Ethiopia’s Economy in 2050

A Glimpse from Goldman Sachs Report

Goldman Sachs, a leading global investment banking firm, has made intriguing predictions of Ethiopia’s economy in their “Global Economics Paper: The Path to 2050.” While the exact details remain hazy, the report paints an optimistic picture of significant economic growth and transformation for the nation. Accordingly, in 2050, Ethiopia will have a USD 1.6 trillion economy, ahead of the USD1.4 trillion GDP of South Africa and Argentina. While it’s important to acknowledge the inherent uncertainties and treat any projections cautiously, Ethiopia has immense potential for economic growth and transformation in the coming decades. EBR’s Economic Research & Business Intelligence closely examines the report.

During the past two decades, Ethiopia reported considerable economic growth that made the country among the world’s best-performing economies with a double-digit growth rate of gross domestic product (GDP) (2004-2018). This transformative growth was, however, achieved against the backdrop of a stagnating or slow-growing manufacturing sector, significant youth unemployment, severe income inequality, natural habitat loss, pervasive human insecurity, restrictive flow of trade and movement of capital and labour; social grievances manifested in the form of street protests; and ethnic and religion motivated killings that engulfed the once hopeful horn of Africa nation.

These cumulated political upheavals led to the change of government in 2018 with the coming of Abiy Ahmed as a new prime minister who, soon after his coronation, made mouthwatering reforms from improving the political space to creating more private sector-friendly economic policies.

Indeed, the arrival of Abiy Ahmed as Prime Minister in 2018 marked a significant turning point for Ethiopia, both politically and economically. Abiy’s primary intervention has been to liberalise the economy and improve the state of the private sector. Ethiopia has achieved significant progress in breaking the 127 years of state monopoly in the telecom sector by allowing the second operator to start services. In July 2021, a consortium led by Safaricom won a license to operate mobile services in the country, paving the way for their official launch the following year. Accordingly, Safaricom officially began operations in Ethiopia on October 6th, 2022. Its digital money transfer wing-M-PESA also launched services in August 2023 and has since made over three hundred million dollar transactions in the few months of its services.

The progress made in the telecom sector with the giant strides made forward by Ethio telecom, the tremendous growth and expansion by the financial industry and the massive expansion on creating an enabling digital ecosystem have indeed increased the hope for Ethiopia as it aims to become an African beacon of hope.

However, the political reform that improved Ethiopia’s political space and created a more liberal and open space for free political activities has been short-lived. This is because of the massive political unrest that engulfed the country. Religious and ethnic tensions and escalated conflicts have brought the country to one of the bloodiest internal wars in history.

Ethiopia’s initial wave of political reform under Prime Minister Abiy Ahmed brought hope for a more open and inclusive society. However, the past few years have seen a surge in internal conflicts and ethnic tensions, casting a shadow over those aspirations.

At the moment, Ethiopia is confronted with multifaceted conflict. The causes of these ongoing conflicts in Ethiopia are multi-layered and multidimensional. While ethnic and religious tensions play a role, other factors like resource competition, historical grievances, and political power struggles also contribute to the instability. The national dialogue soon to start may play a significant role in addressing these fundamental challenges.

At this critical juncture, Ethiopians need to be more reasonable and understanding to each other. It’s crucial to approach the situation with empathy and a genuine desire for dialogue to understand the perspectives of all involved parties. Listening to diverse voices and acknowledging the historical contexts are essential for constructive dialogue.

No matter how challenging these exercises are, the path towards peace requires a commitment from all actors to non-violent solutions. Encouraging dialogue, promoting reconciliation efforts, and upholding human rights and the rule of law are crucial steps in healing the divisions and building a sustainable peace.

As numerous local and international actors are working tirelessly to support peace-building efforts in Ethiopia, the government and other stakeholders need to support initiatives towards peace and reconciliation. By promoting their work and advocating for peaceful solutions, a favourable outcome could be a possible thing to expect.

While these inherent uncertainties, even about the country’s future, remain high, massive economic challenges are expected to thwart the future growth of Ethiopia; many are hopeful that the 21st century will be Ethiopia’s time to claim and assert its continental and global positions rightfully. The Goldman Sacks economists’ Ethiopia in 2050 will have a USD1.6 trillion economy, putting it ahead of South Africa and Argentina, while Nigeria, with a GDP of USD 3.4 trillion, will be more than South Korea USD 3.1 trillion and Australia USD2.8 trillion, and on par with Canada USD3.4 trillion GDP. It’s important to acknowledge the inherent uncertainties and treat any projections with cautious optimism.

