Ethiopia’s Development Faces Structural Barriers Despite Economic Growth, AfDB Report Finds

Ethiopia’s economy continues to grapple with persistent structural challenges, including high unemployment (27.2%), a poverty headcount ratio of 27%, and a low Human Development Index (HDI) score of 0.497, according to a new report by the African Development Bank (AfDB). Themed "Making Ethiopia’s Capital Work Better for Ethiopia’s Development," the report underscores how economic recovery and growth are being undermined by inefficiencies in converting wealth into sustainable, inclusive development.

As frequently highlighted by government officials, economic growth rose to 7.3% in the 2023/24 fiscal year, up from 6.6% the previous year. This was supported by increased exports, relative exchange rate stability, and growing uptake of digital financial services. However, as the continent’s fourth-largest economy in terms of natural resource endowment, Ethiopia will need more than growth alone to overcome long-standing obstacles to development. The country remains off-track in achieving most of the Sustainable Development Goals (SDGs), ranking 145th out of 167 countries in 2024.

To meet its development targets by 2030, Ethiopia requires additional annual financing equivalent to 13.2% of GDP. Yet this remains a distant prospect, with the current tax-to-GDP ratio hovering around 6.2%, one of the lowest in Africa and well below the 15% benchmark considered necessary for basic state functionality. A narrow tax base, widespread informality, and institutional weaknesses continue to constrain domestic revenue mobilization.

Launched yesterday at the Radisson Blu Hotel in Addis Ababa, the report also delivers a sobering analysis of Ethiopia’s economic diversification and liberalization efforts. Agriculture’s share of GDP has declined from 37.5% in 2015/16 to 32.1% in 2023/24, with services making up some of the difference. Manufacturing, however, has stagnated. Rather than transitioning into high-productivity sectors, much of the labor force has moved from informal agriculture into equally low-productivity areas like processing and retail services, far from the structural shift needed for accelerated transformation.

Although Ethiopia is in the final stages of negotiating a debt restructuring deal with official creditors under the G20’s Common Framework, the AfDB’s report highlights the precarious nature of the country’s debt position. Exports remain undiversified, spread over just 231 product categories, while delayed infrastructure projects and a previously overvalued currency (only recently floated in July) have pushed the present value of external debt to exports to around 254%. Ethiopia’s debt-service-to-exports ratio stands at approximately 25%, underscoring how rising annual interest payments have not been offset by stronger export performance. The country’s exports-to-GDP ratio remains one of the lowest globally, even by Sub-Saharan African standards.

Ethiopia’s financial sector, largely dominated by commercial banks, appears stable, with a non-performing loan ratio of 3.9%, below the regulatory threshold of 5%. The rapid digitization of financial services has played a key role in expanding financial inclusion. However, gender and regional disparities persist. The AfDB report recommends accelerating support for the fintech ecosystem, deepening domestic financial markets, and more effectively leveraging both human and natural capital to catalyze sustainable economic transformation.