The current government has embarked on a cautious program of economic reform, including privatization of state enterprises and rationalization of government regulation. While the process is still ongoing, so far the reforms have attracted only meager foreign investment, and the government remains heavily involved in the economy.
The Ethiopian economy is based on agriculture, which contributes 45% to GDP and more than 80% of exports, and employs 85% of the population. The major agricultural export crop is coffee, providing approximately 35% of Ethiopia's foreign exchange earnings, down from 65% a decade ago because of the slump in coffee prices since the mid-1990s. Other traditional major agricultural exports are leather, hides and skins, pulses, oilseeds, and the traditional "khat," a leafy shrub that has psychotropic qualities when chewed. Sugar and gold production has also become important in recent years.
Ethiopia's agriculture is plagued by periodic drought, soil degradation caused by inappropriate agricultural practices and overgrazing, deforestation, high population density, undeveloped water resources, and poor transport infrastructure, making it difficult and expensive to get goods to market. Yet agriculture is the country's most promising resource. Potential exists for self-sufficiency in grains and for export development in livestock, flowers, grains, oilseeds, sugar, vegetables, and fruits.
Gold, marble, limestone, and small amounts of tantalum are mined in Ethiopia. Other resources with potential for commercial development include large potash deposits, natural gas, iron ore, and possibly oil and geothermal energy. Although Ethiopia has good hydroelectric resources, which power most of its manufacturing sector, it is totally dependent on imports for oil. A landlocked country, Ethiopia has relied on the port of Djibouti since the 1998-2000 border war with Eritrea. Ethiopia is connected with the port of Djibouti by road and rail for international trade. Of the 23,812 kilometers of all-weather roads in Ethiopia, 15% are asphalt. Mountainous terrain and the lack of good roads and sufficient vehicles make land transportation difficult and expensive. However, the government-owned airline’s reputation is excellent. Ethiopian Airlines serves 38 domestic airfields and has 42 international destinations.
Dependent on a few vulnerable crops for its foreign exchange earnings and reliant on imported oil, Ethiopia is suffering a severe lack of foreign exchange while simultaneously battling high inflation. The financially conservative government has taken measures to solve these problems, including stringent import controls, focused sectors for export development, eliminated subsidies on retail gasoline prices, and capped lending limits for banks. Nevertheless, the largely subsistence economy is incapable of meeting the budget requirements for drought relief, an ambitious development plan, and indispensable imports such as oil. The gap has largely been covered through foreign assistance inflows.
Information by U.S. Department of State