Ethiopia opens up under new administration

For the past decade, Ethiopia has been a tantalising prospect for investors. With its wide terrain and underserved population of 100 million, its potential is vast. Economic growth rates averaging more than 10% for a decade increase its appeal.

Until recently, much of the country’s centralised, state-controlled economy has been closed to foreign investors. Now, however, Ethiopia is in the early stages of a transformation.

Following several years of unrest and mass protest, former prime minister Hailemariam Desalegn resigned in February. His successor, Abiy Ahmed, has announced a programme of political and economic reforms designed to open the country up and reconcile an increasingly divided population

An act of necessity?

Part of Mr Abiy's motivation is political. Since 2015, the country’s two main ethnic groups have been protesting their political exclusion within the one-party state’s ruling coalition. Government attempts to quell the unrest through crackdowns under successive states of emergency only caused further discontent.

But economic realities play a significant role. FDI dropped some 10% in 2017 to about $3.6bn while public debt currently stands at 58% of GDP. With foreign exchange in short supply, the IMF warns that Ethiopia faces “high debt distress” in 2018. Opening up the economy, in this context, starts to look less like a choice, and more of an exhaustion of other options.

“Ethiopia’s new leadership is sending positive signals that recognise the strategic importance of attracting more private capital and inviting more innovation. The existing economic model is likely to evolve to thrive, and attract higher flows of foreign investment and knowledge transfers,” says Mario Pezzini, director of the OECD Development Centre.

Critics hovering

Some critics of Ethiopia’s statist development model have interpreted Mr Abiy’s agenda as capitulation. While the coming changes are significant, the partial liberalisation planned for previously closed sectors such as telecoms and aviation do not represent a break with the government’s previous policies. Rather, long-planned changes are being accelerated.

“The party has been discussing these changes for several years now, and the decision to move forward at this time appears to have been motivated at least in part by the need to ease a crippling foreign exchange shortage,” says Ty Mccormick, Africa analyst at consultancy Eurasia Group.

Mr Abiy’s political capital should help him push through these changes. A very public assassination attempt in June and the declaration of peace after two decades of conflict with neighbouring Eritrea in July bolstered his popularity at home and abroad.

Under the surface of these events lurks the ferment of opposition to the new direction. The assassination attempt, still under investigation, could point to discontent within the ranks of Ethiopia’s powerful securocrats. A peace deal with neighbour and long-time nemesis Eritrea is likely to antagonise the same factions.

Prizes to be won

Encouraging foreign investment is not a new tactic for Ethiopia. Even before the recent leadership transition, the government was working to portray the country as open for business, even as it maintained monopolies over most of the economy.

A more extensive roll-back of state ownership is now in the offing. Mr Abiy’s government has promised partial privatisations of state-owned monopolies in aviation, utilities and logistics.

“While majority stakes will be held by the state, shares in Ethio Telecom, Ethiopian Airlines, Ethiopian Power and the Maritime Transport and Logistics Corporation will be sold to both domestic and foreign investors,” the party said in its June announcement.

Ethiopian Airlines is regarded as a particularly enticing prize. It is Africa’s most successful air carrier, making $232m in profit in its latest financial year. Both MTN and Vodacom have said they will explore taking stakes in Ethio Telecom. A programme of “mixed ownership” or “outright full privatisation” could also happen in industries including railways, sugar, industrial parks and hotels, Fitsum Arega, the president’s chief of staff, said on Twitter.

This will all take time, however. Analysts do not expect share placements for at least another year and detailed plans for the privatisation process have yet to be made public.

Push and pull

These movements do not represent Ethiopia’s first round of privatisations. The country opened up industries including breweries and mining to outside investors in the 1990s, while limited are partnerships with the government possible in construction and healthcare.

The government has also invested heavily in special economic zones in order to accelerate investment into low-cost light manufacturing. Policymakers hope the country can capitalise on rising labour costs in Asia to become a new hub for producers. Wages in Ethiopia are about one-quarter of those in China and half of those in Vietnam.

This has brought some results. Since 2012, manufacturing has grown to account for 5.5% of GDP, up from 3.5%. Ethiopian factories now supply major retailers including H&M, JCPenney, J Crew and Burberry.

Up until recently, China had been a key investment partner in many Ethiopian state-led projects, including the special economic zones, roads and railways. Chinese entities loaned $13bn between 2006 and 2015 to Ethiopian projects, up from a baseline near zero at the turn of the century.

However, in another sign of Ethiopia’s economic fragility, China is backing away. In June, the Financial Times reported that state-owned export credit insurer Sinosure was more reluctant to extend credit insurance for projects in Ethiopia. Chinese diplomats have signalled they are financially overextended in the country.

Tackling the youth bulge

At stake in Mr Abiy’s reform agenda is the future employment prospects for Ethiopian citizens, a key source of discontent among protesters. Despite the government’s efforts to create jobs through state-led development in recent years, there are demands for much more to be done. Officials claim the country created 800,000 new jobs in the six months to February 2018.

However, Ethiopia has a massive youth bulge to contend with. An estimated 2.5 million young Ethiopians enter the job market every year, many with low levels of education. “More inclusive development and technology transfer are needed, including fostering stronger links between Ethiopia’s regions and special economic zones,” says Mr Pezzini at the OECD.

Expectations for the new prime minister are very high – perhaps impossibly so. Loss of popularity and a turn in public sentiment could swiftly follow. Mr Abiy has approached his new post with vigour but he will need to work hard to ensure his reform agenda is well under way before the honeymoon period wanes.