Ethiopia’s economy beckons

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Prime Minister Hailemariam DesalegnEthiopia just can’t stop surprising the world. After a decade of racing merrily along as one of the fastest and consistently growing economies on the planet, the continent’s second most populous country (after Nigeria) and oldest proudly independent state, has remained resolutely on the path of self-improvement, confounding even its most vociferous detractors.

The Mo Ibrahim 2015 Index of African Governance observes that “Ethiopia demonstrates strong overall governance level as one of the top improvers on the continent.  It has shown year-on-year improvement in overall governance”.  Beyond the continent, the country is a shining example of what committed and resourceful leadership can achieve.

Early this year, Ethiopia won global commentators’ assent as the most improved country in terms of social and economic indices over the last decade, outperforming better-resourced countries in the developed world, thanks to the faithful implementation of the home-grown development programme, Growth and Transformation Plan (GTP).

The country’s leaders aim at moving the Horn of Africa nation into the ranks of middle-income economies by 2025, the same year the United Nations Sustainable Development Goals (SDGs) are due to wind down.  Significantly, the SDGs have been incorporated into GTP II, the second phase of the home-grown blueprint under implementation.  The country proved its mettle by meeting most of the Millennium Development Goals, (MDGs), the pre-cursor to the SDGs, by blending it with its own Sustainable Development and Poverty Reduction Programme (SDPRP). It therefore is quite comfortable with the SDGs, which are already captured in its development plans going forward.  Abdulaziz Mohammed, Minister of Finance and Economic Cooperation says about 70 percent of government’s revenue in the coming years will be spent on pro-poor sectors such as education, health, water, agriculture and infrastructure including transport and energy.

It is a mark of resilience that Ethiopia’s economy continues to attract foreign investment and continued injection of funds into its ambitious infrastructure development projects, in spite of the El Nino-induced drought that has ravaged parts of the country.  Prime Minister Hailemariam Desalegn does not miss any opportunity to sensitize the world, and the donor community in particular, to the special needs of his country as a major victim of global climate change.

Efficient economy manager

So far, his appeals have resonated with most traditional development partners including multilateral development agencies such as the World Bank, the IMF and the African Development Bank on account of the country’s sound macroeconomic fundamentals.  The government has also proved to be an efficient manager of resources that has kept the economy humming and growing even during the difficult years of the global economic crises.

Lately, Ethiopia has earned the respect and continued patronage and support of new players in the sovereign aid industry including China and the Middle East countries. They are stepping up assistance to the country as it upgrades and increases infrastructure stock as well as manufacturing prowess.

The National Rail Network of Ethiopia (NRNE) masterplan to place the country as the transportation hub in its region is an example for the rest of the continent. It tells the Ethiopian story of determined pursuit of sustainable development no matter the odds.  The NRNE plans to complete 5060 kilometres of track before the vaunted deadline of 2025 by which Ethiopia hopes to be recognised as a middle-income economy on the way to becoming a truly developed country.

Dr Getachew Betru, Chief Executive Officer of the Ethiopian Railways Corporation (ERC) explains that the country hopes to develop a total of eight transnational rail corridors which will also link up with Djibouti to the north, South Sudan and Kenya.  The objective is to break the unfortunate restrictions on the country’s potential imposed by its position as a landlocked territory, while improving trade with its neighbours and the world at large.  The Addis Ababa – Djibouti line is rearing to go. Ethiopia’s better access to the seaport would mean more business for its growing export sector.

Pace-setter

Government has not neglected its aviation sub-sector, where Ethiopia is a clear leader on the continent.  It is currently constructing new airports to expand its role as Africa’s aviation hub while growing its own domestic industry to increase the government-owned Ethiopian Airline’s contribution to the national economy in terms of employment generation and government revenues.

The Addis Ababa Light Rail Transit (LRT) has set a record as sub-saharan Africa’s first electricity-powered rail system.  It was made possible, as much of the remaining NRNE projects are, by the partnership of China via its deep-pocketed Chinese Exim with assistance to the tune of $475 million.  The investment in rail is being matched by the improvements in roads especially those leading in and out of rural agrarian and pastoral communities.

