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We expect GDP growth of 2.7% y/y in 2022 and 7.1% y/y in 2023. We expect that the C/A surplus to reach 4.7% of GDP in 2022 and 2.0% of GDP in 2023. We see the pair USD/ETB around 55.6 at year-end.
GDP growth – growth to slow before picking up
Ethiopia remains vulnerable to external problems, security hurdles, and climate change shocks. Still, underlying growth should pick up in the medium term. However, we still forecast GDP growth to slow to 2.7% y/y in FY2022, then improve to 7.1% y/y in FY2023 likely due to better agriculture production as well as reform implementation resuming.
Still, some of Ethiopia’s emerging economic sectors should expand economic diversification. The telecommunication, electricity and mining sectors should support increased economic activity.
Balance of payments – spill-over from Ukraine war
The C/A deficit will likely widen more than forecast in our Jan edition due to the spill-over impact of the Ukraine war. The C/A deficit may grow to 4.7% of GDP in FY2022, from 2.6% of GDP in FY2021, but then improve from H2:23-2024. Rising costs of imports may be the main culprit to deepen the C/A deficit, as was the trend even before the Ukraine war.
Monetary policy – reduced efficacy
We expect inflation to remain elevated, averaging 32.1% y/y, and ending Dec at 29.8% y/y this year. The Ukraine war has bumped up inflation, as has longstanding loose monetary policy. Still, hiking the reserve requirement ratio to 10% from 5% indicates tighter monetary policy, with the NBE’s deposit liabilities rising by 25.3% y/y. Yet, monetary policy is still loose, considering the NBE’s gross claims on the central government. As this is likely to continue in the medium term, the efficacy of monetary policy instruments will be constrained, and inflation will likely stay high. The inflationary impact of high oil prices was contained before, having been only partly passed on to consumers as subsidies provided off-budget support by way of the Oil Stabilization Fund. However, the government may be reducing these costly subsidies. For now, inflation will therefore stay high though we do expect some softening during the harvest season from Oct to Dec.
FX outlook – limited REER correction
We still expect the NBE to limit the correction of the ETB real effective exchange rate appreciation, which may see the ETB depreciate to the USD at its usual pace, ending Dec at 55.57. We assess the ETB as overvalued by 33% in trade-weighted terms. But exchange rate movements have been restricted due to restrictions inhibiting participation in the interbank FX market. Restrictions on payments and transfers include the tax certification requirement for repatriation of dividend and other investment income; restrictions on repayment of legal external loans and suppliers of foreign partners credits; the prioritisation nd rationing of foreign exchange; and needing to provide a clearance certificate from the NBE to obtain import permits.
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