The world was shaken by images of Ethiopian famine back in 1984, yet since then the country has achieved a remarkable turnaround to become one of Africa’s economic success stories in the volatile Horn of Africa.
Since 2005, it has achieved double-digit annual GDP growth according to some estimates, while the 8% preferred by the International Monetary Fund (IMF) and some Western analysts is still more than respectable.
The speed of change is illustrated by the exponential rise in Ethiopia’s GDP. In 2000 it was US$8.2bn, growing to just over $43bn by 2012 before nearly doubling to $80bn by 2017, according to the IMF. By 2023, it is forecast to reach $129bn.
Foreign investment piled in as Ethiopia emerged as one of the world’s fastest-growing economies, while social and economic indices improved faster than anywhere else in Africa (albeit from a low base). But despite all this, at the end of 2015 protests broke out within the country’s Oromia region, home to Ethiopia’s largest ethnic group, the Oromo.
As protests continued into 2016 and beyond – in February this year the country declared a second state of emergency coupled with the prime minister resigning – the country saw its hard-won reputation as an East African stalwart of stability and business opportunity badly shaken.
Ethiopia has always been a country of contradictions, its current rapid pace of change heightening the divergence: In parts of the country people live almost medievally, while parts of the capital, Addis Ababa, are as expensive as New York, with the affluent part of the urban population able to afford luxury Western goods and comfortable lifestyles. One of Ethiopia’s great challenges is squaring such extremes.
Nevertheless, there remains among those doing business in Ethiopia a sense of cautious confidence about the country’s future and opportunities – one reason foreign direct investment (FDI) remained robust during the troubles: In 2016, flows to Ethiopia rose by 46% to $3.2bn. Optimism has been further raised by the fact that the state of emergency was lifted in June at the same time that the country announced the end of a long-standing feud with Eritrea over land and a move to open up state-owned monopolies to investors.
“Ethiopia has a great need for foreign direct investment, the government wants it to come from a wide range of countries, so there are opportunities for everyone,” says Clive Newell, a 35-year veteran of the UK’s foreign office, and now an Africa and Middle East expert at G3, a London business intelligence and investigations firm.
The main advantages, Newell notes, are a growing and youthful large population, strong and sustained economic growth forecast to continue, accelerating urban development, an emerging middle class, a well-established and expanding agricultural sector, and untapped mineral wealth.
Steadying the rudder
On 2 April, Abiy Ahmed was sworn in as Ethiopia’s new prime minister. The 42-year-old technocrat – crucially an Oromo – is widely seen as a reformer who is already taking steps to restore calm.
While the periodic unrest and the state of emergency had somewhat affected business confidence, the new prime minister has helped to stabilise the situation, Newell says, adding: “It’s business as usual in most of the country.”
Indeed, even at the height of the protests, life went on as normal in the capital, Addis Ababa. Ethiopia’s time zone (GMT+3) is conducive for international business, and its strategic position between the Middle East, Europe and the US means it “can be called the centre of the globe,” says Wudu Yedemie, country manager, DHL Express Ethiopia, who notes how within a 10-hour-flight circumference of Addis Ababa, one can reach six billion of the world’s population.
The continuing stability of Ethiopia’s macroeconomic and investment policies during the unrest meant the country still managed to be named a “star performer” in an FDI Attractiveness survey by the World Bank in its 2017/2018 Global Investment Competitiveness Report.
Embracing the developmental state model
Conscious of the need to boost production and productivity to sustain the country’s giant population, the government has embraced state-led development policies focusing on services and agriculture, and drawing on state-generated revenue from strongly performing public companies like Ethiopian Airlines and Ethio Telecom to finance large infrastructure projects.
Ethiopia wants to become a light manufacturing hub to rival those found in the Far East, hence its ambitious program of building multiple investor-friendly industrial parks offering special opportunities to attract foreign capital and expertise.
