapid rise in world oil prices and an overall increase in economic activity (as indicated by faster GDP growth). As a result of export and import trends, Ethiopia has a large structural deficit on its merchandise trade account. This

Coffee remains Ethiopia's top export earner

42 Ethiopia


rose from US$1.2bn in 2001/02 to US$2.8bn in 2004/05 and US$3.6bn in 2005/06.

Developed countries have traditionally dominated the market for Ethiopian goods, mainly because of demand for coffee. Germany has traditionally been Ethiopia!s main market, but fell to second place behind China for the first time in 2006, as oilseed exports to China increased sharply: Germany accounted for 9.4% of exports and China 11.4%. Japan was third with 8.1%. Saudi Arabia remains Ethiopia!s most important supplier, because of petroleum sales, and accounted for 16% of Ethiopian imports in 2006. China was second on 10.1% and India third on 7%.

Invisibles and the current account

Ethiopia generates a healthy surplus on the invisibles account, although this stems almost entirely from high levels of current transfers, both from donors and the Ethiopian diaspora. The country normally runs a small surplus on trade in non-factor services (because of inflows from Ethiopia Airlines, Ethiopia Shipping Lines and tourism), amounting to US$3m in 2006, but the account slid to a US$182m deficit in 2005 because of higher costs associated with booming import transactions. The income account posted a surplus of US$18m for the first time since 1983 in 2006, because of debt relief. According to the IMF!s International Financial Statistics (IFS) the current transfers surplus fell slightly from US$1.4bn in 2005 to US$1.2bn in 2006. However, the IMF!s latest Statistical Appendix on the country shows that the current transfers surplus rose from US$1.7bn in 2004/05 to US$2bn in 2005/06. The cause of the differences are unclear, but it appears that the level of private transfers (mainly remittances from the diaspora) have been undervalued in the IFS. However, the surplus on the invisibles account is not sufficient to offset the trade gap, leaving Ethiopia with a persistent and growing current-account deficit. The shortfall widened sharply from US$136m in 2003, to US$668m in 2004 and a massive US$1.57bn in 2005 (13.8% of GDP). This trend continued in line with the rising trade deficit in 2006 with the current account deficit reaching US$1.8bn, although it fell as a percentage of GD to 13.4%, owing to strong economic growth.

Current account, 2006 (US$ m)

Merchandise trade balance -3,081Services balance 3

Income balance 18Private & official transfers balance 1,274

Current-account balance -1,786

Source: IMF, International Financial Statistics.

Capital flows and foreign debt

The latest World Investment Report from the UN Conference on Trade and Development (UNCTAD) shows that foreign direct investment (FDI) rose sharply in 2006, to US$364m"after dipping in 2005, partly because of election-

Germany and Japan are major export markets

Current transfers support invisibles surplus

FDI registers solid growth in 2006

Ethiopia 43


related unrest"although it failed to match the levels recorded in 2003-04. Ethiopia continues to perform on a par with Tanzania and Uganda, and far better than Kenya, where FDI remains subdued for a variety of reasons (including perceived higher corruption levels). The UNCTAD figures may understate Ethiopia!s FDI: the IFS reports inflows of US$545m in 2006. (The Economist Intelligence Unit uses IMF figures in its forecasts.)

Foreign direct investment into Sub-Saharan Africa (US$ m)

Stock 2003 2004 2005 2006 2006Tanzania 308 331 448 377 6,109

Ethiopia 465 545 221 364 3,133Uganda 202 222 257 307 2,362Kenya 82 46 21 51 1,164

FDI into Sub-Saharan Africa 13,301 11,402 16,120 12,221 199,332

Source: UN Conference on Trade and Development, World Investment Report 2007.

Ethiopia has been particularly successful in attracting FDI from non-traditional sources (including China, India, Turkey, Iran and Slovakia), and the country!s single largest investor is Mohammed al-Moudi (a Saudi Arabian national with an Ethiopian mother), who has extensive interests in many sectors (such as cement, gold mining and manufacturing), mainly through his MIDROC group of companies. Significant FDI from a variety of sources is also being channelled into the booming floriculture sector and, increasingly, into tourism and industry.