Agriculture-led development

The transport sector’s goal is linked to the larger policy of transforming agriculture into the under-lying structure for industrial take-off.  It feeds into the country’s ambition of becoming a light manufacturing centre for the region.  Ethiopia’s 100 million people and potential in agriculture make the dream quite realizable.  Agriculture employs over 70 percent of the population and accounts for 40 percent of GDP as well as 80 percent of exports.

Dr Arkebe Oqubay, a renowned development economist and Special Advisor to Prime Minister Hailemariam, believes his country can create some 200,000 jobs a year from light-manufacturing in agro-processing industries for the domestic and export markets.  He easily sees the potential in the exponential growth in other industries such as textile, leather and pharmaceuticals, given Ethiopia’s comparative advantage in the production of such crops as cotton, and coffee as well as huge stocks of cattle and other livestock.  An authority on manufacturing in Africa, with special emphasis on his native Ethiopia, Dr Arkebe remains government’s strategist on how to harness the country’s potential and build on current success in economic management.  His seminal book Made in Africa; How to Make Industries Work in Ethiopia is a useful tool in government’s overall policy formation.

Since 1994 when government started restructuring its erstwhile socialist-leaning economic model, the Agricultural Development-Led Industrialisation (ADLI) programme has been gravitating towards the export-led model due to the sheer size of the sector’s contribution to GDP.  The challenge, according to Dr Arkebe, has been how to transform agriculture for increased productivity, high-value products and meaningful contribution to industrialization and foreign exchange earnings.

While Ethiopia remains a largely agrarian society, agriculture is still dominated by smallholder farmers, who themselves, consume the bulk of their produce.  It is estimated that only about 10 per cent of total production is available for income generation.  This is particularly true of food crops.

To impact the economy, government is encouraging large-scale commercial farming through the Agricultural Growth Plan. This aims to take agriculture and livestock farming as serious bankable enterprise by upgrading production along the value chain from cultivation, through processing and value-addition, to transportation and ultimately, to the consumer or the industrial end user.  Tefera Deribew, Agriculture Minister, says total crop production through the GTP I years more than doubled from about 12 billion tonnes to almost 28 million tonnes thanks to the increasing use of improved, disease-resistant seeds and agricultural extension services.

Integrated approach

Using the integrated approach to development, the government of Ethiopia has ensured that its policies in transport, trade and commerce and infrastructure in general, dove-tail into its agricultural policy such that rural roads, rails and energy enhance productivity.

In October, Addis Ababa, Ethiopia’s chief city, will host an International Agro-industry Investment Forum where investors worldwide interested in the country’s burgeoning agriculture sector will converge to learn first-hand about available opportunities and incentives.

The government of Ethiopia has a good reason for hosting the meeting.  Ethiopia is almost totally dependent on the export of agricultural and horticultural produce, livestock and its derivatives (mainly leather) for foreign exchange earnings.  Last year, over $3.5 billion accrued from these sources, with coffee, tea and spices the country’s main revenue earners pulling in 30 percent of total.  The Ministry of Agriculture reckons that fruits and vegetables came in next with 18 percent.  Thereafter, oil seeds (17 percent), flowers and plants, an increasingly important sector (8 percent), and livestock (6 percent) each add their quotas to the country’s economic well-being.

Leveraging the success of coffee, the prime export, Ethiopia was inspired to create the Ethiopian Commodity Exchange eight years ago to make the marketing of its prime Arabica beans easier and more transparent for the over three million farmers who earn their livelihood from the crop.  Today, Ethiopia’s coffee has broken into major markets including the US and Europe, with prospects of doing the same in Asia.

In the long-term, Ethiopia hopes to change the economic narrative from agriculture to manufacturing-led industrialization, making light manufacturing to chip in as much as 20 percent to GDP as would be expected of a middle-income economy.  For this to happen, according to Dr Arkebe, the economy must continue to grow by 11 percent per annum, in the coming 10 years, pretty much as it has been doing in the past decade.  Moreover, the contribution of manufacturing to GDP would have to shoot up 25 percent in the same period; a tall order by any standard.

Going industrial

But such daunting challenges have never put down or disheartened the managers of Ethiopia’s economy since the advent of the ruling EPRDF just over two decades ago. Not only has the party managed to stabilized the polity and maintain relative peace in the country, but also led it in an unprecedented economic growth bull run that has made Ethiopia the envy of the Horn of Africa, which ordinarily, is considered a volatile region on the continent.

