Macro Analysis /
Ethiopia

Ethiopia: Macroeconomic Review – Q1 2022

  • Ethiopia's economy was heavily impacted this past quarter by high commodity prices, conflict, and drought..

  • Policy responses included both adjustment and financing measures, and are keeping budget/BOP deficits in check.

  • A normalization of global prices and a re-engagement with external partners will be key turning points for macro outlook

Ethiopia: Macroeconomic Review – Q1 2022
Cepheus Capital Research
7 June 2022

Ethiopia’s economy faced six distinct shocks this past quarter, including major price spikes in global markets as well as domestic shocks linked to conflict and drought.

  • Global shocks: Four items—namely fuel, food, fertilizers, and freight—will be costing Ethiopia an extra $4bn this year and raising total imports from $14bn to $18bn.

  • Domestic shocks: The devastating recent conflict and worst drought in decades will, in turn, be bringing record high budgetary spending for security, relief, and recovery.

Holding it Together: To keep macro conditions intact, the Government is responding with a mix of policies that involves adjusting to the shocks (through cuts to budgeted capital expenditure and reduced fx allocations to the private sector) while also relying on financing measures that moderate the impact of these shocks (higher budget deficits, still-high monetary growth, and a higher drawdown of fx reserves). On the balance of payments side, the big increase in world prices for the “Four Fs” (fuel, food, fertilizers, freight) is being covered by reductions in private capital imports, by higher exports/services/remittances, by greater fx supplies from franco valuta importers (who now make up over half of non-fuel imports), and by a drawdown of NBE reserves. On the fiscal side, the government’s large spending increase is being funded by increased domestic borrowing (mainly from the T-Bill market) but also through cuts to federal capital expenditure (only 34% of which is being executed). This mix of policies is keeping fiscal/BOP positions in check, with both budget and current account deficits unlikely to exceed 4% of GDP this year. In the monetary area, the central bank’s policy response has been to slow the Birr’s monthly depreciation—seemingly to limit inflation—from an annual ‘run rate’ of 33% last year to just 4% at present, though growth in money supply (M2) remains high at 25% above year-ago levels.

Risks: While the current mix of policies is limiting macro imbalances in a difficult domestic and global environment, there are potentially emerging risks. If prolonged, for example, the cutbacks being relied upon—in government capital expenditure, in capital goods imports, and in fx supplies to the private sector—would reduce long-term investment/exports, lower growth, and aggravate inflation. In all likelihood, however, these are exceptional and temporary measures used only for exceptional and temporary circumstances.

Outlook: Looking ahead, successfully riding out the global shocks (via a balanced mix of adjustment/financing policies until commodity price spikes gradually dissipate) and moving towards a deeper post-conflict re-engagement with external partners (donors, lenders) represent two key turning points that would bring a major improvement in Ethiopia’s macro conditions. The exact timing for both remains uncertain, of course, but we presume the second half of 2022 is a possibility and this forms the basis for our macro projections. Accordingly, we still see strong growth returning only next fiscal year and think minimal GDP growth is likely this fiscal year given presumed crop/activity shortfalls in Northern regions plus the tight fx/credit conditions of recent quarters (the Government forecasts growth of 6.6% and the IMF 3.8% for this fiscal year, though these projections may partly reflect the exclusion of conflict-affected areas where data collection—on crops, economic activity, inflation—is not possible under current conditions). On other aspects of the macro outlook, we anticipate: (1) inflation remaining elevated for the rest of 2022 and for most of 2023 (25% by end-2022, 15% by June 2023); (2) a fiscal deficit just below 4% of GDP as previously expected; (3) a higher current account deficit given global price shocks (<s>4% of GDP this year vs </s>3% of GDP last year); (4) continued BOP pressures—and thus severe fx challenges for private businesses—till late 2022 but with modest improvements likely thereafter; and (5) an exchange rate crawl that follows the slower pace of recent months and thus takes the Birr rate to 52 per USD by June 2022 and 55 per USD by end-2022.