Bole Lemi (1)

Boom to Bust

The Ebbing Drift in the Industrial Sector

Ethiopia has undergone an economic transformation in recent years, driven by a comprehensive homegrown economic reform agenda launched in 2019. The plan prioritizes the development of various industries, including agriculture, construction, manufacturing, resources and energy, tourism, and food processing, to drive economic growth and reduce dependency on imports. However, despite the government’s efforts to revitalize the industry sector, recent data shows a significant decline in its contribution to the country’s economy over the past five years. EBR’s Bamlak Fikadu dives deep into Ethiopia’s recent industrial performances. 

Over the past five years, Ethiopia has been striving to transform its economy and has witnessed notable transformation. When Prime Minister Abiy Ahmed assumed office in April 2018, he brought a vision to propel Ethiopia’s economy through a comprehensive homegrown economic reform (HGER) agenda in 2019.

Accordingly, the Commission for Plan and Development produced a ten-year development plan. The key strategic pillars of this ten-year development plan are: to ensure quality growth, improve productivity and competitiveness, undertake institutional transformation, and ensure the private sector’s leadership in the economy.

This initiative explicitly focuses on revitalising various sectors, including mining, construction, manufacturing, etc. However, despite the efforts in the industry sector, its contribution to the country’s economy has experienced a significant drift over the past five years.

Contrary to the ten-year development plan, which projected the country’s economy to grow at 10.2Pct, it launched the industry sector to expand from 29Pct to 35.9Pct, and the service sector to increase its share of GDP from 39.5Pct to 42.1Pct. Within the industry sector, manufacturing was expected to grow from 6.9Pct to 17.2Pct, while the share of agriculture is expected to decline from 32.6Pct in 2019/20 to 22Pct in 2029/30. However, the performances have gone differently than domestic and global operating scenarios have shown dramatic changes.

Regarding sector growth rates, recent growth is noticeably below the long-term average for both industry and services but above the trend for the agricultural sector. The industry growth has shown a significant drop compared to 24Pct in 2013/14 and from the decade’s average 15Pct to as low as five per cent in 2021/22.

The 2023 Macroeconomic review of Cepheus capital growth to the industry sector was the slowest, reflecting bottlenecks in the dominant construction sector, which grew by only five per cent versus past growth rates of above 20Pct due to dysfunctional markets for cement and other inputs. The manufacturing sub-sector saw similarly minimal growth because foreign currency constraints limited raw materials and essential spare parts import. The precarious peace and stability also worsened the ease of doing business in the country.

In recent years, foreign direct investment (FDI) has significantly dropped. However, as Abiy Ahmed took the throne, investment was expected to boost as he garnered unprecedented support from local and global development partners for his reformist agendas.

However, the support and hope withered away in thin air very shortly. As a result, the share of investment in DGP dropped to 25Pct in 2022 from 28Pct in the prior year. The figure for the past ten years was 35Pct of GDP.

Macro policies have experienced a mix of good, bad, and unknown outcomes due to emergency conflict-related measures disrupting the normal functioning of the economy. Severe setbacks have been observed in various areas, including inflation, investment, industry, foreign financing, and foreign exchange reserves.

The 2023/24 fiscal year, which started on July eight, earmarks ETB 203 billion for capital expenditures from the total of ETB 801 billion capital. However, planned capital expenditure fell by 6.7Pct from the previous year. Trade and industry saw the highest rates of budgetary spending growth, at 23Pct, reaching four billion birr.

The sharp decline in industry growth reflects slowing growth in the construction sector, which is, in turn, a feature of declining government and state-owned enterprises (SOE) capital expenditure and dysfunctional markets for critical inputs such as cement production, which was down 23Pct, reflecting ongoing supply bottlenecks.

Policies like foreign exchange controls and import substitution industrialisation enacted in the past five years have made it difficult for manufacturers to import needed inputs and machinery, likely hampering growth in the sector. For example, limiting access to foreign exchange makes it hard for construction companies to import certain building materials, slowing the pace of large infrastructure projects. At the same time, new regulations around work permits and licensing have increased the cost of doing business for firms in these sectors.

The construction industry, which comprises a large part of the industrial sector, grew by only five per cent last year compared to over 20Pct consecutively in the previous years. This slowdown was mainly due to shortages of critical inputs like cement and a slowdown in public investment. The government’s priority has been curbing inflation which called for lowering expenditures in public investments.

According to the Ethiopian Statistical Service (ESS), there were 23,000 contractors registered to do business in the construction industry as of 2021.

For the past three years, the construction sector has been in deep distress as projects are delayed and go over budget. Private contractors could not deliver their commitments on public construction projects pealing for escalation as prices on construction materials kept ballooning.

Witnessing abandoned construction sites in Addis Ababa with empty scaffolding and unfinished structures serves as a reminder of halted progress, which has become standard due to spiralling costs out of control, reflecting not only the financial burden on investors and developers but also the lost opportunities for job creation and economic growth.

Although the construction industry, which contributes up to a fifth of GDP and has been consistently growing at an average of 11Pct annually, is a significant driver for economic expansion, rising prices, foreign currency shortages, fluctuating fuel and metal prices, and political unrest led to construction industry crisis, the chain effect of which was a declining industrial growth and overall economic slowdown.

It is a different story for inputs such as reinforcement bars, cement, and finishing materials. Private developers find the industry more daunting, and contractors are shying away from public projects due to inflexible contracts.

