RENEW Strategies

5 Reasons We Remain Long on Ethiopia

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Tsegamlak Solomon
| December 9, 2020

When considering investing in Ethiopia, it is impossible to overlook the country's recent challenges including the outbreak of the desert locust (LINK), COVID-19, regional tensions over the Grand Ethiopian Renaissance Dam (GERD) (LINK) and the unrest that has occurred in 2020, especially the latest conflict and war in the northern parts of the country between the federal government and the Tigray People's Liberation Front (TPLF) (LINK). But it’s important to look beyond the headlines and recognize the progress that’s been made since RENEW opened an office in 2012. Here are our top five reasons why we remain long on Ethiopia.

1. Investment Law Reform

In 2019, Ethiopia began to implement a new economic policy reform (the Homegrown Economic Reform Agenda). The major goal of the reform program is to open the country’s market for the private sector and to make the country more business-friendly (read our analysis on this reform here). The Ethiopian government plans to undertake measures that will allow the private sector to take the wheel in leading the economy and includes measures to improve the country’s ranking in the World Bank’s Ease of Doing Business ranking.

Under the Ease of Doing Business initiative, the government took steps to change its investment laws (the Investment Proclamation and Investment Regulation), which were in effect since 2012. The new investment laws lifted the majority of the sector restrictions that were imposed on foreign investors, improved administrative complications and introduced dispute settlement mechanisms. By way of example, the new investment laws saw the opening of transport services, education, health, cement manufacturing, and wholesale and retail trades via electronic commerce, among others. The new investment law also adopted a negative listing approach; it lists 33 areas that are reserved for domestic investors and anything outside of these areas are now open to foreign investors.

2. Improving Infrastructure

During the last decade, Ethiopia has invested in infrastructure improvements. Having nine major rivers with several tributaries, the country holds one of the highest hydropower potentials in Africa. Based on that, the government has invested in hydroelectric power generation projects such as the GERD, which will be the largest hydroelectric power dam in Africa once it’s fully functional.

In addition to power generation, the government has been involved in other infrastructure development projects, including the Addis Ababa-Djibouti railway project, the industrial zone development projects that are being undertaken across the country and the road projects that connect Ethiopia with neighboring countries. As Ethiopia is a landlocked country, the railway line and the road projects connecting the country to Djibouti and other ports will increase the accessibility of Ethiopian products to the international market.

3. Privatization of Key Sectors

One part of the Homegrown Economic Reform Agenda is the privatization of some government enterprises, which had a monopoly in controlling the country’s markets. Ethio Telecom, which is the only telecom operator in the country, is a government-owned enterprise that is currently selling part of its membership interest to international operators. In addition to selling part of Ethio Telecom, the government also issued two new licenses for telecom operators. Different international operators have shown an interest to participate in the bid for these newly issued licenses. This will increase the addressability of telecom services to the unconnected portion of the population. In total, the Government of Ethiopia aims to raise at least $7.5 billion USD from selling assets from the sugar industry, telecom, railroads and other infrastructures.[1]

The other sector that is currently experiencing a change in control is the financial sector. The financial sector has historically remained closed to foreign nationals, regardless of their origin. However, a few months after the new administration took power, the sector was opened up to foreign nationals of Ethiopian origin (diasporas). Going forward, the government has pledged to take measures to open the financial sector to foreign investors.

4. Regional Integrations and AfCFTA

On March 21, 2018, the African Union member states signed the African Continental Free Trade Agreement (AfCFTA) in Kigali, Rwanda in order to boost trade, economic growth and integration among African countries. The Agreement established a free trade area, a protocol on trade in goods, and a protocol in trade in service. Ethiopia ratified the agreement and deposited the ratification document on April 10, 2019.

The agreement gives free access to the market of member countries. Member states are obliged to progressively eliminate tariffs or charges on goods and services originating from member states. As a result, products originating from Ethiopia will have access to the markets of the countries that have ratified the agreement. As of 2020, 28 African countries have ratified the agreement, including: Ghana, Kenya, Rwanda, Niger, Chad, Congo Republic, Djibouti, Guinea, Swaziland, Mali, Mauritania, Namibia, South Africa, Uganda, Ivory Coast (Côte d’Ivoire), Senegal, Togo, Egypt, Ethiopia, The Gambia, Sierra Leone, Sahrawi Republic, Zimbabwe, Burkina Faso, São Tomé and Príncipe, Gabon, Equatorial Guinea and Mauritius. Protocols which relate to intellectual property rights, investment and competition policy are underway.

From the regional integration perspective, Prime Minister Dr. Abiy Ahmed brokered a peace deal with Eritrea, which ended the Ethio-Eritrea border conflict that lasted for more than two decades. This resulted in the opening of borders between the two countries and ensured the free movement of people and goods. In addition, the Eritrean ports are now one of the main outlets for Ethiopian products. This resulted in Prime Minister Abiy receiving the 2019 Nobel Peace Prize.

5. Macroeconomic Trends

Another reason to remain long on Ethiopia is the country’s track record for being one of the fastest-growing economies in the world. As per the World Bank Report, the Ethiopian economy has experienced a strong, broad-based growth averaging 9.9% growth from 2007/08 – 2017/18.[2] When compared to the regional average of 5.4%, the Ethiopian economy has been growing exponentially. Though the growth rate will inevitably slow as a result of the pandemic and the conflict, there are signs that the growth rate may still be positive.

In terms of population, Ethiopia is the second-most populous nation in Africa with a population of 110,000 million people. Sixty percent of the population is of working age, entailing the availability of an inexpensive labor force. In addition, with the growing population, there is also an increase in the middle-income population. This is expected to increase the domestic demand for goods and services.

Ethiopia is also endowed with fertile land suitable for the production of coffee, pulses, oilseeds, cereals, flowers and various fruits and vegetables. Coffee holds the biggest share of Ethiopian agricultural products sold to the international market, and Ethiopia is currently Africa’s largest producer of coffee.

Overall, with these development trends, Ethiopia aims to achieve the status of a lower-middle-income country by 2025, joining countries like India, Bangladesh and Vietnam.[3] Of course, there are still a number of bottlenecks that the government is expected to tackle in order to achieve that status, but we remain hopeful.


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Footnotes:
[1]https://www.bloomberg.com/news/articles/2020-01-21/ethiopia-s-privatization-push-aims-to-raise-7-5-billion
[2]https://www.worldbank.org/en/country/ethiopia/overview
[3]https://data.worldbank.org/country/XN