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Backing the dramatic change by economic reforms

Backing the dramatic change by economic reforms

By Bacha Zewdie 09-05-18

Ethiopia is currently undergoing significant changes in political, economic and social areas. The reforms taken by the new Prime Minister Abiy Ahmed are so rapid and enticing especially in the economic sector. 

 The situation is changing in the Horn of Africa and the larger East Africa region. Ethiopia – once the byword for famine in the region – is now garnering attention from foreign investors.

It is to be recalled that, on 6 June 2018, Ethiopia’s new government announced that the state will end its decade’s old monopoly in key sectors such as telecoms, energy and aviation. Reformist Prime Minister Ahmed is keen to modernize Ethiopia’s economy by privatizing key state-owned enterprises and limiting the state’s tight control on all aspects of the economy.

Ethiopia’s government hopes such increased inward investment will allow the state to create jobs for its increasing numbers of unemployed young people. In a country of nearly 100 million people, absorbing more disaffected youth into its labor markets will prove crucial to Ethiopia’s future stability.

The investment attractions are not limited only on the aforementioned state- owned enterprises, but also financial services and heavy constructions. As a developing country, Ethiopia needs financial support and technology transfer in heavy constructions.

According to Africa .com, Private investors lurk around banks in Ethiopia, eager to jump into a sector not yet available to them. For now, all they can do is dream about the potential of “almost 100 million people, one of Africa’s biggest economies, and high GDP growth means opportunity for financial services,” says one insider at Standard Bank, “plus don’t forget the huge unbanked population.”

Ethiopia’s infrastructure spending, as a percentage of GDP, is the highest in Africa. The Ethiopian government rightfully makes the delivery of infrastructural services, such as transport and energy, a focus of its development plan. Absent the government’s current and continued focus on infrastructure, the development story of Ethiopia would hit a wall.

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Heavy construction sectors, including cement and steel, are the ancillary beneficiaries of this infrastructure build. As you drive out of Addis, you pass newly built affordable government housing or private housing developments; both promptly filling up after the final touches are added. Pass through Bole and expect to encounter changing roadways, as one road finishes construction and another undergoes it.

Nowadays, the government is learning that providing residential houses for all citizens by its own is impossible. Therefore, engaging private investors to the sector is the good opportunity to be deployed. To this end, the deputy mayor of Addis Ababa city administration, Engineer Takele Uma, recently stated that the government is planning to engage the private sector in the construction of residential houses.

In addition to attracting investment in various sectors, the Ethiopian government is working on advancement of domestic tax collection though its current performance is not satisfying. The sector needs collective effort to make it supportive for the economic boost. As it is stated through different media recently, the laws that contradict each other regarding tax collection should be amended.

On the other hand, the tax base should be increased or expanded as the current domestic tax payers are very limited to employees, farmers and few investors. The country’s economy is growing rapidly and this is a good opportunity for the government to strengthen itself economically through widened domestic tax collection.

 The Ethiopian Customs and Revenues Authority, a merged institute of the previously known as Revenue Minister, Local Revenues Authority and Ethiopian Customs Authority in the year 2000, had been doing its tax and custom administration in a scattered manner but for the last some years, it has become a collective institute in order to provide service to the public in using limited labor, material and cash resources in a way that is economical and effective.

Envisaging covering the national expenditure by national income by 2025, the authority is striving for competency, trustworthy enforcement of the laws, and modernizing taxation and tax administration ensuring efficient and cost effective national revenue for national development.

However, it is too far from achieving the set goals as the system is bottle necked with multiple sidelines such as corruption, tax fraud and mal administration.

Cognizant of the aforementioned challenges, the government is striving to ensure amenity in the service robustly, implementing policy and organizational reforms. Materializing the culture of paying tax responsibilities voluntary, establishing modern tax and custom administration system which enables the country to collect its revenue efficiently to ensure the social and economic security of the society by using capable and motivated professionals who can enforce the law, are among the areas to be reformed. 

