Ethiopia: The Road to Recovery – Nicholas J. Pascal, Partner at Vedder Price

For over a decade in the 2010s, Ethiopia was widely regarded as one of Africa’s most promising economies, averaging economic growth of nearly 10% per year per capita according to data from the World Bank. More recently, Ethiopia has faced multiple shocks that have considerably slowed its economic growth, including civil unrest, the COVID-19 pandemic and adverse climate events. Despite these significant challenges, it appears that Ethiopia is now on the road to recovery with international investors returning to its domestic markets following the recent ceasefire in Tigray.

Investment climate in Ethiopia
The Ethiopian Government has adopted an ‘investor friendly’ approach since the inception of its 10-year development plan in A Homegrown Economic Reform Agenda: A Pathway to Prosperity in 2021. That plan consists of the Ethiopian Government facilitating a shift towards a more private-sector driven economy, by repealing laws that previously protected state monopolies in key sectors and establishing new funds, such as Ethiopia Investment Holdings (EIH). EIH is a sovereign wealth fund that acts as a strategic vehicle to attract foreign direct investment to Ethiopia which, in turn, helps unlock value from unutilized assets across multiple sectors ranging from agriculture to renewable energy.

As part of this ‘investor friendly’ approach, the Ethiopian Government has legislated to create a robust legal framework for foreign investors to remit monies outside of Ethiopia in convertible foreign currency (usually in US Dollars) at the then applicable rate of exchange. Furthermore, the Government has adopted a comprehensive package of incentives (such as income tax exemptions) to continue to facilitate foreign investment into sectors which it deems a priority, for example technology and agriculture.

Key sectors poised for growth
Three of the key sectors poised for considerable growth in Ethiopia are energy and infrastructure, telecommunications, and logistics.

Energy and infrastructure: Ethiopia has abundant renewable energy resources and has the reported potential to generate over 60,000 MW of electric power from wind, solar and geothermal sources. To exploit these vast resources, the Ethiopian Government – via its state owned utility Ethiopia Electric Power – is currently tendering all of its proposed power generation projects in the country through public-to-private partnerships and independent power projects.

Another state owned utility – Ethiopian Electric Utility – has launched a tender for the construction of 20 solar mini-grids across the country using financing obtained from the World Bank through the Access to Distributed Electricity and Lighting in Ethiopia program. These tendering processes are clear indicators of the potential avenues for growth in Ethiopia’s power generation and infrastructure sectors.

Telecommunications: In recent years, the Ethiopian Government has actively repositioned the telecommunications sector from a state monopoly to being open to private investment. This is evidenced from the decision to grant Safaricom (Kenya’s largest telecoms operator) a mobile banking licence to develop M-Pesa in Ethiopia, an application that provides users with mobile access to transfer and store money. The mobile banking sector is a nascent industry in Ethiopia – and accordingly, is poised for considerable future growth.

Logistics: Market participants note that the logistics sector in Ethiopia is currently underdeveloped compared to its regional peers. The Ethiopian Government has also recognised this and legislated to open this sector to foreign investors, by permitting them to invest in joint ventures up to 49% equity ownership. Given how critical logistics is to Ethiopia and its economic development, there will continue to be opportunities for logistics companies and other participants to invest in this market. 

Challenges to growth in Ethiopia
Some of the most significant challenges are a shortage of foreign currency, the need to implement structural reforms and continued incidences of conflict. These stand to inhibit potential growth in Ethiopia.

Shortage of foreign currency: Ethiopia is a largely importing country that has grappled with shortages of foreign currency (particularly US Dollars) for a number of years. This has recently escalated into an acute crisis with reports from the National Bank of Ethiopia that its US Dollar reserves are only sufficient to cover two months’ worth of imports. This foreign-currency squeeze is resulting in a shortage of vital products and market participants struggling to repatriate monies overseas and obtain letters of credit to facilitate trade. The Ethiopian Government must work closely with international organisations, such as the IMF, to carry out the necessary structural reforms to address this longstanding problem.

Implementing structural reforms: Whilst Ethiopia has made enormous progress over the past 15 years to liberalise its economy, further reforms are required. These include: increasing the private sector’s role in the economy to improve competitiveness and innovation across multiple sectors; easing economic constraints to industrialisation and manufacturing growth including deploying resources to improve trade facilitation and access to energy, in addition to harnessing tourism for foreign exchange earnings and job creation. These structural reforms could take a number of years to implement and rely on a high degree of economic and political stability.

Reducing the incidence of conflict: Recent conflicts – including the Tigray conflict of 2022 – resulted in a freeze in budgetary support from donors and development partners to Ethiopia. Whilst there is an active ceasefire in the Tigray region, the potential resumption of conflicts could complicate reform implementation and forex inflows which would negatively impact Ethiopia in the short- to medium-term.

Outlook for Ethiopia
The economic outlook for Ethiopia is looking positive, with the World Bank anticipating that its annual growth in 2024 will be 6.4% due to the impacts of recent domestic and external shocks waning and continued growth in the services sector. However, there are number of persistent structural challenges that Ethiopia must overcome to realise that growth. If its government can implement those reforms, then the investor outlook for the medium term should be very encouraging.

Nicholas J. Pascal is a Partner at international law firm Vedder Price and is a member of the firm’s Finance & Transactions group working in the London office. Nicholas regularly advises international and domestic clients (including sovereigns, leading funds and corporates) on complex cross-border financings, project and infrastructure finance, distressed debt, and restructurings, with a particular focus on emerging markets in Africa and the EMEA region.

He recently spoke at the AFSIC Investing into Africa Conference providing insights into themes shaping foreign investment in Africa.