CHAPTER TWO FINANCIAL SECTOR DEVELOPMENT IN …

[Pages:27]CHAPTER TWO

FINANCIAL SECTOR DEVELOPMENT IN ETHIOPIA

2.1 Introduction

This chapter provides an overview of the economy and financial sector development of the country. The chapter begins with an overview of the country's economic status and describes the major social and macroeconomic performance for the study period 20042009; then GDP composition and its trends followed by the poverty profile of the country and its trends. The next section provides details of the financial sector evolution and development. The third section focuses on the MFIs sector with reference to legal and regulatory framework, establishments, ownership structure. Finally, the last section concludes.

2.2 Overview of Ethiopian Economy

Ethiopia is the second most populated country in Africa with an estimated population of more than 83 million people. Ethiopia is one of the least developing countries which ranks 157 out of 169 countries on the United Nations Development Program`s 2009 Human Development Index. According to a recent survey nearly 30% of the country's population live below the poverty line MoFED (2011). The Ethiopian economy is based on agriculture, which in 2009accounted for about 42 percent of the gross domestic product (GDP), about 80 percent of total employment, and nearly 80 percent of foreign currency earnings (MoFED, 2009). Ethiopia's major exports include coffee, oil seeds,

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gold, chat, flowers, pulses, and live animals. Coffee is the leading export, constituting 30.6% of total exports by value in the year 2009 (MOFED, 2009).

Generally, the overall economic growth of the country has been highly associated with the performance of the agriculture sector. Recently the industry and service sectors have been increasing their share of the GDP. The industrial sector, which mainly comprises small and medium enterprises accounted for about 13 percent of GDP in 2009. In the same year, the services sector accounted for about 44 percent of GDP (see Table 2.2).

2.3 Social and Economic Performance

In recent years, the country has been experiencing strong economic growth. More importantly, it has registered an average annual real GDP growth rate of 11 percent during the study period. During the period the agriculture sector, the mainstay of Ethiopia's economy, has grown by an average rate of 9.2 %. The industry and service sector registered an average growth rate of 9.92% and 14.17% respectively (see, Table 2.1). In addition, the country's performance on human development in recent years has also been strong (see Table 2.1 and Table 2.4). In the last few years, the country has made significant strides in reducing rural poverty, improving life expectancy, and rising education levels. However, these gains have been accompanied by high urban income inequality and surging inflation. Despite the years of rapid growth, Ethiopia is among the world's poorest countries with a gross national income per capita of US$230. Table 1 provides economic and social indicators of the country for the study period i.e., 20042009.

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Table 2.1: Ethiopia's main social and economic indicators

Indicator Population (million) Population growth (annual) Life expectancy at birth, total (years) Mortality rate, under 5 (per 1,000) Primary completion rate , total (% of relevant group) GDP (Current, US$ billions) GNI per capita, PPP (current international $) GDP growth (annual %) Inflation, GDP deflator (annual %)

Source: World Development Indicators database 2009

2004 2005 2006 2007 2008 2009

72.53 74.26 75.99 77.72 79.45 81.19

2.43 2.37 2.30 2.24 2.20

2.17

54

55

56 57 57

58

112 107 101 96 90

86

37.41 43.24 47.40 48.33 52.07 55.16

10.05 12.31 15.16 19.55 26.64 31.96

560 630 710 800 880

950

13.57 11.82 10.83 11.46 10.79

8.80

3.91 9.88 11.55 17.22 30.31 24.15

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The government of Ethiopia has outlined its growth targets for the next five years in its Growth and Transformation Plan (GTP 2011-2015). According to this strategy document, the country aims to maintain the average annual economic growth at 11% and hence, meet all millennium development goals by 2015.This government plan also has ambitions to double the country's GDP in 2015 from the level of 2010.

2.3.1 GDP by Sector

Although the economy remains heavily reliant on agriculture, the service sector has driven recent growth, accounting for nearly half of the GDP by the end of year 2009. More importantly, during the period, the share of the services sector in GDP has been rising, while that of agriculture has been declining steadily (see Table 2.2).