Ethiopia’s dream of becoming a light manufacturing hub is no mere wishful thinking. The authorities have set in motion a grand scheme to build industrial parks in several locations around the country on 20 million square meters of land with all facilities necessary for the smooth and efficient running of factories and other industrial outfits.

The move is as inevitable as it is necessary. According to Dr. Arkebe, agriculture can only take a country so far. It must be tailored towards supporting industry whose “spillover effect” in technological advancement makes rapid economic development possible. Manufacturing, besides, has the added benefit of creating jobs which Ethiopian authorities hope will be in the millions when its plans come into fruition.

The creation of industrial parks is a master stroke. By putting together industries in clusters, government can direct and provide specific utilities and infrastructure where they are needed. They are also useful centre for technology training and transfer to locals. Foreign investors are most likely to favour such areas for investment because of the special attention governments tend to pay to them and how they are likely to attract ancillary services.

The idea of industrial parks took shape during the GTP I. Unfortunately, only one — the Bole Lemi Parks — has been completed out of the proposed five because of inadequate study of how the country should go about building them. Going forward, the government of Ethiopia has decided on the Singaporean model. Imbued with a new vigour, the government has created the Industrial Parks Development Corporation under the auspices of Ethiopian Investment Commission which reports directly to the Prime Minister’s Office. A new bank to cater for securing land, settling compensation to displaced persons and preparing the sites for occupation is in the offing. Plans for opening up parks in Dire Dawa, Meqelle and Adama are running while a model is shaping up in Hawassa. Interests in the park have been received from as many as 10 companies in the United States, Sri Lanka, India and China.

Economic diplomacy

Ethiopia has not left the task of attracting investors to government officials at the cabinet level alone. It has pressed into service the commercial skills of its 50 missions all over the world. The mission collaborates with the home office in promoting the investment and tourism opportunities the country offers. The government is also encouraging the media to visit and expose Ethiopia’s potential as a stable, safe country with a reliable crop of administrators, receptive to great ideas and ready to offer juicy incentives to genuine entrepreneurs. Hirut Zemene, Director General of Business Diplomacy at the Foreign Affairs Ministry, says the ministry works in line with the aims of the GTP by adopting economic diplomacy as a main pillar of foreign policy. “We try to forge bilateral agreement or agreements that facilitate investment flow, market access, tourism flow and technology transfer”, Hirut says.

The result can be seen in the improved business atmosphere that pavades the Ethiopian economic space: so-called “anchor investors” are bringing big-ticket projects that would continue to create jobs for the country’s teeming employable youth. Leather and textile firms from China are either in the country or preparing to register presence. Japanese car-makers Toyota and Mitsubishi are gearing up to set up shop. Unilever, the UK giant and Bayer, the German pharmaceutical company are among the big timers eyeing the Ethiopian market. Hirut assures that these investors know that Ethiopia would remain true to its reputation built over the past two decades of “being good partners”. Ethiopian authorities, on their part, are frantically building infrastructure to make investment easier and worthwhile by spending wisely on transport, ICT and power infrastructure. Ethiopia Investment Commission spokesperson, Deputy Commissioner Teka Gebre-eyesus discloses that 603 licences have been issued to investors this year. In return, government has granted generous duty-free importation of raw materials to industrialists, tax holidays and loan guarantees to smoothen operations for many. At 0.3USD per kilowatt, Ethiopia boasts one of the cheapest electricity rates on the continent, comparing favourably with those in developed economies.

Power for development

Right from the outset, Ethiopia has known that power supply must be ramped up to fulfill its dream of industrialization. Back in 2010 when the late Prime Minister Meles Zenawi kicked off GTP I, the goal was to increase generating capacity from 2000 megawatts to 8000 megawatts, thereby doubling the number of people with access to electricity over a five-year period.