The latest report from the Ethiopian Investment Agency (EIA), in October 2007, shows a continued rise in foreign activity. Slightly more than half of the 173 projects approved in September were foreign-backed (including joint ventures), from 30 different countries, led by China (18 projects), the US (17) and the UK (10). Notably, investment from the US and the UK is being undertaken mainly by Ethiopian expatriates: the government has been trying to encourage inflows from the diaspora for some time and now seems to be making headway (helped, no doubt, by the relaxation in political tension following the release of imprisoned opposition leaders in July 2007). The latest approved projects are mainly in real-estate, construction, hotels and manufacturing, according to the EIA, although not all of them will go ahead"probably less than half, based on historical patterns.

A more liberal FDI regime

Ethiopia started to liberalise its investment code in the mid-1990s, including a partial opening of the telecommunications and energy sectors, but initial efforts were undermined by the 1998-2000 war with Eritrea. Liberalisation made a significant step forward in April 2003, with many restrictions on domestic and foreign investors being lifted, although the former benefited the most. All activities are now open to the domestic private sector, except three: the supply of electricity via the national grid; postal services (apart from couriers); and air transport using planes with more than 20 seats. Sectors newly opened to foreigners include air freight and the import of cooking gas, although several sectors remain closed, including banking and domestic wholesale and retail trade. Significantly, minimum

44 Ethiopia


investment by foreign firms was reduced from US$500,000 to US$100,000, or from US$300,000 to US$60,000 in the case of joint ventures. Minimum capital requirements were lifted entirely for investors exporting at least 75% of their output. The three-year tax holiday for agribusiness ventures that export at least 50% of their production was extended to five years.

The level of donor support climbed rapidly after the war with Eritrea ended in 2000 and Ethiopia adopted an anti-poverty growth plan in 2002. Donors pledged US$3.6bn over three years at their Consultative Group meeting in 2002 and most commitments were realised. Some experts call for a doubling of donor aid to Ethiopia, to more than US$2bn a year, in order to help the country realise its Millennium Development Goals (including a halving of poverty) by the target date of 2015, but Ethiopia may lack the capacity to absorb such a high level of funding, and the process would have to be carefully managed to prevent possible macroeconomic distortions. Post-election unrest and tension also makes an aid doubling less likely, although donors have not cut back their support in response to political developments, but have rechannelled direct budgetary support from the federal to the local level.

Ethiopia!s total stock of external debt fell from a recent peak of US$7.2bn in 2003 to US$6.1bn in 2005 (of which the World Bank accounted for 53%), as debt relief gathered momentum under the heavily indebted poor countries (HIPC) initiative. Ethiopia was declared eligible for the programme in 2001 and reached completion point in April 2004. This led to the write-off by donors of debt worth US$1.3bn (in net present value terms). Ethiopia was also granted additional topping-up relief, taking the total amount forgiven to nearly US$2bn (in net present value terms). Bilateral debt relief took place with immediate effect, whereas multilateral relief was initially scheduled to be phased in over a 20-year period Following multilateral debt write-offs under the latest multilateral debt relief initiative (MDRI) launched by the G8 group of leading industrialised nations in mid-2005, Ethiopia!s total external debt fell to US$2.5bn at end-2006.

Foreign reserves and the exchange rate

Ethiopia!s official foreign-exchange reserves declined steadily in the late 1990s, to US$306m in 2000, owing mainly to the costs of buying arms and munitions to prosecute the war with Eritrea. The return to normality, coupled with high levels of donor support, pushed reserves to a high of nearly US$1.5bn at the end of 2004, equivalent to a healthy five months of goods and services imports. However, reserves weakened from mid-2005 onwards, finishing 2006 at US$833m, because of rising imports (as a result of growth-driven demand and high oil prices) and reduced donor inflows following election-related unrest. Import cover is currently below the generally accepted standard of three months. However, strong export performance and high donor inflows are estimated to have increased foreign exchange reserves to US$1.2bn by end-2007.

Ethiopia established an interbank foreign-exchange market in October 2001, replacing part-managed foreign-exchange auctions, as part of the move to a

HIPC debt reduction is secured

Donors support Ethiopian development

Gradual depreciation of the birr

Foreign-exchange reserves are under pressure

Ethiopia 45


market-determined exchange rate. However, some restrictions on the move-ment of money persist. The foreign-exchange market remains dominated by the Commercial Bank of Ethiopia, although private banks are handling a rising share of remittances. Ethiopian policy favours a cautious depreciation of the birr, which gently subsided against the dollar, by 0.4% a year, from Birr8.57:US$1 in 2002 to Birr8.7:US$1 in 2006. Downward pressure continued in 2007 with the currency averaging Birr8.95:US$1, although its steady slide was seen a positive move by the central bank as it reduced pent-up downward pressure on the overvalued currency.

