Ethiopia Coaxes Investors as It Struggles to Finance Growth Plan
By William Davison, Bloomberg; February 11, 2013
Ethiopia’s government plans to attract more foreign investment and boost domestic savings as it struggles to finance infrastructure and other development projects, State Minister of Finance Abraham Tekeste said.
Africa’s second-most populous nation plans to spend 144 billion birr ($7.8 billion) developing its economy this fiscal year as part of a five-year plan that ends in mid-2015. Investments are to be made in rail, power, sugar, roads and housing projects as Ethiopia seeks to become an industrialized middle-income nation by 2025.
“Finance has become a challenge,” Abraham said on Feb. 8. “As we intensify implementation of the plan, finance is increasingly becoming a critical constraint.”
Growth in sub-Saharan Africa’s fourth-biggest economy slowed to 8.5 percent in the 12 months to July 7, the end of Ethiopia’s fiscal year, from 11.4 percent a year earlier, as agricultural productivity gains slowed, Abraham said. The expansion is expected to accelerate to more than 10 percent this year as investment in farming boosts output, he said. The International Monetary Fund projects growth will be 6.5 percent.
The government has been urged by the IMF to “rethink” its infrastructure investments and modify a requirement that commercial banks buy central-bank securities equivalent to 27 percent of the loans to help fund development projects. The Washington-based lender also advised the government to raise official interest rates, which are currently at about 5 percent.
Demand for credit from public enterprises is crimping private industry and an inflation rate well above lending rates is discouraging saving, the IMF said in October. Annual inflation slowed to 12.5 percent in January from 12.9 percent the month before, according to the country’s statistics agency.
The government will conduct a mid-term review of the five- year growth plan at the end of this fiscal year, Abraham said. Projects that boost business, such as a railway that links Addis Ababa to Djibouti, the country’s main trade route, and hydropower dams, will be prioritized, he said.
The Export-Import Bank of China loaned Ethiopia $475 million for railways in June, according to Finance Ministry data. The government is also discussing advances with India and other countries for the project, Abraham said.
While the country experienced a surge in demand for foreign exchange due to “uncertainty” at the time of former Prime Minister Meles Zenawi’s illness and death in August, the central bank’s reserves haven’t dropped below the “critical level” of covering three months’ worth of imports, Abraham said. Ethiopia’s trade deficit was $7.5 billion last year.
Ethiopia’s national savings rate as a proportion of gross domestic product increased to 16.5 percent from 12.8 percent last year as business saved for investment, bank branches were opened, people were educated about the benefits of saving and new instruments were offered, including bonds to fund what will be Africa’s largest hydropower project, the Grand Ethiopian Renaissance Dam, Abraham said.
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