By Meraf Leykun
19 June 2013
Over the past decade, Ethiopia has attained high economic growth, averaging 10.7 percent per year. In 2012, Ethiopia was the 12th fastest growing economy in the World. If the country continues its historically impressive growth performance, it could potentially reach middle income status by 2025, according to the latest Ethiopia Economic Update report. This, in turn, may require an adjustment in economic policy to phase in the private sector as an additional engine of growth.
“Ethiopia has been implementing a growth strategy, which emphasizes a strong expansion of public investment. So far, this has delivered positive results. However, the public investment rate of Ethiopia is the third highest in the world, while the private investment rate is the sixth lowest. In order to sustain high economic growth, the development of a strong and vibrant private sector is essential.” says Guang Zhe Chen, World Bank Country Director for Ethiopia.”
In addition, the report argues that Ethiopia needs to make progress on two interrelated and equally important fronts: enhancing domestic savings, and resolving the bottlenecks of the trade logistics system.
Ethiopia’s savings rate is at its lowest in 30 years declining from 10 percent of GDP in 1980s to 6 percent of GDP in the 2000s. This level of savings is much lower than expected given its stage of development. In order to increase savings, the report recommends offering savers higher interest rates, expanding access to both private and public financial institutions, and taking advantage of remittances from the diaspora, estimated at half a billion dollars in 2011.
“Increasing the domestic savings rate in Ethiopia is desirable given the substantial investment proposals embedded in the Growth and Transformation Plan (GTP) and the limits and risks associated with external sources of savings. Ensuring that savers get a good return on their investment is a key element in a strategy to achieve this.” says Lars Christian Moller, Lead Economist and Sector Leader for Ethiopia.
When it comes to efficient trade logistics, according to the report, Ethiopia’s ranking in the World Banks’ Trade Logistics Index has slipped from 104th in 2007 to 141st in 2012. It takes an average of 42 days to import a container of goods to Ethiopia compared to 31 days for Rwanda – another landlocked country. The report recommends: developing a national strategy for trade logistics, improving selectivity of inspections to reduce cost, transit time, and corruption, and providing warehouses with better technology as possible solutions to improve trade logistics.
“There is consensus that the trade logistics system in Ethiopia can improve considerably so that Ethiopia can reap the benefits of cheap and timely shipment of goods traded across borders. There is no panacea to achieving this, however, as this is a highly complex system with numerous actors and a plethora of interdependent factors.” says Michael Geiger, the Bank’s Country Economist for Ethiopia and one of the lead authors of the report.
The Economic Update is the 2nd report launched this fiscal year and is a key element of the World Banks’ programmatic knowledge services, prepared as part of its economic policy dialogue with the Government of Ethiopia to complement the substantial volume of concessionary lending services to the country. Such Economic Update reports for Ethiopia will be prepared every six to eight months along with other tailored knowledge products in close collaboration with the Ministry of Finance and Economic Development.
By Meraf Leykun