AMR: Ethiopia

GDP growth – growth to slow before picking up

Ethiopia remains vulnerable to external problems, security hurdles, and climate change shocks. Still, underlying growth should pick up in the medium term. However, we still  forecast GDP growth to slow to 2.7% y/y in FY2022, then improve to 7.1% y/y in FY2023 likely due to better agriculture production as well as reform implementation resuming. 

Still, some of Ethiopia’s emerging economic sectors should expand economic diversification. The telecommunication, electricity and mining sectors should support increased economic  activity.

Balance of payments – spill-over from Ukraine war

The C/A deficit will likely widen more than forecast in our Jan edition due to the spill-over  impact of the Ukraine war. The C/A deficit may grow to 4.7% of GDP in FY2022, from 2.6%  of GDP in FY2021, but then improve from H2:23-2024.  Rising costs of imports may be the main culprit to deepen the C/A deficit, as was the trend  even before the Ukraine war.

Monetary policy – reduced efficacy

We expect inflation to remain elevated, averaging 32.1% y/y, and ending Dec at 29.8% y/y  this year. The Ukraine war has bumped up inflation, as has longstanding loose monetary  policy. Still, hiking the reserve requirement ratio to 10% from 5% indicates tighter monetary  policy, with the NBE’s deposit liabilities rising by 25.3% y/y. Yet, monetary policy is still  loose, considering the NBE’s gross claims on the central government. As this is likely to  continue in the medium term, the efficacy of monetary policy instruments will be constrained,  and inflation will likely stay high.  The inflationary impact of high oil prices was contained before, having been only partly  passed on to consumers as subsidies provided off-budget support by way of the Oil  Stabilization Fund.  However, the government may be reducing these costly subsidies. For now, inflation will  therefore stay high though we do expect some softening during the harvest season from Oct  to Dec. 

FX outlook – limited REER correction

We still expect the NBE to limit the correction of the ETB real effective exchange rate  appreciation, which may see the ETB depreciate to the USD at its usual pace, ending Dec at  55.57. We assess the ETB as overvalued by 33% in trade-weighted terms. But exchange rate movements have been restricted due to restrictions inhibiting participation in the  interbank FX market. Restrictions on payments and transfers include the tax certification  requirement for repatriation of dividend and other investment income; restrictions on  repayment of legal external loans and suppliers of foreign partners credits; the prioritisation  nd rationing of foreign exchange; and needing to provide a clearance certificate from the  NBE to obtain import permits. 

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