This year will be a decisive one for Ethiopia in determining whether it retains its status as an African economic success story while the government grapples with one of the biggest challenges to its power in decades. Rebecca Spong reports.
Ethiopia is currently one of Africa’s fastest-growing economies, with its GDP growing at a rate of 10.2% in 2014/15, according to International Monetary Fund (IMF) data. Its compound annual growth rate (CAGR) between 2011 and 2015 stood at 20.6%, almost double the rate recorded in its fellow East African nations of Kenya and Tanzania, according to World Bank data.
But while skyscrapers go up in the capital city of Addis Ababa, new railways are built and coffee production ﬂourishes, dissatisfaction for the current political regime has seeped through the country.
Ethiopia’s two largest ethnic groups, the Oromo and Amhara, have grown increasingly agitated with the dominance of the minority Tigrayan people in key positions of power in both politics and business. Government attempts – now abandoned – to expand the boundaries of Addis Ababa into their regions added to their list of grievances. The frustration escalated in October last year as violent protests broke out. People were killed, property destroyed and ﬂower farms burnt. The government responded by declaring a state of emergency – which remains in place today.
While the government’s reaction has temporarily placed a lid on the instability, questions are being raised about the direction Ethiopia will take this year.
Already, growth forecasts are more muted than before. Investors and analysts are mulling whether or not the Ethiopian economy has reached a tipping point.
“The ethnic coalition that has held the country together for the last two or three generations is starting to fall apart and that will be the main threat for an investor dealing with Ethiopia. Essentially the political stability of the country will change, not overnight but over the next few years,” says Robert Besseling, executive director at specialist intelligence company Exx Africa.
“It is the ﬁrst real serious challenge to the [current] Ethiopian state since its founding in the ‘90s, and all comes down to those who have lost out on the economic boom – they all want a slice of the pie,” he says.
The rise of Ethiopia
Ethiopia has gone through a rapid transformation since the 1980s, when the country was gripped by drought and famine. Much of this growth is due to the heavily state-led development model imposed by the Ethiopian People’s Revolutionary Democratic Front (EPRDF) which came to power in 1991 and has ruled with a ﬁrm grip ever since.
The government, currently led by prime minister Hailemariam Desalegn, has implemented ﬁve-year economic plans. The ﬁrst so-called Growth and Transformation Plan ran from 2010 to 2015, and the second ﬁve-year plan is now in place.
So far, the state-run model has generated results. The nation’s GDP stood at US$61.54bn as of 2015, according to World Bank data. This is almost double the size of the economy in 2009 (US$32.43bn).
“They had a vision. Let’s invest massively in infrastructure, education and that’s why we have seen this stunning growth,” says Edward George, head of Ecobank UK and of group research for the bank globally.
Soft commodities, and in particular coffee, underpin the Ethiopian economy. Coffee accounts for 18.8% of Ethiopia’s total exports, with only the re-export of petroleum products accounting for a marginally larger chunk, according to 2014 Intracen data, compiled by Ecobank.
Coffee, tea and spices were the largest exports from Ethiopia by value, reaching US$1.09bn in 2015, based on Equant Analytics data. This is an increase from the approximately US$446mn-worth of exports recorded in 2006.
Ethiopia is leading the way in Africa in the marketing of its coffee, selling the majority of it via the Ethiopia Commodity Exchange (ECX), which was set up in 2008.
“[It has been] hugely successful in improving farmer welfare and has become the model that many exchanges in Africa are trying to copy. There is a network of warehouses around the country. Farmers can deposit coffee there, they can get a warehouse receipt and raise ﬁnancing against it, and live prices are brought in from the trading ﬂoor in Addis so no one is cheating them on the coffee,” George says.
The country’s total export volumes reached approximately US$5.66bn in 2015, according to Equant Analytics. The ﬁrm forecasts that exports will almost double to hit US$10.3bn by 2020.
Ethiopia offers a wealth of opportunity for banks and investors looking at the commodity sector, says Gustavo Seco, head of structured trade and commodity ﬁnance at London-based Moroccan bank BMCE Bank International.
“In terms of advantages, Ethiopia has a young population, and the cost of labour is attractive. The government has put in place an ambitious industrialisation programme that has attracted foreign direct investment,” he says.
Moroccan banks and companies already have their eye on Ethiopia. One of the North African country’s large ﬁrms, the fertiliser producer OCP, signed a US$2.4bn deal with the Ethiopian ministry of public enterprise in November to build a new fertiliser plant that will be able to produce 2.5 million tonnes of fertiliser per year by 2022. A further US$1.3bn-worth of investment is planned to increase production to 3.8 million tonnes per year by 2025.
The plant intends to make Ethiopia self-sufﬁcient in fertiliser, as up until now many farmers have had to pay higher prices for imports, or use less fertiliser to keep costs low. Any excess capacity from the plant is planned to be exported to regional markets, according to a statement released by OCP.
“This investment by OCP in the country will signiﬁcantly improve the agribusiness economy by allowing local farmers to buy [fertiliser] in local currency, helping the country save its foreign currency reserves. I see Ethiopia doing extremely well – at least in the agri space from the moment this factory starts producing. I am very positive about Ethiopia as long as the political situation stays stable,” says Seco.
