Ethiopia’s recent rapprochement with Eritrea and Somalia has breathed fresh life into the Horn of Africa. Expectations are high that we are witnessing a new era of sustained growth and greater economic integration. The government’s goal of Chinese-style growth, based on rising exports, aims to transform key industries to add more value to current exports, which should bring in much need foreign currency to the country. With its population expected to reach 114 million by 2020, Ethiopia certainly needs a comprehensive strategy to grow its export sector to create more jobs for its citizens.
Improving Export Growth
Poised to again be one of the fastest growing countries in Sub-Saharan Africa in 2019, Ethiopia has averaged a remarkable 10 per cent real growth over the past decade. Much of the forecasted growth is based on expectations that manufacturers will make significant investments in the country to boost exports.
Ethiopia suffers from an underperforming export industry. As share of GDP, exports total 8.3 per cent and are only expected to grow marginally to 8.9 per cent in 2019. In contrast, the medium in Africa is nearly 30 per cent, even after excluding economic heavy weights of South Africa and Nigeria. To put it in perspective, in Africa only Burundi exports less than Ethiopia as a share of GDP.
This wasn’t always the case. Exports from Ethiopia remained in the double digits from 2004 to 2014, even peaking at almost 20 per cent of GDP in 2011. The decline can partly be explained by rapid economic growth concentrated in domestic infrastructure and construction reducing exports share of the overall economy.
Broadening the Export Base
In the medium term Ethiopia will strive to expand its currently limited export base. Nearly all of exports in 2017 were primary agricultural products and mineral commodities. These products are subject to climate concerns such as droughts and to volatile global commodity prices. These factors also explain why recent export receipts have not kept pace with increased volume output.
There is hope that Ethiopia will be a major electricity supplier to the region over the coming years. The Grand Ethiopian Renaissance Dam, the country’s flagship project, is in an uncertain stage, as it is unclear when it will start production. The project was slated to be completed in 2017 but a host of issues have led to delays, including the cancellation of a major turbine contract to Ethiopian state-owned Metec due to corruption. With a US$5 billion price tag, which does not include the necessary transmission lines, rising with construction delays, there is legitimate fear that the project may turn into a white elephant.
Greater hope is placed on the manufacturing sector to drive future export growth. Ambitious targets have been set. The government states that by 2025, Ethiopia will be Africa’s biggest manufacturing hub. Estimates have the manufacturing sectoring growing by 25 per cent annually. Four major industrial parks are being constructed throughout the country, with eight more expected in one year. Chinese and Turkish apparel and textile companies have been the first to take advantage. They hope to capitalize on Ethiopia’s large population and low labour costs by shifting their own manufacturing facilities. The financial incentives are attractive, with zero corporate taxes for five years and zero duties on capital goods imports. Moreover, the government has committed to seeing their exports to market by taking equity shares in various ports across the Horn of Africa, from Sudan to Somalia, as well as investing in Kenya’s Lamu port project, giving exporters access to the Indian Ocean.
Beware the Debt Trap
As construction continues on various infrastructure projects to facilitate exports, Ethiopia has to remain cognizant of the growing financial implications. The government, through various arms length public entities, is heavily tied to the growing foreign investment through the provision of guarantees. Debt, mainly owed to external creditors, has risen substantially in recent years to the point where the International Monetary Fund has warned that Ethiopia is under debt distress. The terms and conditions of these loans, in particular from Chinese state-owned entities, lack transparency. Ethiopia only needs to look at Sri Lanka’s Hambantota Port to realize that an inability to service debts can do great damage to the fortunes of a country.
Author: Negash Haile