Ethiopia rising: A bright spot in sub-Saharan Africa

Ethiopia rising: A bright spot in sub-Saharan Africa
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Ethiopia’s economic growth is likely to continue on a positive trajectory. Significant foreign investment is flooding into the country, yet political dynamics pose reputational risks for investors.

Ethiopian Prime Minister Hailemariam Desalegn was re-elected at the beginning of October, continuing his leadership from 2012. In May of this year, the ruling party, The Ethiopian People’s Revolutionary Democratic Front (EPRDF), won a landslide victory in the elections, claiming every parliamentary seat and consolidating their grip on power.

At the top of the PM’s priority list is the implementation of the five-year Growth and Transformation Plan II (GTP II). The ultimate aim of the plan is to catapult Ethiopia into middle-income status by 2025 through transforming it into an industrialised economy, offering a fully integrated supply chain.

Ethiopian economy

On 27 October 2015, the IMF reported that, in spite of sub-Saharan Africa’s relatively miserable economic forecast of 3.75% growth this year, Ethiopia’s is expected to rise by 7% or more.

In order to drive growth, Desalegn is much keener than his predecessor to encourage trade liberalisation. He plans to liberalise 80% of the country’s trade in order to stimulate growth. However, a tension exists as no country has been able to simultaneously liberalise and industrialise without imposing substantial tariffs on foreign trade in order to regulate external competition.

Regardless, the extent of foreign commercial interests in the country is significant and welcomed by the government. In October alone, investor interest was impressive. For example, between 20-21 October 2015, ten Chinese pharmaceutical companies travelled to the county to explore possible joint ventures with Ethiopian companies. Secondly, on the 22nd, PM Desalegn urged Saudi investors, in bi-lateral talks, to explore opportunities in the agricultural sector. Finally, on 30th October, Standard Bank announced the opening of a representative office in the country.

A relative lack of corruption, cheap labour costs, fiscal incentives and a relative lack of security risks render Ethiopia an attractive market. In agriculture, infrastructure, manufacturing and energy sectors, Ethiopia draws substantial international investment particularly from China and the West.

China

In Ethiopian infrastructure development, Chinese investors have a significant presence. The Addis Ababa Light Railway project, operational since November and costing $475 million, was funded by China. China has also played a key role in financing the Addis-Djibouti railway which will increase trade between the two countries.

At the macro level, Sino-Ethiopian trade is impressive. In 2014, Chinese exports to Ethiopia stood at $4.5 billion, whist Ethiopia’s exports to China stood at $456 million. Yet, as China’s economy begins to stagnate, it will be in Ethiopia’s interest to further diversify its economic ties.

Go west

Ethiopia is already an attractive market for Western countries. For example, from 2010 to 2014, UK exports to the country increased by 37%.

In particular, the apparel industry is pivoting away from Asian markets due to increased labour costs, and are now looking toward Ethiopia. The country provides competitively cheap labour and has attracted major Western brands.

Ethiopia aims to offer a “dirt-to-shirt” service for the sector, seeking to act as a one-stop-shop in order to harness sustainable economic growth. The government has encouraged this trend with fiscal incentives such as export credits, duty-free imports and tax holidays.

In turn, the apparel industry is expected to account for $1 billion worth of exports by the end of 2016. This is in line with the government’s aim to increase manufacturing’s proportion of contribution to the GDP as part of the GTP II.

Human rights and reputation

Political stability is strong and Ethiopia is seen as an ‘Island of Stability’ in an otherwise volatile region. The EPRDF’s meritocratic system, lack of tolerance for opposition and strategic positioning in the war on terror has allowed the party to maintain a strong grip over the country.

Ethiopia farmer

A farmer keeps watch from a treetop south of Arba Minch, Ethiopia (David Stanley)

Although this has enabled accelerated economic growth and development, a variety of sensitive social and political issues have arisen in tandem. The government’s management of such grievances will be definitive in the future risk profile of the country for multinationals.

Issues such as alleged land grabbing and communal violence abound. Unfortunately, these issues are heavily associated with foreign investor activity and pose significant reputational risks for foreign investors.

Tens of thousands of people are thought to have been displaced across the country as land is leased out to foreign investors for cotton production. For example, the villagisation programme, operational since 2010, has seen many forcibly evicted from their land. This land, in a number of cases previously used for millet and sorghum production, is now resulting in food shortages.

Related to this problem, the influx of migrant workers into areas where communities have been torn apart by land grabs is contributing to incidents of intercommunal clashes. This is a notable problem in regions such as Gambella and Benishangul-Gumuz. In turn, this could negatively affect the commercial viability of operations.

Mitigation necessities

As Ethiopia industrialises, human rights could become an increasingly serious problem. Issues including land grabbing and intercommunal violence mean that foreign investors will need to undertake enhanced due diligence on commercial partners to mitigate reputational problems associated with their activities.

Given the highly sensitive nature of these issues and scrutiny from international NGOs, it will be necessary for companies to manage relationships with stakeholders at all levels and maintain open dialogue.

Engaging with local communities and ensuring that operations will benefit communities whilst compensating losses will also be instrumental in preventing potential security problems as tensions rise between local communities and migrant workers.

About Author

Elliot Kratt

Elliot is a Freelance Analyst with The Economist Intelligence Unit. Prior to this, he held positions in a number of risk consultancies and has worked in East and West Africa. He has been quoted by journalists with the Financial Times and Wall Street Journal. Elliot holds a first class BA (Hons) in International Relations from the University of Leeds. All views expressed are his own.