46 Ethiopia


Regional overview

Membership of organisations

The African Union (AU) is the successor to the Organisation of African Unity (OAU). It is currently chaired by the Tanzanian president, Jakaya Kikwete, although the day-to-day affairs are managed by the AU commission, with the former foreign minister of Gabon, Jean Ping, the current chairperson. The AU is modelled on the EU and has ambitious plans for a parliament, a central bank, a single currency, a court of justice and an investment bank. The AU also aims to have common defence, foreign and communications policies, based loosely on those of the EU. However, progress towards these aims has been slow and there is division over how they should be reached, this division having remained broadly unchanged since the formation of the OAU in 1963. A number of countries, primarily in northern and western Africa, with Libya being a prominent proponent, favour a rapid transformation into something like a United States of Africa with a common government and army. Opposed to this are numerous countries, primarily in the south of the continent, that would prefer a gradual strengthening of existing structures. This top-down versus bottom-up debate shows no sign of being resolved. Nevertheless, even if the overall goals are not fulfilled, the organisation fills the need for a forum for discussing the continent!s problems, and the idea of pan-African unity exerts a strong hold over member countries.

One of the main problems facing the AU is the cost of many of the proposed new institutions and policy co-ordination mechanisms. Few member states have kept to their funding commitments, and as such the AU remains heavily dependent on donor support, with expansion plans remaining unimplemented. There are further concerns that the AU, like its predecessor, will be undermined by a lack of real commitment to its initiatives among the 53 member states, many of which suffer from weak governance. This problem is further compounded by the fact that many member states are unlikely to give up the sovereignty required to make several of the proposed initiatives"such as a single currency or a court of justice"operate effectively. On a more positive note, the AU has shown a much greater willingness to try to promote democratic practices. AU pressure helped to force elections in Togo after the death of the country!s president and the seizure of power by his son in 2005, although the conduct of the elections was far from perfect. Similarly, AU pressure helped to bring about elections in Mauritania in 2007 after an earlier coup. However, other interventions have been less successful, particularly in Côte d!Ivoire, where little progress has been made, and the AU has avoided any wider involvement in more contentious political crises, such as that in Zimbabwe.

In 2003 the AU established a Peace and Security Council (PSC) modelled on the UN Security Council. It was envisaged that the PSC would sanction military intervention in member states in cases of genocide, unconstitutional changes of government and gross human rights abuse. The first real test of the PSC in intervening in a conflict arose in 2004. As a result of this, 7,000 troops are now

African Union (AU)

Ethiopia 47


in Sudan, trying to keep the peace in the Darfur region. However, they are chronically under-equipped and are overwhelmed by the sheer size of the mission. The AU force was merged with a UN mission at the end of 2007 but continues to face enormous challenges. In 2007 the AU also pledged around 8,000 troops to provide security and peacekeeping in Somalia. However, the troops have been slow to arrive, initially with Uganda the only country to live up to its promise to send around 1,500 troops. Burundi has subsequently sent around 850 troops but the AU force remains undermanned.

Based in Lusaka, Zambia, the Common Market for Eastern and Southern Africa (Comesa) is the successor organisation to the regional Preferential Trading Area (PTA), and came into force on December 8th 1994 with 12 members. Comesa now has 20 members: Angola, Burundi, Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. Comesa!s main focus is on the formation of a large economic and trading unit that is capable of overcoming some of the barriers that are faced by individual states. This aim is to be achieved through monetary union with a single currency and a common central bank; the creation of a Free Trade Area (FTA) on October 31st 2000 was to be a major step towards achieving these. By the end of 2006 13 of the 20 members had agreed to participate (Burundi, Comoros, Djibouti, Egypt, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Sudan, Zambia and Zimbabwe). The 13 FTA members have removed all barriers to trade between themselves, granted trade preferences to the Comesa members that are not part of the FTA and retain tariffs on imports from outside Comesa. The proposed move from the FTA to a customs union with a common tax tariff structure has now been set for the end of 2008, but further delays are likely. The envisaged tax structure is a zero rate for capital goods and raw materials, 10% for intermediate products and 25% for finished goods. The target of full monetary union by 2025 remains, but seems improbable.

