Ethiopia bets on grand projects in drive for industrial power

Addis Ababa, Ethiopia

Chinese workers mingle with Ethiopians putting the finishing touches to a metro line that cuts through Addis Ababa, one of a series of grand state infrastructure projects that Ethiopia hopes will help it mimic Asia’s industrial rise.

In the last quarter century, Ethiopia has transformed itself into one of Africa’s fastest-growing economies.

At the heart of the state’s “Growth and Transformation Plan” are railway, road and dam projects to give the landlocked nation cheap power and reliable transport, as well as the metro line.

“This is the future,” said Abate Yaye, 27, as he helped complete the $475 million system being built by China Railway Engineering Corp, much of it on concrete stilts to keep it above the crowded streets of an expanding capital.

Hefty state-led investment has kept the economy of Africa’s second most populous nation growing at more than 8 percent a year for over a decade, but economists say Ethiopia’s rulers need to relax their grip and give room for more private enterprise to maintain momentum.

Foreigners cannot invest in banking and telecoms and foreign retailers are barred, while Ethiopian banks are directed to buy low-yielding government development bonds.

“This is a country where, relative to rest of Africa, there is pretty good state capacity and a commitment to a development mission,” said S. Kal Wajid, the outgoing Ethiopia mission chief for the International Monetary Fund.

But he said private business needed room to grow and generate income so the economy could reap greater benefit from the new projects. “Where you are making a lot of infrastructure investment, there is a risk that the pay-off may not be as big as you thought,” he added.

The government can point to a list of investors suggesting its formula works. Clothes retailer Hennes and Mauritz (H&M) is starting to source supplies from Ethiopia, consumer goods maker Unilever is building a factory, Diageo and Heineken have bought breweries.

U.S. private equity giant KKR invested in a flower farm last year while an Ethiopian winery is among the investments of 8 Miles, an African-focused private equity fund manager.

The government’s ban on foreign retailers is aimed at encouraging local manufacturing, to cut back on imports, not wanting a consumer culture that could drain foreign exchange.

The government says it wants to keep banks in the hands of Ethiopians and telecoms controlled by the state as the sectors provide funding for national projects such as infrastructure. Earnings from the state telecoms monopoly are helping fund a railway linking Addis Ababa to a port in Djibouti, for instance.

But that leaves few domestic funds available in the market for businesses that could create jobs in future.

“If they are looking at achieving their goal of being a middle-income country and getting employment, you must enable access to financial options,” said James Kanagwa of pan-African lender Ecobank , one of half a dozen foreign banks with representative offices in Addis Ababa but barred from commercial work.

For now, even Ethiopian banks have limited room for maneuver. They must invest the equivalent of 27 percent of their loan portfolio in the development bonds, hindering their ability to lend to the private sector.

“The lending capacity of banks is growing very slowly,” said Mulugeta Asmare, president of Bank of Abyssinia, one of 16 private banks in a sector dominated by state-owned Commercial Bank of Ethiopia.

After launching a debut $1 billion Eurobond in December, Prime Minister Hailemariam Desalegn said tapping international markets did not herald “liberalizing the financial sector”.

“If you have an efficient effective state development model, great,” Colin Coleman, managing director for Goldman Sachs based in South Africa, told a conference in Addis Ababa last month.

“But you must allow businesses to develop in order to get the dynamism in the economy.”

Source: 7News – Free Australian & World News – Yahoo!7 News.