Ethiopia | Government-led growth model is maintained — BAoML

Addis Ababa, Ethiopia, Capital Markets in Africa — Ethiopia’s government-led growth model shows no signs of significant change, with many meetings focused on investment in new industrial parks across the country as part of the second Growth and Transformation plan (GTP2) that runs from 2015 to 2020. The major investment areas are infrastructure, energy, and education/healthcare. GDP growth (which the IMF expects at c.8% in the medium term) continues to be driven by the government.

The authorities are not thinking about currency devaluation, although the IMF recently stated that the birr is 30% overvalued. In its view, it is more important to keep capital imports cheap than to make exports competitive. With c.US$3bn in reserves (2.6 months of import cover), FX access is centrally managed. The current waiting time for access to foreign exchange is around eight months (slightly shorter for the priority sectors such as garments, horticulture, engineering or pharmaceuticals). Aside from the dollar shortage, foreign investors in Ethiopia mentioned a lack of appropriately skilled labor as a key impediment. Most people we met were certain that the telecom and financial sectors would remain tightly controlled by the government.

On funding, the government is not in a rush to come the market. It is a big recipient of remittances and is focused on mobilizing domestic savings and taxes. PPPs are also being used more for infrastructure. The requirement for banks to put 27% of their loan portfolio in state bonds remains in place, despite speculation that it is to be scrapped. Grant revenues are not slowing down, but the authorities expect non-concessional debt to increase as a percentage of total external debt.

The impact of the drought appears manageable, although more than 10m people have been affected. Although the rains are returning, many livelihoods have been ruined through lost livestock, which will make the recovery time longer. Spending has been reprioritized, allowing the government to commit US$400mn so far against an estimated cost of US$700m-$1.2bn. If announced donor commitments come through, there should be enough funds to meet the demand.