Ethiopia is Africa's fastest-growing economy

Ethiopia has an image problem. For decades, mere mention of the country has conjured up images of famine and conflict.

But a new Ethiopia is emerging from troubled times and the latest International Monetary Fund (IMF) forecast says Ethiopia will be the fastest-growing economy in sub-Saharan Africa in 2018.

The IMF World Economic Outlook predicts 8.5% growth in 2018, far outstripping that of advanced economies.

The United States growth is expected to hit 2.9% in 2018, while Europe’s predicted growth is 2.4% and Japan’s is 1.2%.

Global growth is expected to tick up to 3.9% this year and next.

What’s driving growth?

Ethiopia’s rise has been largely driven by an increase in industrial activity, including investments in infrastructure and manufacturing.

Follow the Blue Nile for 500 km north from Addis Ababa and you’ll find Ethiopia’s standout infrastructure project. The Grand Renaissance Dam will be the largest dam on the African continent.

When complete, the dam will span 1,800 metres. Standing 155 metres high, it will house two power stations with a combined output of 15,000 GWh per year.

Ethiopia has also invested in a light rail system, the first of its kind in the region.

Foreign investments

Much of the investment in Ethiopia has come from overseas. According to the IMF, foreign direct investment growth was 27.6% in 2016/17, with investments going into new industrial parks and privatization inflows. Ethiopia has been selling its state-owned businesses to outside investors like China.

China has become not only Ethiopia’s biggest foreign investor but also its largest trading partner. Ethiopia has also encouraged foreign investment in its manufacturing industry, hoping to compete with India and China with its cheap labour costs. Fashion brands like H&M, Guess, J Crew, and Naturalizer have already established manufacturing centres there.

A recent research paper suggests Ethiopia can be the new China, because it has been improving its road and rail connections, and has good air connections. In addition, the report’s authors say that Ethiopia has a stable administration that sees manufacturing as a central part of its growth strategy.

But recent announcements by the new president, saying that the country is not ready for foreign investment in telecoms and banking, has disappointed businesses, who had hoped for a more open approach.

Drought and civil unrest

Ethiopia’s efforts to focus more on industry than agriculture have not been without problems.

Some of the reforms have led to civil unrest. For instance, opposition to an urban development plan for the capital Addis Ababa sparked public demonstrations against political restrictions, land grabs and human rights abuses.

Earlier this year, Prime Minister Hailemariam Desalegn announced his shock resignation, saying he hoped it would leave the government able to carry out reforms that would lead to sustainable peace and democracy.

Parts of the country have also been crippled by drought, which left millions needing help. In April 2017, the number of people in need of emergency food aid had increased to more than 7.7 million.

However, according to the IMF, government action reduced the impact of the drought on the economy.

“Government interventions to mitigate the social impact of the drought, in collaboration with development partners, were timely and effective, thus limiting its human cost,” they said.

Over the medium term, growth in Ethiopia is expected to remain around 8%, supported by sustained expansion in exports and investment.

Ethiopia’s image problem is slowly receding. With sustained economic growth at levels predicted by the IMF, the wider world will have to reappraise its view of a nation that’s blazing a trail for economic development on the African continent.