The country’s current population of around 100 million – making it Africa’s second most populous country after Nigeria – is set to exceed 127 million by 2037. As a result it has a huge labour force that is young, relatively well-educated and affordable. Labour costs are less than half the level in China and Vietnam, according to the McKinsey Global Institute.
“There is huge promotion on the focused sectors like garment manufacturing, horticulture or other manufacturing in the industrial zones, which are well incentivized to promote these activities [with the likes of] 10-year exemptions from tax and VAT,” says Amadou Diallo, CEO, DHL Global Forwarding Middle East and Africa.
For example, Ethiopia aims to boost foreign exchange earnings from flowers and other plants to more than $1bn a year from $280m now, according to the Ethiopian Horticulture Producer Exporters Association.
Other growth areas include sugar industry development, the brewery industry, the hospitality industry, the cement industry and construction.
While the country’s state-led development model has drawn comparisons with China’s, key differences exist. China has allowed private enterprise to prosper, while the Ethiopian government had until recently restricted access to several key sectors such as telecoms, banking and retail.
However, on 5 June the government announced it was loosening its grip on a number of sectors, including telecoms, airlines and energy. While it will retain majority stakes in what were previously state-run monopolies like Ethiopian Airlines and Ethio Telecom, they will now be open to private domestic and foreign investment – a major policy shift.
Land of origins and bounty
The country has the second-highest number of river resources in Africa and has begun tapping its enormous hydropower potential, aware that a reliable and ample source of energy is required to drive industry forward, while its absence will hinder progress. The latest 6.5 gigawatt Grand Ethiopian Renaissance Dam (GERD) could prove a game changer for local energy consumption and enable excess electricity to be sold to neighbouring countries. The dam would also provide water for vast new irrigation schemes to spur the country’s already well-established and expanding agricultural sector. The dam’s man-made lake could even generate fishery and tourist attractions, such as boating and pleasure cruises.
Wind, geothermal, solar power and biomass also offer renewable energy opportunities. Large-scale natural gas production infrastructure is under construction and should generate $1bn per year in revenue, with exports due to start in September 2018. And at the beginning of July 2018, 450 barrels of petroleum crude were extracted from three wells, proving the nation has a commercially viable reserve.
Meanwhile, the government has deftly managed good trade relations, utilising the US’s African Growth and Opportunity Act (AGOA) that enhances market access to the US for qualifying sub-Saharan African countries.
Its exports also have duty-free and quota-free access to the EU, Japan, Canada, China, Turkey, Australia and New Zealand, while India grants it preferential access
Full steam ahead
“Ethiopia is the region’s locomotive,” says Dawit Gebre-ab, director of strategic planning at the Djibouti Ports and Free Zones Authority, which manages Djibouti’s network of ports and logistics infrastructure. “With its expansion in manufacturing, Ethiopia could become the China of Africa. It possesses all the ingredients.” The huge population also means public and private healthcare spending is increasing rapidly.
“The government has set itself ambitious targets to improve the health of the population,” Newell says. “Both public and private healthcare need new clinics, hospitals, equipment, ambulances, coldchain facilities and much else besides, [also] better availability of imported and locally produced pharmaceuticals.”
Economic liberalisation in telecoms looks likely to give the sector a huge boost and give the government more revenues. It’s estimated, for example, that the current $900m the government reaps from its Ethio Telecom monopoly could be closer to $10bn if more competition were allowed.
“Since these sectors have been closed for so long, every sector will offer an opportunity for the [business] experts to play a role in Ethiopia soon as they open up for international business,” Diallo says.
When it comes to technology, many Ethiopians are currently too poor to snap up tech goods. But that hasn’t stopped the country developing mobile phones and smartphones for export to other parts of Africa, such as Nigeria. Furthermore, the country’s rapidly expanding middle class means a growing portion of the population has disposable income for higher-tech, more expensive goods, and Ethiopia is poised to become a middle-income country by 2025, according to the World Bank.
