Easing control of Ethiopia economy a ‘necessity’: analysts

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Ethiopia's economy

(AFP): Ethiopia’s move to open its markets has been hailed as a seismic policy shift, but analysts say the new government had little choice after years of tight control took their toll on the economy.

Ethiopia boasts Africa’s fastest-growing economy and a slew of new, ambitious infrastructure projects — but beneath this jewelled facade are problems.

Despite the heady growth, the economy is showing signs of slowing at a critical time. Just when the country is facing a demographic crunch, dollars have become scarce, debt is unsustainable and sectors that are booming elsewhere in Africa are moribund.

This, say analysts, is what pushed the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF) to announce Tuesday it will allow foreigners to take minority shares in some of its biggest state-owned industries, among them the country’s sole telecom company and Ethiopian Airlines.

It also announced plans to privatise a swathe of industries, from railroads to factories to industrial parks.

“This is potentially a massive change, yes, but it is a change made by necessity,” said Aly-Khan Satchu, an independent economic analyst based in Nairobi.

Prime Minister Abiy Ahmed “understands Ethiopia has their backs against the wall because the model where the government is the main borrower, guarantor and investor does not work anymore.”

The EPRDF put the Ethiopian state at the centre of its plans to rebuild the country after 16 years of civil war that ended in 1991 when they removed the communist Derg regime from power.

Ethiopia’s growth has largely been driven by Chinese investment and loans.

Though it remains one of Africa’s poorest nations, the EPRDF has guided Ethiopia through a decade of double-digit growth.

This year the International Monetary Fund (IMF) predicts its economy will expand by 8.5 percent — the fastest in the continent.

Yet this is a drop from 2017’s rate of 10.9 percent — a dip largely attributed to recent political turmoil.

– Limits of state control –

Abiy came to power in April after the shock resignation of his predecessor Hailemariam Desalegn following years of unprecedented anti-government protests.

The unrest served as a wake-up call to the administration that its economic policies hadn’t delivered jobs or benefited the youth.

More than 41 percent of the country’s population of 100 million is under 15, said the United Nations, while the African Development Bank (ADB) estimates as many as a third of young people in cities have no job.

Ahmed Salim of geopolitical risk advisory firm Teneo Intelligence says the state-centred approach had reached its limits.

“The economic growth story Ethiopia has enjoyed hasn’t been equally distributed around the country,” Salim said.

“The Ethiopian model has been remarkable and it’s worked, but now, it’s just not enough.

“With a country of 100 million people, the public sector is just not able to cope with that” level of unemployment, Salim said.

The liberalisation was announced after a meeting of the top 36 officials in the EPRDF, a one-time Marxist group that wields total control over Ethiopia.

Coming on the same day parliament cut short a nationwide state of emergency, the move was hailed as a sign Abiy is committed to reforms.

The government currently owns most of Ethiopia’s major industries, and foreign businesses are kept out of the banking and retail sectors, a drastic departure from other rapidly-growing African economies like Ghana and Kenya who have welcomed foreign brands.

With the new policy, Salim says he expects foreigners to take interest in the sole telecom Ethio Telecom, along with the agriculture, energy and brewery sectors, where foreigners are already allowed but which may see increased inflows from once-hesitant companies reassured by Abiy’s new approach.

– Will they come? –

Charlie Robertson, global chief economist at investment bank Renaissance Capital, said many prospective investors in Ethiopia may still be turned off by the tough business climate and economy.

Ethiopia, which the World Bank ranks in 161st place globally in ease of doing business, has no stock market, few mechanisms for repatriating profits abroad and last year banned foreigners from personally owning cars.

“Heavy government involvement, a deep suspicion of capitalism, a belief that the government knows best” all may scare away investors, Robertson said, adding that he believes the currency remains overvalued despite a 15 percent devaluation last October.

“Now, the main question will be to see if Abiy is able to back up his promises,” said Satchu.