Ethiopia Battles the Pandemic and Its Economic Consequences

June 10, 2020

Ethiopia recorded its first case of Covid-19 in mid-March. Alarm bells were immediately sounded because of the country’s ominous circumstances: a population of 110 million and an overcrowded capital city of Addis Ababa. What makes matters more complicated is that Addis Ababa’s Bole International Airport is one the busiest hubs on the continent and a major gateway into Africa for millions of international travelers.

In the nearly three months since Ethiopia’s index case, the country has administered 158,521 tests—recording 2,506 confirmed cases, 401 recoveries, and 35 deaths. Given Ethiopia’s large population and insufficient health care capacity, it is remarkable that the country has one of the lowest reported incidences of the virus among the world’s most populous nations. This unexpected turn of events begs many questions, ranging from the government’s public health response to the economic impacts of the pandemic.

Q1: How is the Ethiopian government responding to Covid-19?

A1: Shortly after confirming the presence of Covid-19 in the country, the Ethiopian government moved swiftly to implement containment measures: closing schools, shutting nightclubs and entertainment outlets, and prohibiting religious, sporting, and other large public gatherings. The government closed Ethiopia’s land borders and suspended flights to more than 80 destinations. It also postponed general elections scheduled for August 2020.

While many parts of the world were debating whether to take the pandemic seriously, the Ethiopian government and Health Minister Dr. Lia Tadesse—a highly respected health practitioner who was appointed to the job just one day before the outbreak—sprung into action, immediately subjecting incoming travelers to a mandatory 14-day quarantine. The government also moved decisively to require the wearing of face masks in public places and enforce social distancing measures. The Ministry of Health deployed thousands of community health workers across the country to educate and screen individuals at home. As an extraordinary step, the government pardoned more than 4,000 prisoners to prevent the spread of the virus through the prison system.

The early health efforts have thus far contained the spread of the virus. But in recent weeks, the number of cases has spiked, mostly from sustained community transmission. The government must maintain its safety measures and continue to deploy community health workers to every region.

In addition to immediate health measures taken by the government, on April 8 Prime Minister Abiy Ahmed declared a state of emergency under Article 93 of Ethiopia’s constitution, which allows the government to undertake exigent measures to safeguard the social and economic health of the country. Pursuant to this step, the government launched several adjustments to its fiscal and monetary policies, including support to businesses as well as policies on imports and exports:

• Accelerated processing of VAT refunds to businesses;
• National Bank of Ethiopia set aside a 15-billion-birr ($450 million) liquidity facility for private banks to support their clients, especially businesses adversely affected by Covid-19;
• Allocation of 3.3 billion-birr ($96 million) to the tourism sector;
• New laws facilitating ease of mobile payments—and increase of mobile transfer limits—which has the potential to transform the tech sector and create much-needed jobs;
• Credit to micro and small and medium enterprises (SMEs) via a quick-disbursing special window at the Development Bank of Ethiopia;
• Tax arrears forgiveness for all dues up to FY 2014-15. This covers 3,099 taxpayers with interest/penalties. Principal still due with 25 percent payable;
• Tax exemption for importation of products related to curbing the outbreak;
• Foreign currency for imports of products related to curbing the outbreak; and
• Removal of floor price restriction for horticulture exports.

Q2: What are some key economic challenges facing Ethiopia?

A2: Ethiopia is confronting three principal economic challenges: 1) its debt burden, 2) foreign exchange woes stemming from poor sector performance, and 3) a decline in remittances. The economic consequences of the pandemic appear to be more protracted than health-related repercussions. This will reverse economic gains made in the past few years, which have seen large segments of the Ethiopian population lifted from poverty. The number of people living below the poverty line is now expected to increase to 31 million people in fiscal year 2020-2021 from 26 million people in 2019-2020.

Ethiopia has a substantial amount of debt: external debt and domestic debt account for approximately 30 percent and 27 percent of the GDP, respectively. Servicing external debt was already a stretch for the government’s budget prior to the pandemic. The constraints on the country’s balance sheet have been exacerbated in the last few months. Unless crushing debt payments are delayed, the International Monetary Fund (IMF)’s emergency funding of $411 million and the World Bank’s $82.6 million are a drop in the bucket.

First, the country’s foreign exchange is weak and poses a significant near-term challenge to its economy. Already, the exchange rate has fallen to 33.53 Birr/$1 at the end of April 2020, representing a 15 to 17 percent depreciation from the same time last year, according to conversations with the Ethiopian Ministry of Finance officials.

