Ethiopia: Africa’s next powerhouse?

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Witney Schneidman*

Ethiopia’s prime minister, Dr Abiy Ahmed — the youngest African leader at 42 years old — has initiated a series of unprecedented economic and political reforms in his first 12 months in office. The core challenge that he faces is moving the economy from state-led to market-based growth while overseeing far-reaching political reforms. Success is far from guaranteed but his accomplishments so far have created an enormous sense of opportunity within the country.

Ethiopia has been one of the continent’s best economic performers, growing at a rate of 10% for the past 15 years. It has been a model of state-directed development with a government that permitted no political opposition but invested heavily in infrastructure, agriculture, education, and other sectors. Since Abiy’s emergence as prime minister, there has been a sweeping political opening with indications that economic reforms will be almost as significant. If Abiy is able to succeed with his reforms, Ethiopia will emerge as one of Africa’s undisputed leaders.

 

Reforming the Economy

The prime minister has ambitious plans for the economy. According to the Ethiopian private equity firm, Cepheus Growth Capital, the government plans to fully privatize state-owned sugar plants, railways, and industrial parks. It will partially privatize the four crown jewels of the economy: Ethiopian Airlines, Ethio Telecom, Ethiopian Electric Power Corporation, and Ethiopian Shipping & Logistics Services Enterprises. With more than 60 million mobile and fixed-line subscribers, the government is also planning to publish tenders for two new operating licenses in the telecom sector, which inevitably will lead to competition in new financial and mobile-based services.

The one sector that does not appear to be opening in the near term is the banking sector. With 16 private banks that have averaged a shareholder return of 33% annually over the past decade, there appears to be little incentive to move quickly in reforming the financial sector. As the state-owned Commercial Bank of Ethiopia controls at least half of the sector’s assets, continued poor services and an inability to transfer funds between banks will be a constraint on the government’s reform efforts. Inevitably, there will be pressures to allow other African and international banks into this sector.

Ethiopia has been a pioneer in the creation of Chinese-inspired industrial parks to attract investments in light manufacturing, especially textiles and apparel, and stimulate exports. Currently, there are five government-built industrial parks that have created about 45,000 jobs for Ethiopians and four private industrial parks. In some instances, the industrial parks have performed well, such as the Bole Lemi industrial park outside Addis. Other parks, such as Hawassa, have experienced difficulties with labor, staff retention, and productivity. Ethiopia is aiming to create 30 industrial parks by 2025 in order to increase jobs, generate export revenue, and grow the manufacturing sector from 5% to 22% of the economy’s productivity. Such brands as Michael Kors, H&M, Children’s Place, and apparel giant PVH are already sourcing products from the country.

Abiy’s efforts have already led to results. The World Bank has provided Ethiopia with US$1.2 billion in direct budget support, the largest loan ever to a country in sub-Saharan Africa and the first loan to the country in 13 years after lending was suspended in the wake of the disputed elections of 2005. An Abu Dhabi real estate developer plans to invest US$2 billion in a mixed-use development in the capital city of Addis that will include the construction of more than 4,000 residences. More investment is likely to flow into the country as the privatization process moves forward.

 

The Peacemaker

Abiy wasted little time in normalising relations with Eritrea after 20 years, a stunning development given the previous hostility between the two countries. He freed tens of thousands of political prisoners in his first months in office. Most recently, Abiy accompanied Somalian President Mohamed Farmaajo to Nairobi to meet with Kenyan President Uhuru Kenyatta in an effort to restore diplomatic relations between his two east African neighbors. Last May, Ethiopia announced that it would remove visa requirements for travelers from all African nations and last week the country became the 21st African nation to ratify the African Continental Free Trade Agreement.

While working to stabilise the perpetually unsettled region of the Horn of Africa, Abiy faces stiff political challenges at home. Last September, unrest in the capital forced him to cancel his trip to the opening of the United Nations General Assembly. The unrest culminated several years of protests and clashes in Oromia, Ethiopia’s largest and most populous state, and Amhara. As the International Crisis Group notes, a key source of frustration was the inability of the previous Ethiopian People’s Revolutionary Democratic Front (EPRDF) government to create the needed 2 million jobs annually and to ensure that growth in wages kept pace with the rising prices of staples and commodities.

In an effort to end inter-communal violence and to come to terms with the human rights abuses of the past, Ethiopia’s parliament has approved the creation of a reconciliation commission. Not only has there been an increase in ethnic violence, mainly between the Oromo community and other minority groups, since Abiy’s election, but Ethiopia’s security forces have long been accused of abuses against government opponents. The UN estimates that 2.4 million Ethiopians have been displaced by inter-communal violence.

One of Abiy’s key tests will be preparing for general elections in 2020. In the 2015 elections, the then-ruling EPRDF won all 546 parliamentary seats. The prime minister has taken an initial step in raising expectations for a credible poll by appointing Birtukan Mideksa, a former judge and opposition leader, as head of the National Election Board of Ethiopia, after persuading her to return from self-imposed exile.

 

The United States and Ethiopia

Ethiopia has become a priority country for the Trump administration. The President’s Advisory Council on Doing Business in Africa, led by Commerce Secretary Wilbur Ross, made it one of four stops on an Africa trip last June. On his first visit to Washington as prime minister, Abiy met with Vice President Mike Pence who praised his “historic reform efforts”. In December, the Millennium Challenge Corporation selected Ethiopia as eligible to develop a threshold program to reduce poverty and promote economic growth. It remains to be seen, however, what concrete support the administration is able to provide Ethiopia. In the wake of the deadly crash of Ethiopian Airlines’ new Boeing 737 Max 8, clearly, hard questions will be asked about the relationship that has existed for six decades between the airline and the plane manufacturer. If there was ever a time for the US to step up its support for a key African partner, it is now. – Brookings

*Witney Schneidman is a non-resident Fellow - Global Economy and Development, Africa Growth Initiative

 

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