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Economic Overview

Economic Overview
  • PublishedMay 8, 2012

Under its Growth and Transformation Five Year Development Plan, Addis Ababa is planning to change the Ethiopian economy at a revolutionary pace. High levels of economic growth have been targeted, as the government seeks to secure middle income status and an end to emergency food aid. Many have argued that the plan is overly ambitious but there is no doubt that the government of President Meles Zenawi is trying to overhaul a long moribund economy at lightning pace.

Under its five-year plan 2011-2015, the government hopes to attract $33bn in investment. Much of this will be directed at infrastructure, including hydro schemes and roads, but some will also be aimed at agro-processing, particularly in the sugar sector. Although the government still officially owns all land in the country, it hopes that agricultural output can be doubled in just five years, partly on the back of investment in huge farms by Saudi Arabian and other foreign firms. Controversial agricultural schemes involving large-scale foreign investment and the displacement of local people have seized the headlines but other sectors are also attracting international interest.

In March, Allana Potash Corporation of Canada announced that it would invest more than $600m in its potash project in the Danakil Depression. It will produce potassium chloride, mainly for use as a fertiliser and has secured funding from two strategic investors: the International Finance Corporation of the World Bank and Liberty Metals and Mining Holdings.

The government and the Privatisation and Public Enterprise Supervising Agency (PPESA) plan to continue the sale of state-owned companies and have drawn up a list of about 40 firms that are to be sold off, after generating $388m from the sale of state-owned breweries last year. PPESA has already accepted bids for seven parastatals totalling 2.1bn birr ($121m), including 860m birr for Upper Awash Agro-Industry Enterprise from Midroc Ethiopia, which is owned by Saudi-Ethiopian billionaire Sheik Mohammed Al Amoudi.

A PPESA spokesperson commented: “The enterprise engages in different sectors, including agriculture, beverages, construction, printing, textiles and transport. At this time though, agriculture enterprises are found to be more attractive than others…Several strategic enterprises in different sections will remain in government hands, such as Ethiopian Shipping Lines and another 11 enterprises. They could be privatised once their strategic importance diminishes.”

Ethiopian Airlines and Commercial Bank of Ethiopia also look set to remain under state ownership.

While there is no doubt that Addis Ababa is following the standard economic medicine of encouraging private sector investment at the expense of state control, it may be difficult to reach agreement on how its success will be judged. While the government claims average annual economic growth of 11% over the past five years, a string of financial organisations and analysts have described the figures as “doubtful”.

The government predicts that growth will be sustained at the same level up to 2014 but IMF forecasts are much lower, at 7.5% this year and 5.5% for 2013. These are still very respectable rates of growth, but the government faces a bigger challenge in the shape of inflation. An annual rate of 32% was recorded in March and price rises show no sign of being brought under control.

Infrastructural investment

The government has already begun to deliver on promises to improve Ethiopian infrastructure and the raft of jumbo dam projects under development in the country has caught the international imagination. The second most populous country in sub-Saharan Africa, Ethiopia had a power-generating capacity of just 745MW as recently as 2006 but this figure should reach 10GW by as soon as 2017 as new large hydro schemes are brought on stream.

This will provide electricity to millions more Ethiopians, power for businesses in many sectors and sufficient excess capacity to export electricity to several neighbouring states. At the same time, the various reservoirs should provide water for irrigation and more general supply.

The Gilgel Gibe II and Tana Beles dam projects collectively provided 880 MW of new capacity in 2010, while the 1,870 MW Gilgel Gibe III scheme is already under construction. Gilgel Gibe IV will add another 2 GW but even this will not be the biggest hydro venture in the country. In April last year, the government awarded a €3.35bn engineering, procurement and construction (EPC) contract on the 5,250 MW Renaissance Millennium Dam Project to Italian firm Salini Costruttori, which is already working on some dam projects.