According to Elias Mohammed, a contractor and an expert in urban development with over a decade of experience, the construction material business has evolved to become a cartel-led system in connection with authorities, manipulating prices and controlling material supply, resulting in inflated infrastructure project costs.

He believes the inflated costs fueled by artificial interference have a ripple effect on the overall economy, as higher infrastructure project costs can lead to increased taxes or fees for citizens and businesses.

Elias expresses concern that the reduction in planned capital expenditure will impede the country’s efforts to stimulate economic growth and address infrastructure needs, indicating that while capital expenditure is primarily allocated for infrastructure development, it will also affect the private sector and industries such as construction.

“Insufficient infrastructure funding may cause industrial sector downturns, loss of employment opportunities, and economic slowdown,” Elias said.

The manufacturing sector also saw minimal growth, constrained by a lack of foreign currency to import essential raw materials and spare parts, high cost of raw materials due to low productivity, frequent power outages, insufficient investment support, and an overall tricky operating environment most recently attributable to the escalating absence of peace and stability. These factors have weighed heavily on the broader industrial sector, including manufacturers of inputs for the construction sector.

Bethel Nahusenay, a marketing manager at Geosynthetics Industrial Works, a manufacturer and supplier of plastic pipes, rigid conduits, plastic sheets and gabion netting, and other products, aka, “Geosynthetics” following the crunch in forex several plants exigency is in dire unless a better strategy is plotted instead of solving the problem.

“Our company has been suffering to get a letter of credit (LC) over the past couple of years resulting in a decline in a return margin,” Bethel said. In addition to the foreign currency shortages, internal administrative challenges and the need for more technical expertise hindered them. They have also been switching from one production method to another, deteriorating their industrial performance.

“The customs billing system for imported raw material is exaggerated almost to the same extent as finished material,” he said. It seems like the database system fetched the wrong trade maps”. He told EBR.

In terms of solving the foreign exchange shortage, the government has been working to amend the controversial suppliers’ credit directive that has been ignoring local manufacturers to access inputs on credit by the National Bank of Ethiopia, aiming to allow foreign investors to access foreign commodity credit with a guarantee from local banks.

Local manufacturers faced a lengthy wait for foreign currency under the letter of credit (LC) to import spare parts and input. The NBE permit allows foreign industrialists to access large sums without delay. Local manufacturers excluded from the directive, like Bethel, have referred to it as an apartheid law, promoting unfair competition between importers and manufacturers in related industries. The policy has significantly impacted local manufacturers in the same investment sectors.

Last year Minister of Finance announced that it is revising a directive to include Ethiopian manufacturers in a supplier’s credit scheme. The revised policy allows local manufacturers to import input and parts on a credit scheme paid in six months by customers’ banks. The MoF public debt report shows suppliers’ credit stock at USD1.08 billion, accounting for 3.85Pct of the total external debt.

Despite the initiatives to establish 30 industrial parks by 2025, investment promotion, and fiscal incentives, the sector still needs to be developed with a six per cent GDP output. Key constraints include limited productivity, product diversification, input shortages, forex, high finance costs, electricity and logistics constraints, and industrial relations. Overrated customs taxation further exacerbates the issue. Exports declined seven per cent in 2022, and output from industrial parks dropped by 26Pct.

This drop is attributed to the removal of Ethiopia from the African Growth and Opportunity Act (AGOA) programme, effective since January 2022, accusing Abiy Ahmed’s government of “gross violations” of human rights in the war in Tigray.

Ethiopia’s garment manufacturing sector was the largest AGOA beneficiary in the country. Between 2000 and 2020, Ethiopia exported USD 722 million worth of garments.

Another issue that affected the industry sector’s growth was the failure of the federal and regional governments to compensate investors for damages to their properties due to political unrest and instability in the country. This lack of support from the government led to a loss of trust and confidence among investors, prompting them to seek more stable business environments in neighbouring countries. The uncertainty surrounding future political developments also discouraged investors from expanding their businesses within the country’s borders.

Industrial growth has indeed faced a severe glitch in Ethiopia. According to Aaron O’Neill, a research expert specialising in global historical data, Ethiopia’s share of industry to GDP has declined since 2018. In data published on May 16, 2023, at, a German online platform specialised in data gathering and visualisation, Ethiopia’s industry growth continued to make a strong paced growth from 2011 to 2018, in which its share grew from 9.66Pct to 27.31Pct.

However, since 2018, the year political turmoil in the country forced Hailemariam Desalegn to step down as prime minister, leaving the way open for the ascendance of Abiy Ahmed to the helm; Industrialisation in Ethiopia has faced a glitch, where in 2021, industry’s share reached to 21.85Pct. The World Bank shared this report. The Bank recently reported a slight improvement in 2022, which went 22.72Pct.

Despite these difficulties, the current administration is still dedicated to its plan for domestic economic reform and has already begun implementing the second phase of homegrown economic reform (HGER). Promoting export-oriented industries and luring foreign investment are the primary tools to boost industrialisation.

Despite ongoing challenges, this demonstrates the government’s resolve to encourage economic expansion and open job opportunities. However, the success of these efforts remains unreliable due to the unpredictable global and local economic conditions and potential recurring political and social instability.

11th Year • August 2023 • No. 120 EBR

Leave a Reply

Your email address will not be published. Required fields are marked *

Ethiopian Business Review | EBR is a first-class and high-quality monthly business magazine offering enlightenment to readers and a platform for partners.

2Q69+2MM, Jomo Kenyatta St, Addis Ababa

Tsehay Messay Building

Contact Us

+251 961 41 41 41