Much of the intra-Comesa trade has been concentrated within a few of its members. Reasons for the low level of intra-Comesa trade include a lack of political commitment and political stability in member countries and weak balance-of-payments and foreign-reserves positions. In some cases there are hardly any official trade links between member states. A further constraint has been the strict and cumbersome rules of origin, which are open to conflicting interpretations, and there have been some instances of member countries refusing to honour the relevant certificate of origin presented with Comesa imports. In addition to these impediments, progress towards free trade is hampered by political tensions between member states. Moreover, attempts at promoting crossborder investment and monetary harmonisation have been superseded by initiatives introduced by the East African Community and the Southern African Development Community.

The Intergovernmental Authority on Drought and Development (IGADD), the brainchild of the then president of Djibouti, Hassan Gouled Aptidon, was established in January 1986 with six East African members: Djibouti (where the

Common Market for Eastern and Southern Africa (Comesa)

Intergovernmental Authority on Development (IGAD)

48 Ethiopia


secretariat is based), Ethiopia, Kenya, Somalia, Sudan and Uganda. Its aim was to co-ordinate and channel funding into agricultural development and to alleviate drought and desertification. Progress on development and environmental projects was slow, but the organisation made headway as a forum for regional politics. However, regional events in 1991 undermined IGADD: the presidents of Ethiopia and Somalia were overthrown, Eritrea gained independence and the self-proclaimed Somaliland Republic emerged.

Although IGADD gained a seventh member, Eritrea, in September 1993, it achieved little success in its attempts to help to resolve internal conflicts in Sudan and Somalia. Thus, in March 1996, at a summit in Nairobi, IGADD renamed itself the Intergovernmental Authority on Development (IGAD) and adopted a new charter proclaiming conflict resolution to be its priority. However, with the outbreak of war between Ethiopia and Eritrea in 1998 and civil conflict in Sudan and Somalia, the organisation was severely handicapped in the late 1990s.

After a period of some improvement in the late 1990s and early 2000s, IGAD!s fortunes worsened during 2007, as fighting increased in Somalia and Eritrea suspended its membership over Ethiopia!s involvement in Somalia. In addition, political turmoil in Kenya (scheduled to take over the leadership of IGAD in March 2008), which started in January 2008, is likely to distract Kenya from its IGAD role during the year.

Ethiopia 49


Appendices

Sources of information

Although the quality and scope of Ethiopia!s economic statistics have improved since 1991, continuity, coverage and timeliness all leave much to be desired. The primary sources of public economic data are the quarterly and annual reports of the National Bank of Ethiopia (NBE, the central bank). More up-to-date individual series are published, notably the Addis Ababa retail price index and other series compiled by the Central Statistical Agency (CSA). The Economic Policy Advisory Unit of the prime minister!s office has issued periodic economic reviews, although these have a restricted circulation. The Investment Office of Ethiopia publishes data on private investment.

Growing interest in Ethiopia from foreign research bodies, universities, bilateral aid agencies and non-governmental organisations is gradually expanding the data available on rural and urban economic conditions, but this information remains largely the preserve of specialists. Addis Ababa University!s Institute of Development Research and Economics also produces economic research, often in conjunction with foreign donors. The lack of regional data has been an obstacle to policy formulation by the regional authorities.

Official GDP statistics provide only a crude indication of economic activity in Ethiopia. Only since 1991 have more extensive rural economic surveys led to a better understanding of both rural grain markets and non-market activity. In urban centres the bulk of economic activity is in the informal sector, with most people engaged in petty trading or artisanal production in firms with fewer than ten employees.

Timely international data are increasingly being made available by the World Bank and the IMF electronically. The Ethiopian government is also producing regular data. The IMF and the World Bank produce internal documents that form the basis for lending decisions by the institutions! boards of directors.

The main international sources are:

IMF, Direction of Trade Statistics (annual)

IMF, International Financial Statistics (monthly)

IMF, HIPC Decision Point Document for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative, October 2001

IMF, Ethiopia: Statistical Appendix, May 2006

IMF, The Federal Democratic Republic of Ethiopia: 2004 Article IV Consultation and Sixth Review Under the Poverty Reduction and Growth Facility Arrangement�Staff Report; Staff Statement; and Public Information Notice and Press release on the Executive Board Discussion, May 2006.

