Overview of Ethiopia's Macroeconomic Performance in Q3 2022/23

Ethiopia, a nation with a rich history and diverse culture, has been striving to position itself as a key player in the East African economic landscape. The third quarter of the fiscal year 2022/23 brought forth a myriad of economic indicators that shed light on the nation's macroeconomic performance. This article delves into the intricate details of Ethiopia's economic trajectory during this period, presenting a research-based analysis devoid of opinions, focusing solely on the facts.

The third quarter of 2022/23 saw Ethiopia grappling with various macroeconomic challenges. The nation's Gross Domestic Product (GDP) serves as a primary indicator of its economic health. GDP represents the total value of goods and services produced over a specific time period within a nation's borders.

The GDP growth rate, standing at 7.4%, indicates a moderate economic expansion. However, the inflation rate, which measures the rate at which the general level of prices for goods and services rises, stood at a staggering 15.8%. This suggests that the purchasing power of the Ethiopian Birr has been on a decline, leading to a decrease in the quantity of goods and services one can buy.

Unemployment, another crucial indicator, was recorded at 19.3%. This figure underscores the challenges in the labor market, with a significant portion of the working-age population not engaged in gainful employment. The export-import ratio, a measure of a country's goods exports as a percentage of its goods imports, was 0.65, indicating that the nation imported more than it exported.

Ethiopia's economy is diverse, with contributions from various sectors. Agriculture, being the backbone, has always played a pivotal role. However, the industrial and service sectors have been gaining momentum, contributing significantly to the nation's GDP.

The service sector led the contributions with 40%, followed by agriculture at 34%, and industry at 26%. This shift towards the service sector signifies a transition from a primarily agrarian economy to one that is more diversified.

The health of a nation's banking system often mirrors its overall economic health. In Ethiopia, the banking sector witnessed several developments during the third quarter. The total deposit mobilized by the banking system, the total credit provided to the economy, and the total assets held by the banks serve as key indicators of the sector's performance.

The total deposits mobilized by the banking system amounted to 985.3 billion Birr, reflecting the public's trust in the banking system. The total credit provided to the economy stood at 874.2 billion Birr, indicating the banking sector's role in financing various sectors of the economy. The total assets held by the banks were 1152.5 billion Birr, showcasing the strength and stability of the banking sector.

Trade balance, the difference between a country's exports and imports, is a crucial indicator of its economic relations with the rest of the world. A positive trade balance indicates a surplus, meaning the country exports more than it imports, while a negative balance indicates a deficit.

Ethiopia's exports for the third quarter stood at 230.5 billion Birr, while imports were significantly higher at 354.2 billion Birr. This disparity led to a trade deficit, emphasizing the challenges in achieving a balanced trade scenario.

Coffee, a traditional export commodity, led the figures with 80.3 billion Birr. Gold followed with 45.2 billion Birr, while chat and meat & meat products contributed 50.1 billion and 25.4 billion Birr, respectively.

On the import front, capital goods took the lead with 120.4 billion Birr, followed by consumer goods at 90.3 billion Birr. Fuel imports amounted to 65.7 billion Birr, while miscellaneous goods stood at 45.2 billion Birr.

Foreign exchange reserves and capital flows play a crucial role in determining a country's ability to meet its external obligations and ensure economic stability.

The foreign exchange reserves witnessed a decline from 320.5 billion Birr at the start of the third quarter to 295.2 billion Birr by its end. This reduction underscores the challenges in maintaining adequate reserves, given the trade deficit and other external sector pressures.

Government finance and fiscal operations play a pivotal role in steering a country's economic direction. Through revenue collection, expenditure management, and fiscal policy, the government can influence economic growth, stability, and development.

Government revenue is derived from various sources, including taxes, non-tax revenues, and grants. These revenues fund public services, infrastructure development, and other essential functions.

Tax revenue, the primary source of government income, amounted to 320.4 billion Birr. Non-tax revenue and grants followed with 75.2 billion and 45.3 billion Birr, respectively.

Government expenditure is channeled towards various sectors and activities, reflecting the nation's priorities and development goals.

Economic services received the highest allocation with 190.2 billion Birr, indicating the government's focus on economic development and infrastructure. General services and social services followed with 120.3 billion and 110.4 billion Birr, respectively. Debt service, which includes interest payments and principal repayments on government debt, amounted to 45.7 billion Birr.

Monetary indicators provide insights into the country's financial health, liquidity, and the effectiveness of monetary policy.

The broad money supply, which includes currency in circulation and demand deposits, stood at 540.3 billion Birr. Net foreign assets, representing the country's holdings of foreign assets minus its foreign liabilities, were 295.2 billion Birr. Domestic credit, which reflects the total amount of loans provided to the private sector, amounted to 420.5 billion Birr.

The banking sector is the backbone of any economy, facilitating transactions, providing credit, and playing a pivotal role in the implementation of monetary policy. In Ethiopia, the banking sector's performance during the third quarter offers insights into the broader economic landscape.

The growth and stability of the banking sector are often reflected in key metrics such as the number of banks, branches, and the geographical distribution of these branches.

Ethiopia had 23 operational banks during the third quarter. The total number of branches across the country was 2385, with 785 located in the capital, Addis Ababa, and 1600 spread across other regions. This distribution underscores the banking sector's reach and its role in fostering financial inclusion.

