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Country Commercial Guides for FY 2000: Ethiopia Report prepared by U.S. Embassy Addis Ababa, released July, 1999 Note*

CHAPTER II. ECONOMIC TRENDS AND OUTLOOK

A. MAJOR TRENDS AND OUTLOOK:

Ethiopia's economic growth has surged since the downfall of the communist Derg regime in 1991, averaging 6-7% from 1993-1998. Ethiopia has maintained an average annual inflation rate below 4% during this same timeframe. Debt rescheduling agreements with Paris Club members in 1997-98 halved Ethiopia's debt to exports and debt to GDP ratios, though they remain high at nearly 600% and 80%, respectively. The country runs a severely negative balance of trade, however, which exceeded $550 million in 1998. Foreign exchange reserves have dropped to $500 million, equivalent to three months of import requirements. Ethiopia's main imports consist of semifinished goods, crude petroleum and petroleum products, transport and industrial capital goods, medical and pharmaceutical products, motor vehicles, civil and military aircraft, raw materials, and agricultural machinery and equipment.

B. PRINCIPAL GROWTH SECTORS:

Coffee continues to be the most important export commodity in Ethiopia. For about twenty years up to 1996, coffee accounted for an average of 55 percent of the nation's total value of exports. This proportion has increased recently to an average of 63 percent of total export earnings from 1995-1998. A glut in the world supply of coffee, however, reduced Ethiopia's export earnings last year. In 1998/99, Ethiopia exported 110,000 metric tons of coffee, generating about $300 million, a decline of 22% in earnings from the previous year.

Ethiopia is estimated to have 75 million head of livestock, the largest concentration in Africa. It is difficult to calculate the sector's value, since a significant part of meat and dairy production is for subsistence purposes. In certain regions, particularly in the highlands, livestock is utilized only to support farming. Ethiopia's livestock continues to suffer from unpredictable weather conditions, diseases, and the lack of a coherent plan for the development of the sector. Although hides/skins and leather are Ethiopia's second most important export, the sector's huge potential remains largely untapped.

Ethiopia continues to take advantage of its wide-ranging ecological and climatic zones by diversifying and expanding agricultural production. Several products show significant export potential. Tea production has increased to nearly 4,000 metric tons and opportunities exist for expanded cultivation, processing and marketing. Ethiopia's production of cotton and sugar cane cannot keep up with local industrial demand, but with proper technology and inputs could be increased several-fold. There are considerable opportunities for expanding the cultivation and export of dried fruits, cut flowers, and canned vegetable products. With over seven million bee colonies, Ethiopia is already the leading producer and exporter of honey and bee wax in sub-Saharan Africa but offers additional prospects for private investment. In addition, Ethiopia is interested in exploiting its forestry and fishing resources.

Gold, marble, limestone, and small amounts of tantalum are mined in Ethiopia. Other resources with potential for commercial development include large potash deposits, natural gas, iron ore, and possibly coal and geothermal energy. Ethiopia has only tapped a small portion of its potential hydroelectric power resources. Although oil deposits may exist, as yet there have been no discoveries and the country is totally dependent on imports for oil. The manufacturing sector concentrates on the production of construction materials, metal and chemical products, and basic consumer goods such as food, beverages, clothing, and textiles. The sector is dominated by about 150 public enterprises, which account for more than 90 percent of its value. The production from state-owned enterprises is concentrated in food and beverages, textiles, clothing, leather products, tobacco, rubber, plastic, and cement.

Private sector manufacturing activity follows a similar pattern. Most of the 165 private sector manufacturing firms are involved in bakery products, textiles, footwear, and furniture production. In the short term at least, the sustainability of the manufacturing recovery is likely to be influenced by how well the private sector responds to market incentives, as well as by the capacity of public enterprises to adapt to the recently more competitive market environment.

C. GOVERNMENT ROLE IN THE ECONOMY:

To create a conducive environment for development, the Government of Ethiopia adopted a Five-Year Development Plan in 1995 that aims to enhance agricultural productivity, improve rural infrastructure, encourage private investment, promote participation of the private sector in the economy, mobilize external resources, and pursue appropriate macroeconomic and sectoral policies.

