Digital transactions in Ethiopia to represent 39 percent GDP by 2025

A new report forecasts that the size of digitally transacted economic activities in Ethiopia will grow to 3 trillion Birr by 2025 representing 39 percent of the country’s GDP.

The new report, Ethiopia’s Digital Economy,  produced by Cepheus Capital and USAID CATALYZE Ethiopia: Market Systems for Growth (MS4G), forecasted that digital transaction in Ethiopia will grow nine-fold by 2025 from its was in 2020. The report launched on Tuesday at Hyatt Regency Hotel in Addis Ababa, estimated that as of 2020 some 350 billion Birr in gross transaction value (equivalent to 10 percent of Ethiopia’s GDP) was transacted digitally generating net revenue of 5 billion Birr for companies involved.

“The largest revenue pools will likely remain within digital finance and telecom services, followed by marketplace platforms, transportation, and digital media. Several companies in the digital finance, ride-hailing, and digital media space could see Birr 1bn valuations in a few years’ time, by our estimates. If seen as a stand-alone company and using current valuation metrics of comparable cases, tele birr is likely to be Ethiopia’s first ‘digital disruptor’ to reach dollar unicorn status (with a $1bn-plus valuation) well before 2025,” the report stated.

“The digital economy space in Ethiopia is clearly entering a “liftoff phase” thanks to a mix of both macro and ecosystem drivers (fast growth, rapid urbanization, growing internet penetration, improving networks, and better data affordability), improved public policies, and rising numbers of private entrants and funders,” it said.

“Widespread digitization across the economy’s key sectors should yield benefits of macroeconomic significance by removing long-standing payment problems, by reducing high transaction and trading / intermediation costs, by activating previously unused or underutilized labor/other resources, by boosting sales volumes/channels for both small and large businesses alike, and by raising foreign exchange earnings potential. Maximizing all these gains will not be automatic, however, and as highlighted by many in the sector both the private and public sectors— including entrepreneurs, investors, and policymakers—have a vital role to play in each of their respective domains,” the report said.

“Most notably, for the Ethiopian context, we see the most urgent priorities in:
– (1) making further progress on still remaining digital infrastructure, affordability, and policy constraints;

– (2) addressing the mismatch between Ethiopia’s biggest GDP components (agriculture, construction, wholesale/retail trade) and the current set of digital service offerings (mainly in finance, transport, and personal services/entertainment);

– (3) channelling fin-tech offerings (the largest digital economy sub-segment for the foreseeable future) much more heavily towards credit offerings rather than just payment solutions;

– (4) orienting digital enterprises towards activities that capture and further boost the sector’s vast foreign exchange potential; and

– (5) ensuring that the public sector’s dominant role in key digital sub-segments (telecom, finance) is subjected to competitive conditions and advanced in ways that create open platforms and partnerships for private enterprises in those same activities or in closely related sectors.”

Key points of the report

– Cross-country standing: Despite the recent progress, the scale and scope of Ethiopia’s digital disruptors remains quite limited when seen from a crosscountry perspective. Companies in other country contexts have shown massmarket adoption by providing exemplary solutions to some well-known consumer ‘pain points’ and/or business bottlenecks.

In the Ethiopian context, this would mean, among other things, offering simplified solutions for making
payments (P2P, P2B, P2G, G2P); addressing inefficient/costly food value chains; improving weak information bases faced by buyers and sellers of goods/services (jobs, homes, personal goods, industrial items); enhancing localized offerings for services (education, entertainment); and solving
bureaucratic aspects of government services (utilities, IDs, permits).

Funding environment: Only around $40mn in funding has been provided by equity investors in the digital economy space, and an additional $20mn provided by donors. Average funding size has been very limited and Ethiopia’s share of global flows remain trivial.

We expect funding resources to expand substantially in the coming years, to as much as a quarter billion dollars over the coming years, as four distinct pools of funders—government funds, foreign investors, donors, and local funders—take a much more active role.

Policy Issues and Regulatory outlook: While a wide range of regulatory obstacles held back growth in digital economy in the past, many industry players now describe the policy environment as the best it has ever been. Recent/upcoming reforms are addressing the nation’s overarching digital strategy, e-transactions, e-commerce, and commercial/investment laws.

Still, some sector-specific constraints remain while broader macro challenges (fxaccess/convertibility) also pose obstacles that merit attention and action if the true potential of Ethiopia’s ‘digital disruptors’ is to be realized.

– Until very recently, the enabling conditions for the emergence of a digital economy in Ethiopia were
largely absent, given very limited telecom infrastructure, very high costs of network access, and very
low digital connectivity rates among the general population.

– Reforms enacted over the past few years have substantially altered the digital infrastructure and
connectivity landscape: telecom coverage has now reached 95 percent of the country by population
and 85 percent by geographical area, mobile usage has reached 52 million subscribers, and internet
access is available to 25 million users. Telecom costs have been cut by 50-80 percent, boosting
affordability: for example, 1MB of data usage now costs just 6 Birr cents from 30 cents before.

– Looking ahead, the enabling environment for the digital economy is set to improve sharply across
multiple additional dimensions thanks to high level policy/strategic initiatives, regulatory reforms,
telecom market liberalization, enhanced competition, and measures addressing skills gaps. Macro
trends—rapid economic growth, urbanization, and ease of doing business reforms—are providing a
further boost to the digital economy ecosystem, while the COVID pandemic and recent currency
conversion have accelerated the on-going transition to digitization even further.

The fundamental conditions needed for a vibrant digital economy—good network connectivity, affordable
access costs, and conducive policies—have until recently largely been missing in the Ethiopian economy