IMF Urges Ethiopia to Slow Nile Dam Project to Protect Economy

Ethiopia should slow the construction of Africa’s largest hydropower plant to avoid the dam and other projects starving the rest of the economy of funds, the International Monetary Fund said.

The government began work on the Grand Ethiopian Renaissance Dam, situated on the Blue Nile River near the Sudanese border, in April last year. The 80 billion-birr ($4.5 billion) project that will generate 6,000 megawatts, partly for export to the region, is scheduled to be completed in 2018.

“I think there’s a need to rethink some of those projects a little bit to make sure that they don’t absorb all domestic financing just for that project,” IMF country representative Jan Mikkelsen told reporters yesterday. “If you suck in all domestic financing to just a few projects that money will be used for this and not for normal trade and normal business.”

Ethiopia, the world’s fifth-biggest coffee producer, is seeking to diversify its economy to reduce a reliance on agriculture for 43 percent of total output. Ethiopian Electric Power Corp., the state-owned utility, began exports to neighboring Djibouti in May 2010 and plans to ship as much as 2,000 megawatts to Egypt and 1,200 megawatts to Sudan by 2020. Power exports to those nations may earn about $1.6 billion a year, according to Access Capital, the Addis Ababa-based research company.

The delayed return on investments for long-term projects increases the need to ensure they don’t absorb all domestic financing as they’re being built, Mikkelsen said.

‘Well-Considered’

Ethiopia’s government won’t reschedule construction of the Grand Renaissance dam, said Communications Minister Bereket Simon, who co-chairs a fundraising committee for the plant.

“It was a well-considered plan and it’s one of the mega projects for which the government commits itself unconditionally,” Bereket said in a phone interview yesterday.

In the current fiscal year that ends next July, Ethiopia plans to invest 144 billion birr, about 16 percent of gross domestic product, in industrial development, transport, telecommunications, energy and housing, according to the government’s five-year growth plan.

The Grand Renaissance dam is being funded by Ethiopians as foreign lenders were unwilling to finance it because of Egypt’s historical refusal to sanction development projects on the river, according to Ethiopia’s government. As much as 5 billion birr has been raised for the project so far from the public by selling bonds that pay 5.5 or 6 percent interest, Bereket said.

Bond Purchases

In April 2011, the government introduced a requirement for banks to purchase National Bank of Ethiopia securities worth 27 percent of each loan they disburse. The measure raised 12.6 billion birr for the government to invest in infrastructure projects in its first 16 months, according to Access Capital.

The regulation is “too onerous” and the fund has suggested an adjustment so banks can still fund state investments while freeing up more credit for private enterprises, Mikkelsen said.

Ethiopia’s economy grew 7 percent in the 12 months to July 7 and 7.5 percent the previous year, according to the IMF. Inflation is projected to slow to 25.4 percent by the end of this year from 38.1 percent a year earlier, according to data on the lender’s website.

Ethiopian officials have vowed to implement the industrialization program of former Prime Minister Meles Zenawi, who died last month. Meles aimed to transform Ethiopia into a middle-income nation by 2025.

“This is the brainchild of the late prime minister and we want to show commitment to his vision,” Bereket said.