Ethiopia’s promise buried in web of State regulations

By Toddy Thairu
Posted  Sunday, August 24   2014

Ethiopia is fast becoming the preferred destination for foreign investors coming into sub-Saharan Africa, according to the World Bank.

Ethiopia’s attractiveness is driven by a high rate of economic growth now standing at a 10-year average of 10.6 per cent compared to 4.6 per cent average for sub-Saharan Africa.

Ethiopia has more recently made “giant strides” to attain this status. Not too long ago in the 1980s, the country faced the worst famine in history and a civil war that did not end until 1991.

But Ethiopia has, like the proverbial phoenix, managed to rise from the ashes to become Africa’s fastest growing non-energy-driven economy.

The country’s rapid economic growth can largely be attributed to intense government plans aimed at achieving the Millennium Development Goals (MDGs).

The country’s current five year development plan, the Growth and Transformation Plan (GTP) covering the period between 2010/11-2014/15, aims to find sustainable means of economic, social and environmental development to achieve the MDGs.

Goals of the GTP include maintaining a rapid GDP growth of at least 11 per cent per year, a build-up in the country’s foreign exchange reserve which currently stands at just over two months import cover, an increase in bitumen road network from 49,000km to 64,500km, construction of 2,395km of railway line as well as an increase in the power generation capacity from 2,000 MW to 8,000MW.

To confirm the government’s commitment to the GTP, Parliament approved a $9.2 billion (Sh800.4 billion) budget for the year 2014-2015 — the final year of the GTP.

At Sh800.4 billion, the budget represents a 15 per cent rise from the previous year’s and is expected to boost spending on education, health and infrastructure development.

Besides, the Ethiopian government has ensured that the GTP is not just a policy paper as is usually the case with most government policies in developing countries.

Ethiopia’s development and transformation is clearly visible and tangible. Walking through the streets of Addis Ababa feels like a walk through a giant construction site.

Financial experts are, however, of the view that it’s time the country shifted from public spending-driven development to promoting private investment which is the surest way to realising its dream of becoming a middle income nation by 2025.

In the recent past, the government has demonstrated willingness to support private investment through measures such as establishment of Ethiopian Investment Agency (EIA) as a “one-stop-shop” where investors can obtain licences, incorporate and register companies as well as obtain work permits among other services.

Weathered opposition

Ethiopia has also established the Privatisation and Public Enterprises Supervising Agency (PPESA) to oversee the privatisation of State-owned enterprises.

Attractive tax incentives such as corporation tax and customs duty exemptions for manufacturers and exporters are now guaranteed under the recently enacted 2012 Investment Proclamation.

The country has weathered strong opposition from NGOs and local groups to offer investor-friendly land leases for those investing in the agricultural sector.

The leases are as low as $2 (Sh174) per hectare per annum and in some regions investors can easily access huge tracts of land (up to 25,000 ha), providing a sound basis for mechanised farming.

Nonetheless, difficulties remain for investors including restriction of foreign investment in sectors such as financial services, telecommunication, air transport, mass media, legal consultancy, advertisement and promotion as well as importation and retail business. These are reserved for the government and locals.

Whereas restrictions such as those on retail trade and legal consultancy are intended to protect local investors, opening up sectors such as financial services and telecommunication will inject efficiency and impetus that the economy needs to attain the next level of growth.

Take for example the financial services sector which has about 19 banks serving a population of about 94 million. The presence of international banks can play a major role in taking Ethiopia towards its aim of achieving middle income status by 2025.

With a huge part of the country’s loans going towards public expenditure, lending for private investors has been squeezed.

The presence of international banks would be a big boost for private investors, offering them access to more credit facilities as well as sophisticated financing to grow their businesses.

The other major obstacle facing investors in Ethiopia is that of the foreign exchange controls enforced by the National Bank of Ethiopia.

Obstacle to growth

The NBE regulates the inflow and remittance of foreign exchange through specific directives which are applicable to both Ethiopians and foreigners. For example, a trader seeking a foreign currency denominated loan is required to obtain approval from the NBE.

And for approval to be obtained, details of the loan facility such as the amount, interest rate, repayment terms and proof that such a facility is not available from Ethiopian banks must be presented to the NBE.

Also, the perennial shortage of foreign currency makes the process of making any foreign currency payments out of Ethiopia a nightmare.

There are cases of businesses waiting for over three months to obtain foreign exchange allocation, hugely impacting their activities.

There is no doubt that the stringent foreign exchange controls, coupled with the shortage of foreign exchange reserves and the fact that the local currency is not freely convertible, are a major obstacle to the country’s development.

Opening up the economy and liberalising foreign exchange would be a welcome move and one that could help the country sustain its phenomenal economic growth in the long term.

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