In pursuit of these goals, the government embarked on a program of economic reform, establishing the Ethiopian Privatization Agency to implement a phased privatization program. Ethiopia issued new laws opening banking and insurance to the domestic private sector. In 1995, the Government started selling most state-owned retail shops, hotels, and restaurants. To date, about 180 government entities have been privatized, including the Pepsi-Cola and Coca-Cola bottling plants, the St. George Brewery, and the Lega Dembi Gold Mine. Private companies are negotiating with the government over tenders for the Kenticha Tantalum Mine, the Calub Gas Company, and the Wonji-Shoa Sugar Factory. Enterprises valued at over three million dollars, such as major hotel chains, tanneries, textile mills and garment factories are being offered for sale, lease, management contract, or joint venture with the Government. The government maintains complete ownership of all land in Ethiopia. A new legal framework allows the leasing of urban land, the value of which is established by public auction or via pre-set rates established by the market. In the agricultural sector, the Government abolished most marketing boards, which enabled farmers to sell their crops to the highest bidder. Parts of the market for agricultural inputs were liberalized, and coffee marketing has been opened to competition.

About 20 percent of Ethiopian imports are conducted through government tenders. The tender announcement is made public to all interested potential bidders, regardless of nationality of supplier or origin of the products/services. Both Ethiopian and foreign suppliers, especially those from Italy, Germany, France, Japan, and the United Kingdom who have local representatives participate aggressively and tend to compete successfully. It is important that suppliers be involved at the earliest design stages to ensure that project specifications fit U.S. products. The Investment Authority is responsible for coordinating new investment from foreign and domestic sources, although each of the nation's eleven administrative regions has its own investment bureau, with growing capacities for promoting localized investment. The federal and regional authorities have issued a combined 4,818 investment permits for an estimated investment capital of $5 billion. Of these projects, 163 are foreign investments with a capital projection of $1.2 billion. A total of 283 of these projects became operational over the last calendar year. Recent legislation opened three formerly prohibited sectors to private investment, including large-scale hydro-electric projects, telecommunications, and defense industries. Banking, insurance, and many small-scale personal services remain closed to foreign investment.

Other areas of Government consideration include: formulating and implementing a national energy strategy, doubling the access to safe water and effective sanitation among the population, and addressing housing shortages by liberalizing the housing and construction markets.

D. BALANCE OF PAYMENTS SITUATION

Ethiopia's current account deficit before official transfers, which reflects a large trade deficit, grew slightly in 1998 to about $520 million, or 7.9% of GDP. External reserves fell to about $412 million, or just under three months of imports. E. INFRASTRUCTURE:

Ethiopia's surface transport infrastructure is inadequate and underdeveloped. In fact, Ethiopia has the lowest road density per capita in the world. The country's main route from Addis Ababa to the port of Djibouti along the Assab road could become a bottleneck to the movement of goods, despite efforts currently underway to improve it. Only 21 percent of the highway network is paved, with few interconnecting links between adjacent regions and a grossly insufficient feeder road network. As a result, large parts of Ethiopia are isolated and dependent on pack animals for transport. The poor road sector has hampered economic development and remains an obstacle to economic integration, export growth, and the realization of greater economic potential in general.

With the help of the World Bank, the European Union, and the African Development Bank, and other donors, the Ethiopian Government is implementing a Road Sector Development Plan. This program aims to expand the road network by 80 percent by 2007, at a cost of $3.9 billion. The World Bank approved a loan for $309 million in 1998, the first of three loans planned. The program will also lead to the repair and renovation of major and minor trunk roads and help develop private road construction and contracting capacity. Reforms undertaken in support of the RSDP include privatizing state construction companies, liberalizing transport charges, and implementing a road fund for sustainable road maintenance.

Limited rail service links Addis Ababa with Djibouti via the eastern Ethiopian city of Dire Dawa. Passenger and cargo air transport service is provided by Ethiopian Airlines. Its international flights link the country with 43 cities on three continents, and its domestic service links 38 airfields and 21 landing strips with Addis Ababa.

Ethiopia has one of the lowest number of telephone lines per capita in sub-Saharan Africa. The Ethiopian Telecommunications Corporation (ETC), the government-owned service provider, plans to reach over 1% of the population by the year 2000 with the addition of 700,000 new telephone lines. Internally, direct microwave telephone links are available to most regional cities. A number of smaller towns also have automatic telephone services. International communications links are maintained through two satellite earth stations, providing telephone, telex, and television services. Digital telephone exchanges have also been installed recently and cellular phone service also commenced earlier this year. The ETC is planning to award the contract soon for the provision of wireless local loop within Addis Ababa.