What lies behind Ethiopia’s privatisation push?

The winds of change are blowing through one of Africa’s most tightly-controlled economies. Ethiopia’s new reforming prime minister Abiy Ahmed looks set to pursue a series of privatisations which appear to challenge decades-long, state-led economic development policies inspired by the country’s long-time economic benefactor, China – yet it is unclear whether he is overseeing a genuine change of direction or merely desperate to fill depleted foreign currency coffers.

While Mr Abiy’s flurry of reforms since coming to power in April have significantly improved the political climate in the strife-torn country ruled by the authoritarian Ethiopian People’s Revolutionary Democratic Front (EPRDF) since 1991, the implications of his decision to privatise a host of state-owned enterprises, including highly attractive assets such as the state airline and telecoms operator, are still being digested.

The privatisation plans, while apparently under consideration by the former regime, came as something of a bolt from the blue, with Mr Abiy, a former army officer, providing few hints of his intentions when he came to office. The sell-offs, announced in early June, are seen by officials as part of efforts to boost and modernise the economy. While the state will retain a dominant role in part-privatised enterprises in the telecoms, energy, logistics and aviation fields, a combination of partial and full privatisations are envisaged for sectors including railways, sugar mills, industrial parks and hotels. 

With central bank foreign reserves believed to be barely enough to pay for imports from one month to the next, the sell-offs could be seen as economic opportunism aimed at addressing the country’s financial crisis, given the apparent absence of any accompanying attempts to improve the tough business environment. Ethiopia comes near the bottom of the World Bank’s league table of international investment conditions.

Yet there’s a strong argument for a move towards economic liberalisation. With reports of China’s interest in Ethiopia, Africa’s fastest-growing economy, cooling off over concerns about the country’s finances, Mr Abiy must look to develop the private sector. That he has already taking steps to reduce the role of the military in the economy is a sign that he is serious about economic reform.

For decades, billions of dollars in Chinese loans have sustained Ethiopia’s massive public investment programme that has supported infrastructure projects, from dams and railways to nationwide industrial parks. It has contributed to double-digit growth, albeit from a low base: the country remains one of the poorest in the region. China identified Addis Ababa as a key partner in its ambitious Belt and Road initiative aimed at building a network of trading links across Asia, Africa and Europe, with Ethiopia’s industrial parks home to low-cost manufacturers producing cheap textile products for international brands.

Yet a recent report in the Financial Times suggests that China’s is scaling back its investment because of Ethiopia’s foreign exchange crisis and increasingly unsustainable levels of debt, nearly 60% of GDP. Despite helping to substantially expand the country’s manufacturing base, which draws most foreign investment, exports are dwarfed by high volumes of imports, exacerbating the dollar shortage. The problem is so acute that state banks have been instructed to issue hard currency only to businesses in sectors deemed strategically important, such as pharmaceuticals and manufacturing. That has left small companies without the means to purchase overseas supplies, forcing many to close.

Moreover, some of the projects that China has financed are not proving to be such sound investments, in particular a modern tram system in Addis Ababa, a first for sub-Saharan Africa, and an electrified railway line between the capital and Djibouti, slashing travel time to Ethiopia’s maritime export outlet. Both projects are said to be underperforming, apparently hit by significant logistical problems.

With China reportedly set to back away from its Horn of Africa ally, it would make sense for Mr Abiy to review his country’s statist economic model, which on the face of it would be consistent with his direction of travel since coming to power. A whirlwind of encouraging moves have included the release of thousands of political prisoners, the loosening of restrictions on the media, ending a state of emergency two months earlier than planned and plans to implement a long-disputed peace agreement with neighbouring Eritrea.

But assuming that Mr Abiy genuinely believes that Ethiopia needs to open up its markets, he might face resistance from his deeply divided ruling coalition, which could leave him vulnerable. Although the identity of those behind an apparent assassination attempt last month at a rally in Addis Ababa remains unknown, the incident underlines the dangers associated with the political and economic risks Mr Abiy is taking.

Yet even his critics within the EPRDF, notwithstanding their desire to maintain a grip on the economy, likely understand that revenue-generation from at least partial sell-offs is required to deal with the foreign currency shortage which, if not addressed, could lead to more business closures and fuel already high employment. The instability that rocked the country and threatened the regime over the past three years was in large part caused by limited economic opportunities available to the country’s increasingly youthful population. The EPRDF does not want to see more waves of unrest.

Mr Abiy will likely tread cautiously. Details of the planned privatisations are thin on the ground, as he perhaps tries to assess Western investors’ appetite for sell-offs in a country crying out for pro-business reforms. In the meantime, the UAE’s recent £3bn financial aid and investment package has given him some breathing room.

For some investors, the prospect of stakes in attractive assets such as Ethiopian Airways and Ethio Telecom, the sheer size of the Ethiopian market and the government’s commitment to infrastructure development, may outweigh significant corruption risks, opaque regulation, foreign currency shortages and a financial sector closed to foreign institutions. Others, however, might hold off until they are confident Mr Abiy is prepared to put as much effort into improving the business environment as he has towards changing the political landscape.

Yigal Chazan is an associate at Alaco, a London-based business intelligence consultancy.