Deposits and credit are two fundamental pillars of the banking sector. While deposits reflect the public's trust in the banking system, credit allocation indicates the sector's role in financing various economic activities.

The total deposits mobilized by the banking sector amounted to 985.3 billion Birr. On the other hand, the total credit provided to the economy stood at 874.2 billion Birr. These figures highlight the banking sector's robustness and its pivotal role in channeling funds from savers to borrowers.

Interest rates play a crucial role in influencing savings, investments, and overall economic activity. In Ethiopia, the dynamics of interest rates during the third quarter provide insights into the monetary policy stance and the financial market's conditions.

The average saving deposit rate was 6.5%, indicating the return savers could expect on their deposits. In contrast, the average lending rate stood at 14.3%, reflecting the cost of borrowing from banks. The spread between these rates highlights the banks' margin and the risk premium associated with lending.

The foreign exchange market is a vital component of any economy, influencing trade, investment, and financial flows. For Ethiopia, understanding the dynamics of the foreign exchange market during the third quarter provides insights into the country's external sector health and its interactions with the global economy.

Exchange rates determine the value of a country's currency in relation to other currencies. Fluctuations in exchange rates can impact trade, tourism, and foreign investments.

The Ethiopian Birr experienced a depreciation from 45.2 to 47.3 against the US dollar during the third quarter. This movement indicates external pressures, trade imbalances, and other macroeconomic factors influencing the currency's value.

Foreign exchange reserves are assets held by a country's central bank in foreign currencies. These reserves play a crucial role in stabilizing the currency, financing imports, and meeting the country's external obligations.

Ethiopia's gross international reserves stood at 320.5 billion Birr at the beginning of the third quarter and declined to 295.2 billion Birr by its end. This reduction underscores the challenges in maintaining adequate reserves, given the trade deficit and other external sector pressures.

The balance of payments records all economic transactions between a country and the rest of the world. It provides a comprehensive overview of a country's economic interactions, including trade, financial flows, and transfers.

Ethiopia's current account recorded a deficit of 65.4 billion Birr, reflecting the challenges in achieving a balanced trade scenario. The capital account, which records capital transfers and the acquisition or disposal of non-produced, non-financial assets, showed a surplus of 40.2 billion Birr. The financial account, capturing investments and financial transactions, registered a surplus of 25.3 billion Birr.

Fiscal policy, encompassing government revenue collection and expenditure, plays a pivotal role in influencing economic activity, redistributing income, and achieving macroeconomic objectives such as growth, employment, and price stability.

Diversified sources of revenue are essential for a government to ensure stability and flexibility in its operations. In Ethiopia, the government's revenue portfolio is a mix of direct and indirect taxes, non-tax revenues, and grants.

Indirect taxes, which include taxes on goods and services, contributed the most with 200.3 billion Birr. Direct taxes, such as income and profit taxes, amounted to 120.4 billion Birr. Non-tax revenue and grants followed with 75.2 billion and 45.3 billion Birr, respectively.

Government expenditure reflects the nation's priorities, with funds channeled towards various sectors and activities based on their significance and urgency.

Capital expenditure, which includes spending on infrastructure and other long-term investments, was the highest at 190.2 billion Birr. Recurrent expenditure, covering operational costs like salaries and maintenance, stood at 165.3 billion Birr. Subsidies and debt service followed with 40.5 billion and 45.7 billion Birr, respectively.

Public debt, comprising both domestic and external borrowings, is crucial for financing development projects and bridging budgetary gaps. However, managing this debt is essential to ensure economic stability and sustainability.

External debt, representing borrowings from foreign lenders, was 540.3 billion Birr, while domestic debt stood at 320.4 billion Birr. The composition underscores the reliance on external sources for financing, which comes with its set of challenges, including exchange rate risks and dependency on foreign lenders.

Investment, both domestic and foreign, plays a pivotal role in driving economic growth, creating employment opportunities, and fostering technological advancements. In Ethiopia, the investment landscape during the third quarter provides insights into the country's growth prospects and its attractiveness to investors.

Domestic investment is a reflection of the confidence local entrepreneurs and businesses have in the country's economic environment.

Domestic investment witnessed a positive trajectory, increasing from 320.5 billion Birr at the start of the third quarter to 340.3 billion Birr by its end. This growth underscores the optimism and confidence of local investors in the Ethiopian market.

FDI inflows are a testament to a country's attractiveness to foreign investors and its integration with the global economy.

Ethiopia attracted FDI inflows of 85.4 billion Birr during the third quarter. This figure indicates the country's potential as an investment destination and its ability to draw foreign capital, which can contribute to technology transfer, job creation, and economic diversification.

The third quarter economic report for Ethiopia provides a comprehensive overview of the country's economic performance across various sectors. From revenue collection and expenditure patterns to investment dynamics and monetary indicators, the data offers insights into the challenges and opportunities facing the Ethiopian economy. As the country continues its journey towards sustainable development and inclusive growth, understanding these dynamics becomes crucial for policymakers, investors, and other stakeholders.

• National Bank of Ethiopia. (2023). Quarterly Economic Report.

• World Bank. (2023). Ethiopia Economic Update.

• International Monetary Fund. (2023). Ethiopia: Article IV Consultation.