Table 2.2: Decomposition of GDP Trend, 2004-2009

2004 2005 Agriculture, value added (% of 47.4 47.1 GDP) Industry, value added (% of 13.6 13.4 GDP) Services, value added (% of 39.7 40.4 GDP)

Source: MoFED, 2009

2006 2007 2008 46.1 44.6 43.2 13.2 13.0 13.0 41.7 43.5 45.1

2009 42.0 13.0 46.1

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The agriculture sector's share of GDP declined gradually from 47.4 percent in 2004 to 42 percent in 2009 and has now been surpassed by the service with its share increasing from 39.7% in 2004 to 46.1% in 2009. However, the share of industry showed no significant change during the period (see Figure 2.1). Although the share of agriculture in GDP tended to decline over time, it still remains the largest employer, the main source of foreign exchange, and supplier of raw materials and market to domestic industries.

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Figure 2:1 Sectoral distribution of GDP in 2004 and 2009

Services 39.7%

2004

Industry 13.6%

Agriculture 47.4%

Services

46.1%

2009

Agriculture 42%

Industry 13%

Source: MoFED, 2009

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Table 2.3 shows the GDP growth rate by sector for the period 2004-2009. The double digit growth has been sustained throughout the study period that led to a simple average real GDP growth rate of 11.3%. The economy registered a 10.4% real growth in the year 2009. According to MoFED (2009), this is one of the highest growths compared to the performance of Sub-Saharan economies which averaged 5% growth. The growth registered in Ethiopia is not only the fastest, but is also broad-based in the sense that agriculture, industry and services sectors registered commensurate growth rates of 9.2%, 9.92% and 14.9%, respectively (see Table 2.3).

Table2.3: Growth rate by sector 2004-2009

GDP growth rate Agriculture Industry Services All Sector

Source: MoFED data

2004

13.50 9.40 12.80 12.6

2005

10.90 10.20 13.3 11.5

2006 2007

9.40 7.50 9.50 10.10 15.30 16.60 11.8 11,2

2008

6.40 9.70 14.00

10

2009

7.60 10.60 13.00 10.4

Average 9.22 9.92 14.17 11.26

Figure 2.2: Growth rate by sector, 2004-2009

18.00 16.00 14.00 12.00 10.00

8.00 6.00 4.00 2.00 0.00

2004

2005

2006

Source: Computed from MoFED data

2007

2008

2009

Agriculture Industry Services All Sector

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2.4 Poverty profile in Ethiopia

Poverty reduction has been the overriding development agenda of the government of Ethiopia. Accordingly, the government has been implementing a series of povertyfocused development strategies, beginning with the Sustainable Development and Poverty Reduction Program (SDPRP) which was executed during the years 2002/032004/05. This was followed by the five-year plan: the Plan for Accelerated and Sustained Development to End Poverty (PASDEP) which covered the period between 2005/06 and 2009/10 and now the Growth and Transformation plan (GTP) covers 2010/11-2014/15. Indeed, the rapid growth over the periods (SDPRP and PASDEP) has helped reduce the incidence of income poverty (MOFED, 2011). According to the recent Household Income, Consumption and Expenditure Survey (HICES) by MoFED(2011), the proportion of people living below the poverty line (measured by headcount index) declined from 38.7% in 2004 to 29.6 % in 2010. Further, the report shows that the poverty incidence in rural areas dropped from 39.3% in 2004 to 30.4% in 2010, while in the urban area's poverty declined from 35.1% to 25.7%. According to the report between 2004 and 2010, income (consumption) inequality measured by Gini Coefficient has shown a slight decline from 0.3 in 2004 to 0.298 in 2010. Inequality as measured by the coefficient has declined in urban areas from 0.44 to 0.37, while rural inequality increased from 0.26 to 0.27 though inequality is still higher in urban than in rural areas.

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