According to the report, the key drivers of growth will be the following.

Rapid Population Growth

By 2050, Ethiopia’s population is expected to double, reaching nearly 200 million. This surge will provide a substantial consumer base and workforce, fueling demand and production.

Ethiopia’s rapid population growth is a complex issue with positive and negative implications, making it difficult to label it as solely an opportunity or a challenge. It’s more accurate to say that it presents a set of opportunities and challenges that need to be carefully managed.

A growing population can provide a larger labour pool, potentially boosting economic productivity and growth. It also stimulates local businesses and industries, creating a larger domestic market. A growing young population can further contribute to a more dynamic and innovative society, fostering entrepreneurship and new ideas, which is a good promise for a thriving economy.

However, providing sufficient jobs for a growing population requires significant investment in infrastructure, education, and skills development. Increased demand for water, food, and energy resources can also strain existing infrastructure and lead to shortages. Indeed, Ethiopia has already been experiencing pressure on this front and needs to be more wary of an alarmingly growing population. A larger population footprint can also put pressure on the environment, leading to deforestation, degradation of land, and increased pollution, which has caused drought to be more frequent and exacerbated livelihood vulnerability for millions. This situation has further aggravated existing social tensions and inequalities, potentially leading to instability and conflict.

While these issues remain evident, it’s possible to make population growth a force for good through practical planning and management. Investing in education and healthcare that would equip the population with the skills and knowledge needed to contribute to the economy and improve their lives; balancing economic growth with environmental protection and resource conservation; focusing on policies that create quality employment opportunities for all segments of the population; developing the infrastructure needed to support a growing population, including transportation, housing, and sanitation; and addressing inequalities and ensuring that all groups benefit from economic growth would make Ethiopia earn a better dividend from its booming population.

Infrastructure Development

Goldman Sachs predicts significant investment in infrastructure, improving transportation, communication networks, and energy access, which Ethiopia is currently putting a considerable resource investment in, which will boost connectivity, facilitate trade, and attract investment. Indeed, the adequately planned and sequenced infrastructure development will unlock Ethiopia’s potential by increasing productivity for a sustainable future.

While Ethiopia has been hugely attracting and managing investments in the infrastructure area, it requires being more cautious to ensure responsible debt levels. Indeed, Ethiopia’s national debt has become a significant challenge as the country navigates a complex web of economic stress. As of March 2023, Ethiopia’s national debt is over 60 billion USD, according to the Ministry of Finance, representing roughly 38Pct of its GDP. Although the share of debt to DGP has been declining, in actual figures, the debt value has steadily risen in recent years, driven by factors such as infrastructure investments, social programmes, and ongoing conflicts.

The IMF and other economic institutions project that Ethiopia’s debt-to-GDP ratio will continue to increase in the near term, potentially reaching 50Pct by 2024. Some analysts believe Ethiopia can manage its debt burden sustainably, while others express concerns about the potential debt crisis, which is already looming as the country missed a USD33 million Eurobond coupon payment on December 5th, 2023. The default on the Eurobond coupon marks a challenging economic phase for Ethiopia. This development comes amidst internal conflicts, high public debt, and ongoing discussions with the IMF for a potential financial bailout and debt restructuring. It could lead to reduced access to international borrowing and higher interest rates on future loans.

Technological Leap

Ethiopia is expected to embrace technological advancements, from automation in agriculture and manufacturing to digital solutions in finance and healthcare. This will enhance productivity and drive innovation across sectors.

Indeed, Ethiopia has opened its doors to technological revolutions in finance by embracing digital technological transformations as a cornerstone of its development path. From the liberalization of the telecom sector to the digital ID system, online payment arrangements, and the electronic procurement system implemented in recent years, Ethiopia has been taking the proper steps in the right direction to reap the benefits of technology ultimately.

Urbanization

The Goldman Sachs report also anticipates a rapid shift from rural to urban areas, creating megacities and fueling demand for housing, services, and consumer goods. While these fueling demands are incentives for investments, they are equally a challenge if the country cannot institute prudent leadership and governance. Ethiopia has already seen massive incompetence and institutional inefficiencies in its bureaucracy. Ethiopia will need capable state machinery that is meticulous in planning and executing development projects. With the current system of incompetence and corrupt practices, the hope for development and progress is far from reality.