For GTP II, which will run till 2020, the bar has been raised to 17000 MW. Along the line, Ethiopia started the Grand Renaissance Dam which is estimated to cost $6 billion on completion. Already badly affected by climate change, Ethiopia would need to minimize its carbon footprint as it runs the development course. Besides, Gosaye Mengistie Abayneh, Chief Executive Officer of Ethiopian Electric Utility says the country also hopes to be a power hub for Africa in line with its other ambitious schemes and aspirations. Ethiopia already exports power to neighbouring countries including Djibouti, Sudan and Kenya, with agreements to extend its coverage to South-Sudan, Rwanda, Tanzania and across the Red Sea to Yemen. Ethiopia is capable of hitting 45000 megawatts of electricity from hydro sources alone, which is enough for changing the lives and economies in its region. The electricity market is huge and ready, making it a good proposition for investors looking for secure long-term income earner. Moreover, as Ethiopia braces for increased activities in its industrial sector, demand for power is bound to increase at a pace investors would find attractive and big enough to warrant heavy investment in generating capacity.

Tapping into services: A tourist delight

Ethiopian authorities are casting their economic diversification net as wide as possible, tapping into the potential in services.  The country is arguably Africa’s cradle of civilization, given its over 3,000 years of history as a self-governing society with lots of priceless artifacts and archeologically significant sites.  Yet, it has not made much from tourism.

That situation will change soon.  Prime Minister Hailemariam’s economic team has woken up to the realities and potential of the tourism industry.  After all, Ethiopia is home to the oldest known human fossil, Lucy, said to be a member of the Australopithecus Afarensis species and estimated to have lived 3.2 million years ago.  All around the country, there still stand relics of ancient structures and locations, many already declared world heritage sites, waiting for tourists and adventurers willing to pay for the pleasure and privilege of guided tours.

Last year, the European Council on Tourism and Trade ranked Ethiopia number 1 on the tourist destination list because of the country’s “outstanding natural beauty, dramatic landscapes and ancient culture.”  In the same year, the Ministry of Culture and Tourism records showed that more than 600,000 tourists visited the country’s sites.  The World Bank reckons that close to a million jobs depended on the industry which pulled in more than $2 million; contributing 4.5 per cent of GDP.

This year, expectations are high that more tourists would flock into the country, with forecasts hitting a million.  This has got government moving.  The nation’s air industry is being expanded with the construction of a new airport as well as the upgrading of existing facilities.  The rail system is even better than envisaged with efficient electric lines running through towns, linking up the rural areas, and busy commercial centres to tourist attractions in the hinterlands, thoughtfully networked with highways.  Lately, the Ethiopian Tourism Commission (ETC) has broached the perennial problem of internal tourism by focusing parts of its awareness campaign on Ethiopian nationals, who, it says, must be encouraged to take advantage of the interesting holiday sites practically in their backyard.  The salutary effect on the economy can easily be imagined, if Ethiopians patronize their own tourism industry as much as foreigners do.

The ETC estimates that the number of top quality hotels in the country has crossed the 400-mark as new entrants make their presence felt while old brands open up new properties in and around ancient sites and national parks.  The hospitality sector is set for the good times.

Reaching for wealth in the depths

Ethiopia may not be known for its mining prowess; it nonetheless has some potential in the sector.  A recent discovery of gold in commercial quantity has got investors interested in exploration for the precious metal, which was hitherto left, largely, to artisanal miners and small-time entrepreneurs.

The new find would increase interest in the country’s little explored reserves of copper, tantalum and platinum.  Investors will be tempted to plough more money in the considerable deposits of such minerals as clay and gypsum as well as salt and shale; especially now that government is interested in diversifying the economy.  The country’s experts and independent assessors reckon that as much as $5 billion could be realized from the mineral wealth in the next decade.

Tolesa Shagi, Minister of Mines, Petroleum and Natural Resources  assures that incentives have been sweetened to encourage investors. Income tax for gold prospectors, for instance, has been slashed from 35 to 25 percent; and royalties moved down from 8 percent to 7 percent.

First movers’ advantage

The prospects are bright.  Investors from the US, Cyprus and Egypt are lined up to take up the new opportunities in the mining sector.  As first movers, they hope to settle in before 2020 and avoid the hassle of seeking yield only after the best concessions have been grabbed.

Getting ready for better days

Ethiopia is opening up its economy. Slowly but surely, the world’s savvy investors are watching and getting ready to pile in.  It’s a no brainer.  In a country where population is crossing the 100 million mark with a rising middle class and general standard of living, business can only get better as the years roll on.

 

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