News Column

Sustaining Growth Requires Changing Strategy

August 19, 2014

Toddy Thairu

Ethiopia is fast becoming the preferred investment destination for foreign investors coming to Sub-Saharan Africa. According to the World Bank, Ethiopia has had an average gross domestic product (GDP) growth rate of about 10.6pc for the past decade. Compare that to 4.6pc for the Sub-Saharan regional average and it is clear why Ethiopia has surged ahead as the region's preferred investment destination.

To attain this status, Ethiopia has made "giant strides". Not too long ago, the country faced the worst famine in its history in the 1980's and the civil war did not end until 1991. In spite of these challenges, Ethiopia has, like the proverbial phoenix, managed to rise from the ashes to become Africa's fastest growing non-energy economy.

Ethiopia's rapid economic growth can largely be attributed to intense government projects aimed at achieving the Millennium Development Goals (MDGs). The government's current five year development plan, the Growth & Transformation Plan (GTP) for 2010/11-2014/15, envisions sustainable means of economic, social and environmental development in a bid to achieve the MDGs.

Some of the key goals of the GTP include maintaining a rapid GDP growth of at least 11pc per year, an increase in the country's foreign exchange reserve which currently stands at just over two months import cover, an increase in the road network from 49,000Km to 64,500Km, construction of 2,395Km of railway line as well as an increase in the power generation capacity from the current 2,000Mw to 8,000Mw.

Despite facing a lot of challenges as well as criticisms from various sectors and financial observers, the government has remained committed to the GTP and its concerted efforts have largely influenced Ethiopia's economic growth this far. In a bid to confirm the government's commitment, Ethiopia's parliament approved a 178.6 billion-Br budget for the fiscal year 2014/15, which is the final year of the GTP. This budget represents a rise of 15pc from the previous year and is expected to boost spending on education, health and infrastructure development.

The government must be lauded for ensuring that the GTP is not just a policy paper, as is usually the case with most government policies in developing countries. The development and transformation in Ethiopia is clearly visible and tangible. Walking through the streets of the capital, Addis Abeba, feels like walking through a giant construction site.

However, despite all this positive development efforts, financial experts and observers are of the view that the government must now change its strategy and switch its focus from public expenditure to promoting private investments in order to maintain the steady economic growth so that the country can realise its dream of reaching middle income status by 2025.

The government has in the recent past demonstrated a willingness to support private investment with measures such as the introduction of the Ethiopian Investment Agency (EIA) as the "one-stop-shop" where investors can obtain investment licenses, incorporate and register companies as well as obtain work permits among other services. The government has also established the Privatization & Public Enterprises Supervising Agency (PPESA) in an effort to enhance the privatisation of state owned enterprises. Attractive tax incentives such as corporation tax and customs duty exemptions for manufacturers and exporters are now guaranteed under the recently enacted 2012 Investment Proclamation.

In the agricultural sector, the government has been at the forefront of offering very investor friendly land leases. This is despite facing resistance from locals and NGOs. There are leases as low as two dollars per hectare per annum. In some regions, the leases are for huge tracts of land with sizes of up to 25,000ha, which provides a sound basis for mechanised and economical farming.

Nonetheless, the government has room to improve in order to help the private sector drive the economy. One of the difficulties facing foreign investors in Ethiopia is the restriction of foreign investment in certain sectors. Major sectors such as financial services, telecommunication, air transport, mass media, legal consultancy, advertisement and promotion as well as importation and retail business are restricted to either the government or Ethiopian nationals.

While restrictions such as those on retail trade and legal consultancy are intended to protect local investors, the government needs to consider opening up some sectors such as financial services and telecommunication.

Take for example, the financial services sector which has about 19 commercial banks serving a population of about 94 million. There is no doubt that international banks can play a major role in taking Ethiopia towards its aim of achieving middle income status by 2025. With a huge part of the country's loans going towards the government's public expenditure, lending for private investors has been squeezed. Having international banks in Ethiopia should be a big boost for private investors as they will be able to access more credit facilities as well as sophisticated financing to grow their businesses.

The other major obstacle facing investors in Ethiopia is that of the foreign exchange controls that are enforced by Ethiopia's central bank, the National Bank of Ethiopia (NBE). The NBE regulates the inflow and remittance of foreign exchange in Ethiopia through specific directives applicable to both Ethiopians and foreigners.

For example, a trader seeking a foreign currency denominated loan facility is required to obtain approval from the NBE. For approval to be obtained, details of the loan facility such as the amount, the interest rate, the repayment terms as well as proof that such a facility is not available from Ethiopian banks must be presented to the NBE. Equally, an investor looking to make loan repayments or repatriate profits from Ethiopia either via dividends, interest or technical and management fees must obtain approval from the NBE.

While the procedure of obtaining NBE's approval is well documented and pretty straight forward, the reality is that the shortage of foreign currency in the country makes the process of making any foreign currency payments out of Ethiopia a nightmare. There are cases of businesses having to wait in excess of three months to obtain foreign exchange allocation and this has hugely impacted business development in Ethiopia.

There is no doubt that the stringent foreign exchange controls coupled with the shortage of foreign exchange reserves and the fact that the local currency is not freely convertible, are a major challenge for the country's economic development.

Attaining middle income status is really key for Ethiopia where about 25pc to 30pc of the population still live below the poverty line. With the current GTP term coming to an end, the government's responsibility now is to come up with another plan that will focus on private development and ensure that the country attains middle income status by 2025. In the meantime, opening up the economy and liberalising foreign exchange would be a welcome move and one that is likely to help Ethiopia sustain its phenomenal economic growth.

Toddy Thairu, Senior Tax Advisor At Kpmg Kenya

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Source: AllAfrica

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