Diversification

At its core, economic diversification is reducing reliance on a single industry or resource and spreading that dependence across a broader range of economic activities. This approach offers several benefits, promoting a more resilient, stable, and prosperous economy.

An economy heavily reliant on one sector is more susceptible to external shocks like commodity price fluctuations, natural disasters, or technological disruptions. Diversification mitigates these risks by spreading them across different industries, making the economy less likely to be crippled by a single event. Diversification creates multiple income streams, making the economy less reliant on revenue from a single source. This approach provides a financial buffer during downturns and strengthens the government’s ability to respond to unforeseen challenges.

Over the next two decades, Ethiopia will move beyond its agricultural dependence, expanding into manufacturing, services, and technology sectors. Already, agriculture is giving way to services and industries. This diversification will reduce vulnerability to external shocks and create a more resilient economy.

Diversification has its challenges. It requires investment, skilled workforce development, infrastructure upgrades, and effective government policies. It’s crucial to carefully analyze existing strengths and potentials before pursuing diversification. Additionally, transitioning away from established industries can be complex and require a gradual, well-managed approach.

Economic diversification offers a powerful path towards a more resilient, prosperous, and equitable future. By recognizing its benefits and managing the challenges effectively, countries and communities can unlock their full economic potential and achieve sustainable development.

Challenges and Uncertainties

Maintaining a stable political environment is crucial for attracting investment and sustaining economic growth. Any political instability could derail progress. Currently, political stability remains a vital challenge for Ethiopia’s progress. Understanding its complexities and exploring potential solutions are crucial for the country’s long-term benefit. Without it, Ethiopia’s prospect for growth and development is at stake.

Ethiopia needs to manage its resources effectively, including land, water, and energy, to ensure sustainable growth and equitable distribution of benefits. The current focus on sustainable development through the Green Legacy needs to be strengthened and sustained. Beyond addressing the impacts of climate change, the Green Legacy significantly impacts agriculture, food security, and water resources.

Ethiopia must now emphasize improving the state of the education system. Investing in education and healthcare is essential to equip the population with the skills and knowledge needed to participate in the modern economy. This is very important to empower citizens to own the development and become active participants and beneficiaries in the fruits of the development.

Potential Outcomes in 2050

Regional Powerhouse: When Ethiopia addresses these challenges, together with its immense potential, the country is poised to become a regional Powerhouse. If Ethiopia successfully navigates these challenges, it has the potential to become a regional economic powerhouse, influencing trade and development across the African continent along with Egypt, Nigeria, and South Africa. Indeed, these financial success stories will add to the political and diplomatic successes that have given Ethiopia a strategic leadership role in the continent since the formation of the Organization for African Unity, currently the AU.

Global Player: With its strategic location, burgeoning population and improved continental diplomatic role, Ethiopia would emerge as a significant player in the global marketplace, attracting investment and participating in international trade networks. Based on current potential and ongoing developments, Ethiopia could become a force to be reckoned with in global affairs by 2050.

While declaring Ethiopia a “power” by 2050 is bold, the country possesses significant potential in an active development phase. Continued efforts to address internal challenges, capitalize on available opportunities, and navigate the global landscape effectively can put Ethiopia on a path to becoming a significant player in international affairs.

Improved Living Standards: Economic growth should translate into improved living standards for the Ethiopian population, with increased access to basic necessities, education, and healthcare. However, this translation is only sometimes automatic and requires conscious effort to ensure equitable distribution of benefits.

Ethiopia has significantly reduced poverty, with the national poverty rate dropping from 30Pct in 2011 to 24Pct in 2016. Beyond purely income-based measures, the Multidimensional Poverty Index (MPI) paints a complex picture. As per the UNDP’s 2021 report, 68.7Pct of the Ethiopian population (82.7 million people) is multidimensionally poor, while 18.4 per cent are classified as vulnerable to multidimensional poverty (22.1 million people). This means the country needs massive interventions to realize all-inclusive growth and development so that Ethiopians live a dignified life devoid of material impoverishment and the freedom they seek.

Goldman Sachs’s predictions offer a promising outlook for Ethiopia’s economy in 2050. However, it is crucial to remember that these are just projections based on current trends and assumptions. The actual path of Ethiopia’s economic development will depend on a multitude of factors, both internal and external. Regardless of the specific outcomes, one thing remains clear: Ethiopia has immense potential for economic growth and transformation in the coming decades. EBR

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12th Year • December 16 2023 – January 15 2024 • No. 124