Ethiopia bets on grand projects in drive for industrial power

By Reuters

Feb 08, 2015 07:00 PM EST

Chinese workers mingle with Ethiopians putting the finishing touches to a metro line that cuts through Addis Ababa, one of a series of grand state infrastructure projects that Ethiopia hopes will help it mimic Asia's industrial rise.

Brought to its knees by "Red Terror" communist purges in the 1970s and famine in the 1980s, Ethiopia has been transformed in the last quarter century, becoming one of Africa's fastest-growing economies.

At the heart of the state's "Growth and Transformation Plan" are railway, road and dam projects to give the landlocked nation cheap power and reliable transport, as well as the metro line - the first urban light railway network in Sub-Saharan Africa.

"This is the future," said Abate Yaye, 27, from the poor south as he helped complete the $475 million system being built by China Railway Engineering Corp, much of it on concrete stilts to keep it above the crowded streets of an expanding capital.

"We will become an example for the whole of Africa."

Hefty state-led investment has kept the economy of Africa's second most populous nation growing at more than 8 percent a year for over a decade, but economists say Ethiopia's rulers need to relax their grip and give room for more private enterprise to maintain momentum.

Foreigners cannot invest in banking and telecoms and foreign retailers are barred, while Ethiopian banks are directed to buy low-yielding government development bonds.

"This is a country where, relative to rest of Africa, there is pretty good state capacity and a commitment to a development mission," said S. Kal Wajid, the outgoing Ethiopia mission chief for the International Monetary Fund.

But he said private business needed room to grow and generate income so the economycould reap greater benefit from the new projects. "Where you are making a lot of infrastructure investment, there is a risk that the pay-off may not be as big as you thought," he added.


Others in Africa have looked with envy at Asia's inexorable rise but few governments, if any, have proven as single-minded as Ethiopia has in mobilizing its resources in a bid to turn an agrarian nation of 96 million people into a manufacturing hub.

Yet it comes at a cost. The IMF said last year Ethiopia was "on the cusp" of shifting from low to moderate risk of debt distress. Total debt at about 50 percent of gross domestic product was still manageable, but tougher if it rises much more.

"In the next five-year plan, there should be a clear indication of a change of emphasis and a significant emphasis on the private sector," said Wajid, referring to the next Growth and Transformation Plan starting in July.

The government insists it will not rack up unsustainable debts because funds are used to finance infrastructure and other projects such as sugar factories and industrial zones.

Investors also say Ethiopia benefits from better security than others in a region blighted by Islamist militant attacks. And few executives cite corruption as a big hindrance in business, although it can be elsewhere in Africa.

But Ethiopia is no model for political and media freedom - there is just one opposition party member in the 547-seat parliament and international rights groups say the authorities muzzle critics. The government insists politics is open to all and that it allows free speech.

The current five-year growth program ends in June and the government has given little away about the next plan. But it remains clear about its economic goals.

"Without investing in infrastructure, it is now abundantly clear that Africa cannot sustain growth," Finance Minister Sufian Ahmed told Reuters in December.

Sufian's deputy Abraham Tekeste said this month the new plan would likely continue "most of the priorities" of the last one.

The government can point to a list of investors suggesting its formula works. Clothes retailer Hennes and Mauritz (HMb.ST) is starting to source supplies from Ethiopia, consumer goods maker Unilever (ULVR.L) is building a factory, Diageo (DGE.L) and Heineken (HEIN.AS) have bought breweries.

U.S. private equity giant KKR invested in a flower farm last year while an Ethiopian winery is among the investments of 8 Miles, an African-focused fund chaired by singer Bob Geldof who launched Live Aid to help Ethiopian famine victims.


The government's ban on foreign retailers is aimed at encouraging local manufacturing, to cut back on imports, not wanting a consumer culture that could drain foreign exchange.

Central bank foreign reserves barely cover two months of imports - an inadequate level, according to the IMF. Other east African states have at least four months.

The government says it wants to keep banks in the hands of Ethiopians and telecoms controlled by the state as the sectors provide funding for national projects such as infrastructure. Earnings from the state telecoms monopoly are helping fund a railway linking Addis Ababa to a port in Djibouti, for instance.

But that leaves few domestic funds available in the market for businesses that could create jobs in future.

"If they are looking at achieving their goal of being a middle-income country and getting employment, you must enable access to financial options," said James Kanagwa of pan-African lender Ecobank (ETI.LG), one of half a dozen foreign banks with representative offices in Addis Ababa but barred from commercial work.

Ethiopia, with average annual per capita income of $470, aims to reach middle-income status by 2025, which the World Bank says starts at $1,046.

For now, even Ethiopian banks have limited room for maneuver. They must invest the equivalent of 27 percent of their loan portfolio in the development bonds, hindering their ability to lend to the private sector.

"The lending capacity of banks is growing very slowly," said Mulugeta Asmare, president of Bank of Abyssinia, one of 16 private banks in a sector dominated by state-owned Commercial Bank of Ethiopia.

Banks must rely on equity and deposits for funding, in a nation where only one in 10 people have a bank account, because there is no developed capital market.

After launching a debut $1 billion Eurobond in December, Prime Minister Hailemariam Desalegn said tapping international markets did not herald "liberalizing the financial sector".

"If you have an efficient effective state development model, great," Colin Coleman, managing director for Goldman Sachs based in South Africa, told a conference in Addis Ababa last month.

"But you must allow businesses to develop in order to get the dynamism in the economy."

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