In 2016 Ethiopia overtook Kenya as the largest economy in East Africa, and remains the US’s main Horn of Africa ally, having played a key role in regional military operations. Such economic, political and military clout means Ethiopia is well placed to drive economic development for the increasingly integrated East Africa region, which currently has 71 construction projects valued at $32.6bn, according to Deloitte, and four of the 10 biggest projects are in Ethiopia.
“Ethiopia’s projection of soft power, including trade relations with its neighbours, the development of cross-border economic infrastructure and sharing of services, is helping to bind these nations more closely together and demonstrating in tangible ways the benefits of integration,” says Matt Bryden, executive chairman of Sahan Research, a Nairobi-based think tank.
Keen to connect
The country is also seeking to overcome both its landlocked state and its isolationist past with a series of five-year Growth and Transformation Plans to improve infrastructure and facilitate international trade. Infrastructure spending as a percentage of its GDP – 39% in 2017, according to an analysis by financial consulting group Deloitte – is the highest in Africa, with transport, energy and real estate the top three sectors driving the expenditure spree.
“The government is heavily investing in infrastructures for road, aviation and rail and factoring in convenience through building industrial parks with one-stop shop services, such as customs, and more,” says Yedemie. “It’s also building dry ports to reduce the effect of being a land-locked country, and investing in IT parks to enhance supporting technology infrastructure.”
He notes Ethiopian Airlines is a particular logistical strength, with strong local, regional and international passenger and cargo flight networks. The government is upgrading the national road network, he says. This will enable farmers to transport produce to bigger markets, support the area’s growing sugar industry, enable the development of coal mines in the region, and improve connections to neighboring countries such as Sudan, Kenya and Djibouti.
In 2018 a new $4bn electric railway from Addis Ababa to Djibouti opened, cutting freight transport times from two days to 10 hours.
But while Ethiopia’s transport infrastructure is undoubtedly improving, like most elements in Ethiopia it is coming from a low base. “The infrastructure at all critical points in our logistics world is not up to the mark and a lot needs to be done to bring it up to speed,” Diallo says.
“Furthermore, the procedural component also lags behind other African countries, including below-par customs processes and formalities, international shipment handling, timeliness at customs and ports, logistics competence, and tracking and tracing of all shipments entering and moving around the country,” he adds.
This explains why, in 2016, the World Bank’s Logistics Performance Index assessment ranked Ethiopia at 126, placing it well behind South Africa and Kenya, and also behind the likes of Tanzania, Rwanda and Ghana. But a low starting point invariably offers potential.
“The challenges are there,” says Diallo. “We do, however, see significant opportunities in Ethiopia going forward, provided the country manages to address its challenges in terms of trade facilitation and processes.”
There are other economic issues to overcome. The country is struggling under high public debt and rising inflation, and has long been plagued by a shortage of foreign currency – a consistent lament from foreign companies working in the country – while Ethiopia’s ease-of-doing-business ratings remain among the world’s worst.
The World Bank estimates the country needs to invest $5.1bn in infrastructure each year for 10 years to overcome existing constraints on development. Ethiopia is also heavily in debt to – and dependent on – China for providing enormous funding, expertise and cooperation for many of Ethiopia’s recent infrastructural developments.
Crucial juncture for future growth
Ethiopia therefore finds itself at a crossroads. Despite the current optimism and relative calm, further violence is possible and, if sustained, could result in shareholder pressure to mark time on investments, or even disinvestment campaigns by human rights activists. But if the ruling party continues to open up the economic and political system, some say Ethiopia’s progress toward stability and prosperity could quicken.
For now, the consensus among observers is that investors will continue to be drawn by the country’s advantages: the size of the domestic market, the sustained record of high economic growth, the government’s welcoming of foreign investment and striving to provide the requisite infrastructure, an increasingly skilled workforce and Ethiopia’s growing regional role.
There is even talk of Ethiopia eventually emerging as an African powerhouse alongside South Africa and Nigeria – if it can retain stability both politically and economically.
“It’s a promising situation as the country opens to the world, and now is the right time to be there,” Diallo says.
Source: This article was originally published by DHL. (22 October 2018).