Second, the country’s foreign exchange status can be attributed to its poor-performing sectors, particularly its national airline, agricultural exports, hospitality sector, and production targets.

• Ethiopian Airlines, the country’s largest foreign exchange earner, saw a decline in revenue of over $550 million between January and April 2020. This is particularly worrisome as the airline supports over 1 million jobs and contributed over 5 percent of Ethiopia’s GDP in 2019.
   
• Ethiopia’s agriculture exports— 60 percent of total exports in 2019—have also been dealt a major blow as demand slows in major European and North American trading partners. The agriculture sector is the largest employer in the country and generates significant foreign exchange for Ethiopia, particularly coffee and oil seeds. According to Deloitte, Ethiopia’s agricultural exports as of April 2020 were only at 20 percent of their usual volume, translating into a year-to-date (YTD) loss of about $132 million. In addition, a significant amount of Ethiopia’s cropland and pastures have been impacted by a locust invasion, pushing over one million people into hunger.
   
• Ethiopia’s hospitality sector has collapsed as travel bans have gone into effect around the world. The collateral damage is significant as hospitality accounts for over 8 percent of the total employment in the country. At the same time, Ethiopia’s manufacturing sector—a key focus of the government in recent years—has weakened due to the disruption in supply chains worldwide. Ethiopia’s textile and apparel industries, in particular, have been affected by supply shortfalls in China, as well as the slowdown in demand in Europe and North America.

Finally, Ethiopia will experience a sharp decline in remittances from its global diaspora, which in 2019 totaled $5.7 billion, according to conversations with Ethiopian Ministry of Finance officials. Ethiopia is not immune to the expected 20 percent decline in global remittances in 2020, as estimated by the World Bank. Many Ethiopians in the diaspora face economic hardships in the United States, Europe and elsewhere. Several countries in the Middle East including Lebanon, the United Arab Emirates, and Saudi Arabia have exacerbated the situation by deporting Ethiopian domestic workers.

Q3: How should the Ethiopian government and its partners address the economic crisis stemming from the pandemic?

A3: The Ethiopian government has responded swiftly and successfully in tackling both the health and economic crises presented by the pandemic. This problem, however, is different from any the country—or the world—has faced in recent times. Below are four steps the Ethiopian government and its partners can take to address some of these issues.

• Widen social safety nets. Most African countries, including Ethiopia, do not have the fiscal muscle to provide a social safety net for their citizens in the same way that developed countries have been doing. While Ethiopia is providing food and shelter to protect the most vulnerable, the government must further expand food assistance and social protection programs for its most vulnerable populations. It has been encouraging to see the private sector and citizenry participate in supporting those less fortunate in their communities.
   
• Encourage private and public sector investment. While liquidity has been made available to the banks, the impact of such measures can only be assessed in terms of their positive effects on the businesses they were intended to reach. As investment in and by the private sector has slowed, now would be a good time for increased public sector investment to keep the economy running and mitigate drastic job loss. It is also critical to engage and encourage private sector creditors to participate in debt relief efforts.
   
• Accelerate Mobile Payment Reforms. The government has made some progress in the telecom sector during the pandemic, particularly in digital payments. Recently proposed laws would allow non-financial institutions into the financial services sector for the first time, including telecommunications giant and state-controlled monopoly Ethio Telecom. The government should press ahead in these efforts to bring about much-needed investment, job growth, critical revenue in the government treasury, and much-anticipated mobile money efficiencies for customers.
   
• Support International debt relief. There does not yet seem to be international political support for an outright Highly Indebted Poor Countries (HIPIC)-like debt relief at the moment. Donor governments such as Canada, China, France, the United Kingdom, the United States, and others should support immediate debt moratorium for 2020 and 2021 so that countries like Ethiopia can use their limited resources to expand social protection for their citizens.

Prime Minister Abiy Ahmed penned an eloquent op-ed in the Financial Times pleading to the international community on behalf of the African continent on the need for global coordination efforts, “We can defeat this invisible and vicious adversary-but only with global leadership. Without that, Africa may suffer the worst, yet it will not be the last. We are all in this together, and we must work together to the end.” He is right: we are all in this together.

Mimi Alemayehou is a senior associate (non-resident) with the Africa Program at the Center for Strategic and International Studies in Washington, D.C. She is the managing director and a member of the board of directors of Black Rhino Group, an investment platform focused on the development and acquisition of energy and infrastructure assets across Africa.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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