Ethiopia loosens throttle on many key sectors, but privatization still far off

6 Jun

Posted by The Ethiopia Observatory (TEO)

“However, unless implemented with skill, knowledge and focus,” Abiy [Ahmed] said, “it can lead to a repeat of the pervasive theft seen in many African countries and a destruction of Ethiopia’s wealth.”

ADDIS ABABA (Reuters) Ethiopia’s decision to sell stakes in its lucrative telecoms monopoly and other assets could open one of the world’s largest untapped markets to huge potential investments by firms willing to work with a government still wary of private enterprise.

The stake sales are part of a raft of measures announced by Abiy Ahmed, a young former army officer who became prime minister in April, saying a new start was necessary to end crisis and chaos in a country of 100 million people, where some 40 percent are aged under 15.

While some fear Ahmed is moving too fast to challenge entrenched interests in his ruling EPRDF coalition, there is also hope across the region that his reforms will help ease crippling unemployment, foreign currency shortages and poverty.

The stake sales were announced on Tuesday, the same day Ethiopia said it would implement a 2000 peace deal with neighboring Eritrea and cede disputed territory on the border it has occupied for nearly 20 years[L5N1T75WX].

Companies have been waiting in the wings for Ethiopia to open its state monopolies and Tuesday’s news was welcomed.

South Africa telecoms group MTN told Reuters that it was excited by the potential opening up of the Ethiopian market “as it would be a natural fit for MTN’s existing pan-African footprint.” 

South African peer Vodacom said, “Vodacom has said on many occasions that Ethiopia is an attractive market so it follows that there would be interest. Naturally this is dependent on what might become available and if it fits within our investment parameters.”

It is unclear whether the government would consider licensing foreign mobile operators. Interest might be limited if the only option is a minority stake in the monopoly.

Analysts have said the government’s move falls far short of enabling full competition by multinationals. They note that by selling minority stakes the EPRDF is underscoring its view that the state should be a key player in the economy.

But the step is still radical for the EPRDF, in power since it took over from the communist Derg regime in 1991, and could indicate how 41-year-old Abiy plans to steer the country.

The economic reforms come two months after Abiy took power promising political changes to address roiling anger among young people over ethnic marginalization and unemployment.

The invitation to private investors to take shares in state companies including highly profitable Ethiopian Airlines is an acknowledgment the public sector alone could not provide adequate jobs or push export earnings higher, said one Addis Ababa-based analyst who spoke on condition of anonymity.

“There is a realization that you might need the private sector’s help,” he said.

In a statement issued Tuesday evening after a day-long meeting, the EPRDF’s executive committee said it recognized that economic reforms needed to be taken to sustain economic growth that has averaged near 10 percent for the past decade.

The statement referenced foreign exchange shortages that are draining shops of goods that suppliers cannot access hard currency to import. Foreign reserves are estimated by economists to cover less than two months’ of imports.

ECONOMIC TRANSFORMATION

The government has poured earnings from the national flag carrier and Ethio Telecoms into its infrastructure projects, part of an ambitious strategy to transform an agrarian nation into an industrialized one where the manufacturing sector provides large export earnings.

More revenues are needed, government spokesman Ahmed Shide told reporters after the coalition’s announcement.

Calling state-owned corporations a “huge source of wealth”, Shide said allowing private investors to buy shares “will enable us to generate even more wealth through them”.

But the morning after the premier himself suggested that, while the reforms are necessary, they come with risks.

“It is progressive. This new economic decision will afford us the opportunity to resolve widespread unemployment, ease foreign currency shortages, and reduce weaknesses in market connectivity,” Abiy said on Wednesday.

“However, unless implemented with skill, knowledge and focus,” Abiy said, “it can lead to a repeat of the pervasive theft seen in many African countries and a destruction of Ethiopia’s wealth.”

“The government is still deeply skeptical about capitalism and ‘speculative investors’”, said Charlie Robertson, global chief economist at Renaissance Capital, an emerging market investment bank.

Despite being Africa’s fastest growing economy, Ethiopia is a poor nation where GDP per capita is less than $800 per year and affordability of items like a smartphone is low.

The stakes sales also raise the question of what the government will do with the exchange rate. Foreign investors will want an easily convertible local currency. The Ethiopian birr is overvalued by at least 15 percent, according to the black market spread.

Still, there is undoubtedly huge untapped potential in the market given its size and under-served population, said Jacques Nel at research group NKC African Economics.

“Ethiopia remains a difficult place in which to do business, with inadequate infrastructure and opaque regulatory requirements, while the government remains deeply involved in most facets of the economy,” Nel said. “Foreign investors will still have to contend with these challenges.”

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