Current state of the Ethiopian economy

Ethiopia, one of the fastest-growing economies in Africa, is facing potential challenges due to global trade tariffs and protracted debt restructuring negotiations. An envisaged slowdown in investment is expected to affect several African economies, posing a threat to access development financing. Mulalo Madula, an Economist at Standard Bank Group, discussed these issues on CNBC Africa. Madula highlighted that while Ethiopia is concerned about the aid story more than tariffs, the country's limited imports compared to exports mitigate the direct impact of tariffs. Despite facing a baseline tariff of 10%, similar to countries like Kenya and Nigeria, Ethiopia's status as a manufacturing hub gives it an advantage. With only 8.7% of its goods exported to the US and significant trade with other regions, Ethiopia's reliance on global markets is relatively low. Additionally, even though Ethiopia lost access to AGOA in early 2022, the country had already made adjustments in anticipation. In terms of currency performance, Ethiopia devalued the BIR by 15% in 2024 to align official and parallel market rates. Following this, the BIR experienced initial depreciation but has since stabilized, fluctuating between 0.1% and 3.6% monthly. Madula noted that the BIR is not highly volatile, and despite recent adjustments and potential impacts from foreign aid cuts, stable inflows like foreign direct investment (FDI) remain crucial. If FDI slows down significantly, the value of the BIR could be affected. While global economic slowdowns may pose risks to African countries heavily reliant on exports, Ethiopia's lower export to GDP ratio (6.6%) compared to nations like Namibia and Mozambique indicates a lesser direct impact. Madula emphasized that unless FDI and capital formation in Ethiopia are severely hampered by global economic conditions, the country may weather the storm better than others. However, with ongoing debt restructuring negotiations and uncertainties surrounding global trade tariffs, Ethiopia's economy remains at a critical juncture. The potential reduction in FDI inflows could pose challenges for the BIR and overall economic stability. As Ethiopia navigates through these complexities, policymakers will need to remain vigilant and proactive to safeguard the country's economic growth and development.