In line with modernizing the tax collection system, the government is working vigorously to alleviate the economic inflation against the low income population particularly in urban areas. The government’s interference to supplying basic consumption goods such as oil and sugar with a fair price is one of the measures.       

Inflation refers to a general rise in the prices of goods and services over a period of time. As inflation increases, the percentage of goods and services that can be purchased with the same amount of money decreases. Though there are various reasons for this to happen, in Ethiopian context, the lack of foreign currency takes the lion share.

Ethiopia needs hard currency to import basic goods including medicine. But the incompatibility of import and export goods put an obstacle to secure sufficient amount of foreign exchange.

The reforms in the economic sector like plan to privatize some key sectors, stood as a wet to strengthen cooperation among the government and western countries and international institutions. And most of them lauded their interest to support the reforms. To this end the good will shown by World Bank to support Ethiopia’s economy can be taken as a sign that the country is becoming good opportunist.

According to the report of the World Bank in Ethiopia, the  Bank has provided $1bn in direct budget support to Ethiopia as it promised few months ago, more than 13 years after the body and other donors suspended budgetary help over a disputed election in 2005.

Speaking at his first press conference since taking power in April, Abiy Ahmed credited his government's economic and political changes for the development.

"This is due to the reforms taking place in the country," he said, vowing to continue with dramatic transformation "at any cost".

Ethiopia’s huge population of about 100 million makes it the second most populous nation in Africa, next to Nigeria. Although it is the fastest growing economy in the region, it is also one of the poorest, with a per capita income of $783. Ethiopia’s government aims to reach lower-middle-income status by 2025.

Ethiopia’s economy experienced strong, broad-based growth averaging 10.3% a year from 2005/06 to 2015/16, compared to a regional average of 5.4%. According to official statistics, Ethiopia’s gross domestic product (GDP) is estimated to have rebounded to 10.9% in FY2017. The expansion of agriculture, construction and services accounted for most of this, with modest manufacturing growth. Private consumption and public investment explain demand-side growth, the latter assuming an increasingly important role.

Higher economic growth brought with it positive trends in poverty reduction in both urban and rural areas. In 2000, 55.3% of Ethiopians lived in extreme poverty; by 2011 this figure declined to 33.5%. The government is implementing the 2nd phase of its Growth and Transformation Plan (GTP II). GTP II, which will run to 2019/20, aims to continue work on physical infrastructure through public investment projects, and to transform Ethiopia into a manufacturing hub. Growth targets are an annual average GDP growth of 11%; in line with manufacturing strategy, it also hopes the industrial sector will grow by an average of 20%, creating jobs.

Ethiopia’s main challenges are sustaining its positive economic growth and accelerating poverty reduction, which requires progress in job creation and improved governance.

Sustainable ways to finance infrastructure, support private investment through credit markets, and tap into the growth potential of structural reforms can help the country maintain high economic growth.

Important measures were taken to address persistent Birr overvaluation, large external imbalances, foreign exchange shortages, and rising external debt. Inflation remained in single digits on average in FY2017, but accelerated to 15.6% by February 2018. Key challenges relate to limited competitiveness, an underdeveloped private sector, and political disruption. The lack of competitiveness constrains the development of manufacturing, the creation of jobs and the increase of exports. A larger and stronger private sector would seem to be the main response to strengthen Ethiopia’s trade competitiveness and resilience to shocks. The authorities are counting on the expansion of the private sector, especially through foreign investments in the industrial parks, to make Ethiopia’s growth momentum more sustainable. Political disruption associated with social unrest could also negatively impact growth through lower foreign direct investment (FDI), tourism, and exports.

The changes being registered in Ethiopia initiated also the developed countries like Germany which is willing to provide technical and professional support.

The sum of all these opportunistic activities enables the government in making the country economically hopeful through attracting investments, broadening the domestic tax collection and downing the inflation to single digit.




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