After twelve years of record economic growth, the economy slowed in 2016, hit by a severe drought and a less buoyant international environment. However, this downturn has been softened by effective government intervention and the strength of industry and services (trade, transport, telecommunications, tourism and banking). In 2017, a return to normal weather conditions was likely to be reflected in a rebound in growth of over 7%. However, serious ethno-political trouble erupted at the start of October 2016, leading to the establishment of a state of emergency. This instability has adversely affected activity, impacting on both investment and tourism, which is likely in turn to hamper the recovery. If the political situation normalizes, growth is expected to benefit in future years from the implementation of a substantial public investment program, which continued under the Ethiopia's second Growth and Transformation Plan. The Plan continues to be focused on developing transport networks and energy, telecommunications and IT-related infrastructures. It also emphasizes expansion of the export-oriented manufacturing sector. The leather, shoes, textiles and agri-food sectors are likely to continue to play a key role in this expansion, unless there is a long-term impact on foreign direct investments caused by the worsening political climate.

The supplementary budget for 2016 allowed the social cost of the drought to be taken into account, while limiting the budget deficit to 3% of GDP. However, the under-execution of non-core expenditure will not be sufficient in 2017 to prevent the deficit from rising as a share of GDP and, in the medium term, new reforms will be required to increase the still low level of taxation. The current account deficit remained high in 2016 because of stagnating export income resulting from the fall in world prices (coffee, oil seeds, gold). Furthermore, higher imports of capital goods and food counterbalanced the drop in the energy bill. However, expatriate workers' remittances and foreign direct investments rose substantially. Despite lower food imports and higher expatriate remittances, there will still be a large current account deficit in 2017. With regard to export performance, the rise in public sector imports is still too great. A more moderate increase in these imports could reduce external financing needs, enable the build-up of a foreign exchange reserve cushion (these represent only 1.9 month of imports) and better resistance to shocks. In addition, the exchange rate is not sufficiently flexible, which harms the country's competitiveness. Although external debt is up, the risk of debt distress is considered moderate. Public investment could well generate growth and the proportion of official borrowing on concessional terms remains high.

Protests by the majority Oromo ethnic group, who have been demonstrating since November 2015 against the expropriation resulting from the Addis Ababa boundary expansion project, to which those by the Amhara have recently been added, have intensified since early October 2016 following a bloody stampede provoked by the security forces. A nationwide state of emergency was announced on 9 October 2016 for a period of six months after a week of violence marked by a growing number of demonstrations with attacks on public buildings and foreign interests. The risk of an escalation in the conflict cannot be ruled out given the hardening stance of the government, dominated by the minority ethnic group, the Tigrayans. Ethiopia is located in an unstable region, marked by security and political stability problems. Relations between Ethiopia and Eritrea, former warring parties, remain very tense. Instability in Somalia is also a threat to the country's security. Finally, tensions with Sudan and Egypt over the construction of the Grand Ethiopian Renaissance Damn have not gone away.