Ethiopia has witnessed rapid economic growth, with real gross domestic product (GDP) growth averaging 10.9 per cent between 2004 and 2014, which is lifting the country from being the second poorest in the world in 2000 to becoming a middle income country by 2025, if it continues its current growth trajectory, World Bank Report said.
The report launched November 23, 2015, noted that fueled by substantial public infrastructure investment and a conducive external environment, the country’s growth has been stable, rapid and it has managed to decrease poverty substantially from 44 per cent in 2000 to 30 per cent in 2011.
In the report launched at Hilton Addis under the title “Ethiopia’s Great Run: The Growth Acceleration and How to Pace It”, the bank pointed out the reasons behind the impressive growth and also puts forth policy suggestions on sustaining it.
The recent growth acceleration was part of a broader and very successful development experience, it indicated, adding that poverty declined substantially from 55.3 per cent in 2000 to 33.5 per cent in 2011, according to the international poverty line of 1.90 USD.
According to the report, Ethiopia’s growth was concentrated in services and agriculture on the supply side, and, private consumption and investment on the demand side.
While agriculture was the main economic sector at the beginning of the take-off, the services sector gradually took over and was complemented, in recent years, by a construction boom, it was stated.
Out of an average annual growth rate of 10.9 per cent in 2004-14, services contributed by 5.4 percentage points followed by agriculture 3.6 percentage points and industry with 1.7 percentage points.
Moreover, the private consumption contributed to most growth on the demand side with public investment becoming increasingly important.
The likelihood of continued high growth in Ethiopia is buoyed by five factors, including productivity-enhancing structural change, within-sector productivity gains including agriculture, technological catch-up, urbanization, and FDI.
“Ethiopia began to see accelerated economic progress in 1992 and it shifted to an even higher gear in 2004, pulling millions of people out of poverty and leading to improvements in other areas like improved life expectancy and reduced child and infant mortality,” said Lars Christian Moller, the World Bank Group’s lead economist for Ethiopia and the lead author of the report.
He added: “To continue the impressive run, Ethiopia needs to continue its reform efforts to further strengthen its growth foundations.”
The report has also included some key findings which have contributed hugely for the rapid economic growth of Ethiopia such as services, agriculture and public infrastructure investment.
The three policy recommendations that the report made to help Ethiopia sustain high growth include identifying sustainable ways of financing infrastructure, supporting private investment through credit markets, and, tapping into the growth potential of structural reforms.
The bank believes that private investments will have a key role in sustaining further growth – and in order to do so, they need to be supported through credit markets. According to six different survey instruments, access to credit is mentioned as one of the top three most binding constraints for the private sector and more binding than infrastructure concerns. Providing more credit for private companies would arguably help the Ethiopian economy. The government could institute two policy reforms: To continue the existing system but to direct more credit toward private firms compared to public infrastructure projects; and to gradually liberalize interest rates to better reflect the demand and supply for savings and credit.
It further indicates that alternative sources of financing infrastructure need to be identified. With Ethiopia having the third largest infrastructure deficit in Africa and infrastructure being one of the most important drivers of economic growth, Ethiopia needs new mechanisms to finance infrastructure as past financing options could have an impact on other areas most notably crowding out the private sector in the debt markets. Other financing mechanisms including raising tax revenues, increasing private sector involvement, and improving public investment management can be considered.
The third recommendation is about the need to tap into the growth potential of reforms. If Ethiopia can catch up with its peers in Sub-Saharan Africa in terms of financial modernization, its per capita GDP growth rate would increase by 1.9 per cent annually, the report pointed out. While Ethiopia has so far modernized its merchandise trade, the country could reap rewards by reforming the service sector. In doing so, it can benefit from the lessons of other countries and tailor reforms to its own circumstances, the bank said.
Moving forward, the report also proposes a series of indicators that would monitor the trade-offs that could occur while implementing the current growth strategy. This could provide early warnings to policy makers and help initiate reform efforts to sustain higher growth.
[www.ethpress.gov.et/herald]