The Renaissance Millennium Dam is being developed on the Blue Nile, 710km west of Addis Ababa. In February, the ministry of water and energy announced that feasibility studies would be carried out on three more hydro schemes in the Abay Basin. The government of Norway has offered a $20.1m grant to fund the studies into the 2.1GW Beko Abo, 2GW Mendaia and 1.6GW Kara Dodi projects. Development costs have yet to be determined but pre-feasibility studies have already been completed by Scott Wilson of the UK and other European consultants.

Ethiopia already exports electricity to Djibouti and in late March the Ethiopian Electric Power Corporation (EEPCo) announced the completion of a 296km 230kV power transmission line between Ethiopia and Sudan. The project received $41m of funding from the World Bank. Another cross-border interconnector, between Ethiopia and Kenya, will have four times the capacity of the Sudanese line and is expected to cost $1.2bn. Funding is expected from the World Bank, the African Development Bank and Agence Française de Développement to support a power export agreement that was signed in December. The government predicts that electricity will overtake coffee as the country’s biggest export earner by 2020.

Some investment in wind power is planned in Ethiopia but the fact that hydro schemes will provide the bulk of the new generating capacity has provided a boost to the country’s construction industry. Until now, cement companies have relied on expensive oil feedstock to fuel their production but stateowned Ethiopian Petroleum Enterprise (EPE) is to start importing cheaper South African coal in order to phase out the sector’s oil imports. A consortium of the Ethiopian government, EPE, cement producers and the Ethiopian Maritime and Transit Services Enterprise (EMTSE) is to import 860,000 tonnes a year from next year, ramping up to 1.5m tonnes a year by 2015. All cement factories in the country are in the process of converting from oil to coal.

Ethiopia has been landlocked since the secession of Eritrea in 1991 and so the coal will be imported via the port of Djibouti. In December, China Civil Engineering Construction Corporation (CCECC) signed a deal with Ethiopian Railways Corporation to complete the upgraded railway from Addis Ababa to Djibouti at a cost of $1.19bn. Other Chinese companies are already working on the first half of the line from Addis to Mieso, while CCECC will construct the 339km section from Mieso to Djibouti.

The government hopes to oversee the construction of 5,000km of rail line by 2020, including a light railway in Addis Ababa. This timetable seems optimistic, but the pace of dam construction in the country has shown what can be achieved in a relatively short time.

However, Addis Ababa is keen to reduce its dependence on a single port and so hopes to strengthen transport links with alternatives, including the planned new port of Lamu in Kenya and the port of Berbera in the self-declared state of Somaliland. Again, such ambitious plans seem entirely at home in the development programme set out by the Ethiopian government.

Banking on success

As discussed above, Commercial Bank of Ethiopia (CBE) is expected to remain under state ownership. As the biggest bank in the country, it is the only Ethiopian financial services company that could compete with the giants of the African banking world. However, the absence of private ownership enables Addis Ababa to employ the company to support government economic policy.

In a statement, a bank spokesperson said: “CBE continues to pay cardinal attention to supporting national development strategies by availing the funding needed to finance development priorities. To this end, deposit mobilisation, foreign currency earnings and collections are at the heart of its operations.”

CBE deposits exceeded $4bn in February, while profits before tax reached $90m in 2011. As with many other sectors of the economy, the Ethiopian banking industry is benefitting from Chinese support.

In December, CBE signed an agreement with Export-Import (Exim) Bank of China for a $300m credit facility to help fund projects considered central to the government’s five-year growth programme. This takes Exim’s lending to Ethiopia to $1.85bn. On a more domestic level, retail banks are quickly embracing internet banking, in the wake of the introduction of a national automated payment system by National Bank of Ethiopia last year. United Bank, Zemen Bank and now Berhan International Bank are all introducing online banking services. In early April, Solomon Mammo, Berhan’s director of information systems said: “Once we ensure that our networks are secure, we will immediately start internet banking services.” The company has employed consultants from Ernst & Young to undertake an IT audit in order to ensure the security of its system.

Written By
New African

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