IMF, The Federal Democratic Republic of Ethiopia: Joint staff advisory note of poverty reduction strategy paper 2003/04, January 2006

National statistical sources

International statistical sources

50 Ethiopia


OECD, Geographical Distribution of Financial Flows to Aid Recipients

World Bank, Global Development Finance (annual)

Addis Tribune (English-language independent weekly), Addis Ababa

Addis Zemen (Amharic official daily), Addis Ababa

Ethiopia Herald (English-language official daily), Addis Ababa

Negarit Gazeta (Amharic, official gazette), Addis Ababa

Martin R Doornboos et al (eds), Beyond Conflict in the Horn, James Currey, 1992

Mekonen Tadesse and Abdulhamid Bedri Kello (eds), The Ethiopian Economy: Problems of Adjustment, Addis Ababa, 1994

Getachew Yared and Abdulhamid Bedri Kello (eds), The Ethiopian Economy: Problems and Prospects of Private-Sector Development, Addis Ababa, 1994

Addis Tribune: www.addistribune.ethiopiaonline.net"local and regional news articles from the local press

UN Mission in Ethiopia and Eritrea (UNMEE) site: www.un.org/Depts/dpko/ unmee/body_unmee.htm"UNMEE operations and mandates

Ethiopia news site: www.ethiopiadaily.com"contains news articles from local sources

National Bank of Ethiopia: www.nbe.gov.et"reports and statistical information on the Ethiopian economy

Ethiopian Privatisation Agency: www.telecom.net.et/~epa"privatisation statistics and opportunities in Ethiopia

Ethiopian Investment Authority: www.ethioinvestment.org"investment statis-tics and past and current investment opportunities in Ethiopia

Walta Information Centre: www.waltainfo.com"a pro-government news and information service with a network throughout Ethiopia that provides daily news in Amharic and English

Capital: www.capitalethiopia.com"a pro-business and private sector weekly newspaper that covers both microeconomic and macroeconomic issues

Reference tables Population (m; mid-year estimates)

2002 2003 2004 2005 2006Totala 73.1 75.0 77.0 78.9 81.0 % change 2.6 2.6 2.7 2.5 2.7Totalb 67.3 68.6 70.0 71.3 72.7 % change 2.3 1.9 2.0 1.9 2.0

a IMF data. b World Bank Data.

Sources: IMF, International Financial Statistics; World Bank.

Select bibliography and websites

Ethiopia 51


Government financesa (Birr bn unless otherwise indicated; fiscal years ending Jul 7th)

2001/02 2002/03 2003/04 2004/05 2005/06Tax revenue 7.9 8.2 10.9 12.4 14.1 Direct taxes 3.1 3.0 3.4 3.9 4.5 Domestic indirect taxes 1.5 1.7 2.2 2.6 3.1 Import duties & taxes 3.3 3.6 5.3 5.7 6.6Total revenue incl others 10.4 11.1 13.9 15.6 19.5 % of GDP 16.6 16.4 16.6 15.8 16.9Total revenue & grants 12.8 15.7 17.9 20.1 23.2Current expenditure 10.6 13.5 11.9 13.2 15.2 Defence 2.6 2.3 2.5 2.9 3.0 Education 1.8 2.3 2.5 2.9 3.9 Health 0.5 0.5 0.5 0.7 0.8Capital expenditure 6.1 6.3 8.2 11.3 14.0Total expenditure & net lending 16.7 19.8 20.5 24.8 29.3 % of GDP 26.6 29.1 25.1 25.2 25.4Overall balance (incl grants)a -4.8 -5.5 -2.6 -4.6 -6.0 % of GDP -8.4 -8.1 -3.2 -4.7 -5.2

a Cash basis�sums to do not tally in source.

Source: IMF, Statistical Appendix.

Money supply (Birr bn unless otherwise indicated; end-period)

2002 2003 2004 2005 2006

Money (M1) incl others 16.6 18.6 22.3 26.0 32.1

% change, year on year 19.4 12.3 20.0 16.4 23.4

Quasi-money 13.0 14.6 17.3 21.0 24.3

Money (M2) 29.5 33.2 39.6 47.0 56.4

% change, year on year 15.9 12.4 19.3 18.6 20.0


Interest rates (%; period averages)

2002 2003 2004 2005 2006

Lending interest rate (%) 8.7 7.0 7.0 7.0 7.0

Deposit interest rate (%) 3.8 3.4 3.4 3.5 3.6


52 Ethiopia


Gross domestic product at factor costa (Birr m unless otherwise indicated; fiscal years ending Jul 7th)

