Global Financial Crisis Discussion Series. Paper 16: Ethiopia Phase 2

Abstract

This study sought to investigate the channels through which the financial crisis has transmitted its effects in Ethiopia, the effects of the crisis on growth and development, policy responses that have been put in place and whether the country is well placed to respond effectively to crisis in the future. A mix of both secondary and primary data was used to assess the impact. To see the level, direction and trend of the impact of the crisis, we used before and after comparisons. Among other things, the study identified foreign direct investment (FDI), trade, remittances and aid as channels through which the crisis transmitted its effects. After the crisis hit, it was observed that FDI, remittances, export volumes and export prices declined. The decline in exports and remittances led the government to ration foreign exchange, with a resultant decline in imports. Accordingly, gross domestic investment declined from about 24% of GDP in the past four years to 20.3% in 2008/09. Tax revenue and government expenditure also declined in 2008/09. With regard to impacts on imports, tax revenue and government expenditure, a decline in overall growth would be expected. Despite the Ethiopian government estimating real growth of GDP in 2008/09 at 11.2%, overall growth is estimated to have been as low as 7.5% (IMF, 2009b) and 6% (World Bank, 2009). This estimated decline in growth and the observed decline in public expenditure and private consumption resulting from the crisis are expected to have increased incidence of poverty