Infrastructure and China
Ethiopia’s exports are still currently dwarfed by import volumes. The country has been running a trade deﬁcit for years, which widened to 21.9% of GDP in 2015, according to the IMF, after having lingered around 16 to 18% of GDP during the previous ﬁve years.
Total imports in 2015 stood at US$27.86bn, according to Equant Analytics data. The ﬁrm forecasts imports to rise to US$37.36bn by 2020.
The surge in imports is down to demand for capital goods and materials to support the country’s infrastructure plans. The fastest-growing imports as of 2015, according to the same data, were railway and tram locomotives and related rolling stock.
The railway-related imports were no doubt partly supporting the construction of the new railway that connects Addis Ababa to the Port of Djibouti, around 750km away, which opened in October. The service intends to cut the journey time down from a three-day road trip to a roughly 12-hour train ride. Given that Ethiopia is a land-locked country, it provides strategically important access to the port of Djibouti from which its exports can be shipped.
Much of the investment came from Ethiopia’s largest import partner, China. The railway was partly funded by China Export-Import Bank and built by Chinese ﬁrms.
According to Equant Analytics, Chinese imports to Ethiopia in 2015 were worth US$7.4bn. China’s large-scale investment in Ethiopia mirrors its strategy in other African countries, where the Chinese have ﬁnanced and built strategically important infrastructure such as ports, factories and railways in order to secure long-term supplies of commodities to support their own economy.
Chinese companies and banks are also involved in the construction of industrial parks. In January, the Ethiopian Industrial Parks Development Corporation (IPDC) awarded the construction of three industrial parks in Addis Ababa and Jimma to three Chinese construction companies. The total project cost is reported to be Br10.5bn (about US$464.2mn).
While Ethiopia has seen staggeringly high levels of growth, there are signs that the state-led infrastructure-heavy economic model may not be sustainable. The IMF’s October 2016 regional outlook report forecast slower GDP growth of 6.5% and 7.5% in 2016 and 2017 respectively. The fund cited concerns with the impact of a weakened global environment and the effect of the severe drought on Ethiopia’s growth. Export revenue stagnated in 2015 due to low global commodity prices, the IMF added.
A slowdown in China could also be problematic for Ethiopia, given the high level of investment from Chinese ﬁrms. “If China’s growth continues to stall, this threatens Ethiopia’s progress towards being Africa’s growth engine,” says Rebecca Harding, CEO of Equant Analytics.
The heavy hand of the state over the economy also makes it difﬁcult for foreign businesses to invest in the country. “It is very controlled in terms of where you can put your money. There are certain sectors you can and certain sectors you cannot. You really need to have an Ethiopian partner to succeed,” says Ecobank’s George.
The government has begun to liberalise parts of the economy. Infrastructure and logistics are open to outside investment. But the telecoms sector remains dominated by the state monopoly, Ethio Telecom, and the banking sector also remains closed to foreign capital.
While non-Ethiopian banks can open representative ofﬁces in Addis Ababa, they are not allowed to offer full retail banking services. There are also restrictions on money leaving the country.
These constraints mean that Ethiopia is not well-placed to be a foreign company’s launching pad into the rest of Africa. “It can’t be your East African hub – it is an Ethiopian play. It is not like going into Kenya. How are you going to get your money in and out of Ethiopia?” asks George.
The lack of access to US dollars also makes trade ﬁnance transactions in Ethiopia tricky and potentially more expensive for the trading partners involved, says BMCE’s Seco.
“International trade requires US dollar liquidity. The foreign currency reserves of the central bank are limited, which negatively impacts the capacity of the Ethiopian banks to open letters of credit accepted by international banks. Because of this situation, it is difficult and expensive for local banks and corporates to have access to US dollars, which are required to finance the imports of commodities and equipment and support the country’s economic development.”
The political question
The biggest question mark remains over the political stability of the country. In early February, Ethiopia’s communications minister Negeri Lencho told the Financial Times that the state of emergency had successfully quashed the protest movements, and the government would not allow them to derail the fast-growing economy. Just how the government has quashed the protest movement has attracted criticism by some human rights organisations.
Besseling at Exx Africa says it is unlikely that the current state of emergency will tip over into the outright revolutions as seen in North African countries. Rather, there will be a gradual shift in power as prime minister Hailemariam Desalegn tries to ‘rejuvenate’ the EPRDF.
“He is trying to gradually replace the old military guard and top party leadership with a younger cohort of technocrats, and that is what we have seen in the recent cabinet reshufﬂes at the end of 2016. He is bringing in new people with technocratic specialist backgrounds to run their relevant portfolios,” Besseling says.
Desalegn appointed 21 new cabinet ministers in the reshufﬂe in October, including two members of the Oromo ethnic group in two key ministerial positions: foreign minister and communications minister. It is perhaps a step in the right direction, though it may not be enough to assuage the feeling among large ethnic groups that they have been excluded from Ethiopia’s boom years.
From a foreign investor perspective, Ethiopia will maintain its appeal. “There will still be a huge amount of interest from international investors in Ethiopia,”says Besseling. “People are still looking for the next African frontier and Ethiopia really has to be it. But most of it will depend on how the government deals with the current crisis. 2017 will be a crucial year for Ethiopia.”