2001/02 2002/03 2003/04 2004/05 2005/06Agriculture & allied activities 30,764 27,258 31,979 36,250 40,307Industry 8,737 9,003 9,900 10,702 11,496 Mining & quarrying 332 346 368 397 430 Manufacturing 3,604 3,633 3,870 4,180 4,518 Electricity & water 1,512 1,577 1,689 1,825 2,022 Construction 3,288 3,447 3,974 4,301 4,526Services 25,948 27,122 29,094 31,536 34,438 Distribution services 12,713 13,083 14,154 15,237 16,361 Other services 13,235 14,039 14,939 16,299 18,077 Banking, insurance & property 1,013 1,321 1,542 1,748 2,255 Public administration & defence 3,694 3,827 3,966 4,411 4,985 Education 1,695 1,891 2,103 2,360 2,647 Health 718 688 741 896 996 Domestic & other 1,239 1,248 1,317 1,399 1,484

Total GDP at constant 1999/00 pricesa 64,990 62,845 70,345 77,731 85,184

% change, year-on-year 1.0 -3.3 11.9 10.5 9.6

a Totals do not sum in source.


Gross domestic product by expenditure (Birr m; current prices; fiscal years ending July 7th)

2001/02 2002/03 2003/04 2004/05 2005/06Consumption 59,454 66,435 77,326 95,857 109,604 Private consumption 49,061 53,309 65,313 82,312 95,306 Government consumption 10,393 13,125 12,013 13,545 14,299Investment 14,247 14,891 17,462 20,165 22,833 Private 7,426 8,431 10,107 11,200 13,163 Public 6,820 6,460 7,354 8,965 9,670Gross domestic expenditure 73,701 81,326 94,788 116,023 132,437Exports of goods & services 8,027 9,778 12,929 15,823 18,205

Imports of goods & services 17,709 20,137 27,399 37,776 46,275GDP at market prices 63,462 68,898 81,755 98,398 115,590


Prices and earnings (% change, year on year)

2003 2004 2005 2006 2007

Consumer prices (av) 17.8 3.3 11.6 13.6 17.2


Ethiopia 53


Coffee production and exports, domestic figuresa ('000 tonnes unless otherwise indicated; fiscal years ending Jul 7th)

2001/02 2002/03 2003/04 2004/05 2005/06Production 245 250 260 300 300Domestic consumption 110 110 110 110 110

Exportsb 116 137 142 157 162Export earnings (US$ m) 163 165 223 335 354

a Does not include movements in stocks (smuggling etc). b As recorded at port.

Sources: Ethiopian Coffee and Tea Authority; IMF.

Exportsa (US$ m; fiscal years ending Jul 7th)

2001/02 2002/03 2003/04 2004/05 2005/06Coffee 163.0 165.0 224.0 335.0 354.0Pulses 32.9 19.9 26.7 35.4 37.0

Oilseeds 32.6 46.5 83.6 125.0 211.4Sugar & molasses 10.0 17.7 10.3 n/a n/a

Leather & leather products 55.5 52.0 44.3 67.6 75.0Live animals 0.8 0.5 2.1 12.8 27.6

Meat (canned & frozen) 1.1 2.4 7.7 14.6 18.5Fruits & vegetables 9.4 9.6 7.1 16.1 13.2Chat 49.0 57.5 88.0 100.2 89.1

Gold 35.0 42.1 48.7 59.4 64.7Othersa 62.9 69.4 58.3 80.9 109.6

Total 452.4 482.7 600.4 847.2 1000.3

a Includes textiles, essence oils and spices.

Sources: Ministry of Finance and Economic Development; IMF, Statistical Appendix.

Imports cifa (US$ m; fiscal years ending Jul 7th)

2001/02 2002/03 2003/04 2004/05 2005/06

Raw materials 29.7 21.8 26.0 49.1 77.1

Semi-finished goods 288.3 274.6 435.3 664.7 821.0

Fuel 267.7 287.7 310.6 668.7 860.2

Capital goods 480.1 549.5 876.7 1,199.4 1,452.3

Transport 139.9 174.0 298.4 371.6 429.3

Agricultural 7.0 5.9 10.8 24.4 38.1

Industrial 333.3 369.6 567.6 803.4 984.5

Consumer goods 587.1 654.3 895.8 986.1 1,281.2

Durables 153.1 183.6 294.7 337.3 415.0

Non-durables 434.0 470.8 601.1 648.8 866.1

Miscellaneous goodsb 42.8 68.4 43.1 65.3 98.4

Total 1,695.7 1,856.4 2,586.9 3,633.3 4,592.2

a Customs basis. b Includes military equipment.

