Monday, September 30, 2013

Ethiopia's 2025 ambitious plan

ETHIOPIA has experienced a 30% reduction in the number of people living below the national poverty line and a fourfold increase in GDP per capita between 2003 and 2012.

In an effort to capitalise on this recent success, the ruling EPRDF government has set out an ambitious plan to become a middle-income country by 2025.

Its five-year (2010-2015) Growth & Transformation Plan (GTP), costing US$75bn-$79bn, sets targets for economic growth and poverty reduction. Goals include the building of 16000km of roads and a 2400km rail network; the quadrupling of power generation from 2000MW to 8000MW, coupled with the laying of 132000km of new power distribution lines; and an increase in the number of mobile phone users from 7m to 40m and Internet service subscribers from 200000 to 3,7m.

The massive amount of government spending required by the plan is one of the drivers of Ethiopia's recent economic boom. "On the demand side, increasingly growth is explained by public investment. Of the 8,5% growth in 2011/2012 [according to IMF figures], two-thirds came from public investment," says Lars Moller, lead economist at the World Bank in Ethiopia.

Seid Nuru of the Ethiopian Economics Association says the rise in public spending on infrastructure projects has been critical to stimulating the economy and has also helped create jobs.

However, some analysts feel the effects of the GTP are not entirely positive. One Ethiopian economist who preferred to remain anonymous believes some of the monetary and fiscal difficulties recently faced by Ethiopia are a direct result of the GTP. These difficulties include high inflation (which reached a peak of 40,7% in August 2011 but has recently dropped to single digits), foreign exchange shortages, increasing external debt and bank illiquidity.

Local banks are unable to meet the high demand for credit from both the private and public sectors. High inflation, coupled with low interest rates, has reduced the level of savings to well below the sub-Saharan average. This, together with a National Bank of Ethiopia directive exacting a 27% levy on new bank loans for the purchase of government bonds to fund big infrastructure projects, has meant less finance is available.

Furthermore, observers say the public sector is given more favourable treatment by the banks in access to credit and foreign exchange. The result? Though Ethiopia has the third-highest rate of public investment in the world, its private investment is the sixth-lowest.

This crowding out of the private sector presents a serious challenge to continued growth. However, Moller believes public investment in road, rail and hydro-power will have a catalytic effect - improving trade logistics, stimulating trade and eventually crowding-in the private sector.

The Ethiopian economy has for a long time been dominated by agriculture: around 85% of the workforce is engaged in the sector and coffee remains the largest export. Gold has recently become a key export, generating revenues of $578,8m in 2012/2013, and the extractive industries in general are set to grow. Deposits of tantalum and potash have been found and Tullow Oil and Marathon Oil are looking for gas and oil.

Seid is concerned about the country's dependency on commodities. "We need to diversify our exports and the structure of the economy has to be changed," he says. One area of potential diversification is light manufacturing.

The conditions for foreign direct investment (FDI) in this sector are good. Cheap labour, competitive electricity prices, duty- and quota-free access to the US and EU markets and tax exemptions and holidays are beginning to draw in foreign companies in the textiles and leather industries. Huajian, a major Chinese shoe manufacturer, began production in Addis Ababa in 2012 and together with the China-Africa Development Fund plans to invest $2bn over 10 years to create a global shoe hub.

However, FDI remains low, reaching just an estimated $1bn in 2012. One Western economist blames this on "the heavy hand of the Ethiopian government in the private sector". A 2012 World Bank study on Chinese FDI in Ethiopia bears this out. The survey found 84% and 54% of investors respectively cited customs and trade regulations and tax administration as major constraints on their business.

Trade logistics is also problematic. The cost of transportation to and from landlocked Ethiopia is one of the key difficulties Huajian has faced. For every 12 containers shipped, eight are imported at a cost of $8000 each, says Helen Hai, CEO of overseas investment with Huajian Group. Of this, $4000 goes on transport from China to the port of Djibouti, the rest is swallowed up on the 700km journey to Addis Ababa.

According to World Bank listings on trade logistics, Ethiopia has dropped from 104th place to 141st in the past five years. If growth is to be sustained, doing business in Ethiopia has to be made easier.

Moller is hopeful the situation will improve. "The government acknowledges the challenge and is asking for the World Bank's support to move it forward," he says.