Sources: IMF, Statistical Appendix.

54 Ethiopia


Main trading partners (% of total)

2002 2003 2004 2005 2006

Exports fob to: China 1.5 1.0 2.3 9.1 11.4

Germany 10.3 11.6 11.4 13.4 9.4

Japan 7.8 8.9 9.3 7.3 8.1

US 3.4 4.6 5.4 4.8 7.4

Imports cif from: Saudi Arabia 6.8 12.0 12.3 14.5 16.0

China 8.9 10.8 9.4 12.5 10.1

India 5.8 6.7 4.9 6.6 7.2

Italy 8.7 7.7 4.1 4.5 4.5

Source: IMF, Direction of Trade Statistics.

Balance of payments, IMF series (US$ m)

2002 2003 2004 2005 2006

Goods: exports fob 480 496 678 917 1,025

Goods: imports fob -1,455 -1,895 -2,769 -3,701 -4,106

Trade balance -975 -1,399 -2,090 -2,784 -3,081

Services: credit 586 762 1,006 1,012 1,174

Services: debit -580 -709 -958 -1,194 -1,171

Income: credit 14.3 18.8 31.7 43.4 55.6

Income: debit -36.9 -43.0 -60.3 -47.9 -37.9

Current transfers: credit 876.5 1,266.4 1,420.6 1,426.1 1,297.2

Current transfers: debit -20.7 -33.2 -16.8 -23.9 -23.5

Current-account balance -136.6 -136.4 -667.8 -1,567.8 -1,785.9

Other investment assets -4.2 68.9 -261.6 302.2 73.3

Other investment liabilities -78.6 178.1 335.0 191.2 357.7

Financial balance -82.8 247.0 73.4 493.4 431.0

Net errors & omissions -915.2 -390.2 -354.1 486.2 1,161.2

Overall balance -1,134.4 -279.6 -948.8 -322.8 351.7

Financing (� indicates inflow) Movement of reserves -448.5 -73.6 -541.2 375.3 288.8

Use of IMF credit & loans 44.3 14.6 30.9 0.0 0.0


Ethiopia 55


External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end)

2002 2003 2004 2005 2006

Public medium- & long-term 6,319 7,031 6,332 5,899 2,212

Private medium- & long-term 0 0 0 0 0

Total medium- & long-term debt 6,319 7,031 6,332 5,899 2,212

Official creditors 5,239 5,214 5,466 6,225 6,825

Bilateral 2,500 2,473 2,367 2,357 2,432

Multilateral 2,738 2,741 3,099 3,868 4,392

Private creditors 123 113 96 94 207

Short-term debt 87 79 60 64 83

Interest arrears 62 65 48 46 41

Use of IMF credit 95 77 106 143 157

Total external debt 6,501 7,188 6,497 6,106 2,452

Principal repayments 98 84 120 54 52

Interest payments 57 53 63 37 45

Short-term debt 2 1 1 1 1

Total debt service 155 137 183 90 98

Ratios (%) Total external debt/GDP 90.2 92.4 83.7 82.6 30.9

Debt-service ratio, paida 15.7 13.0 18.1 8.1 7.4

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Foreign reserves (US$ m; end-period)

2002 2003 2004 2005 2006

Total reserves incl gold 882.0 955.6 1,496.8 1,121.5 832.7

Total international reserves excl gold 881.7 955.6 1,496.8 1,121.5 832.7

Gold, national valuation 0.3 0.0 0.0 0.0 0.0


Exchange rates (Birr per unit of currency; annual averages)

2003 2004 2005 2006 2007

US$ 8.60 8.64 8.22 8.70 8.95

£ 14.0 15.8 14.9 16.0 17.9

� 9.7 10.7 10.2 10.9 12.2

SR 2.29 2.30 2.19 2.32 2.39

Rmb 1.04 1.04 1.00 1.09 1.18

¥ 0.074 0.080 0.075 0.075 0.076


Editors: Christopher Eads (editor); Jorge Gallego (consulting editor) Editorial closing date: March 3rd 2008 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

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