Ethiopia rising: A bright spot in sub-Saharan Africa
By Elliot Kratt
Ethiopian Prime Minister Hailemariam Desalegn was re-elected at the beginning of October, continuing his leadership from 2012. In May of this year, the ruling party, The Ethiopian People’s Revolutionary Democratic Front (EPRDF), won a landslide victory in the elections, claiming every parliamentary seat and consolidating their grip on power.
At the top of the PM’s priority list is the implementation of the five-year Growth and Transformation Plan II (GTP II). The ultimate aim of the plan is to catapult Ethiopia into middle-income status by 2025 through transforming it into an industrialised economy, offering a fully integrated supply chain.
On 27 October 2015, the IMF reported that, in spite of sub-Saharan Africa’s relatively miserable economic forecast of 3.75% growth this year, Ethiopia’s is expected to rise by 7% or more.
In order to drive growth, Desalegn is much keener than his predecessor to encourage trade liberalisation. He plans to liberalise 80% of the country’s trade in order to stimulate growth. However, a tension exists as no country has been able to simultaneously liberalise and industrialise without imposing substantial tariffs on foreign trade in order to regulate external competition.
Regardless, the extent of foreign commercial interests in the country is significant and welcomed by the government. In October alone, investor interest was impressive. For example, between 20-21 October 2015, ten Chinese pharmaceutical companies travelled to the county to explore possible joint ventures with Ethiopian companies. Secondly, on the 22nd, PM Desalegn urged Saudi investors, in bi-lateral talks, to explore opportunities in the agricultural sector. Finally, on 30th October, Standard Bank announced the opening of a representative office in the country.
A relative lack of corruption, cheap labour costs, fiscal incentives and a relative lack of security risks render Ethiopia an attractive market. In agriculture, infrastructure, manufacturing and energy sectors, Ethiopia draws substantial international investment particularly from China and the West.
In Ethiopian infrastructure development, Chinese investors have a significant presence. The Addis Ababa Light Railway project, operational since November and costing $475 million, was funded by China. China has also played a key role in financing the Addis-Djibouti railway which will increase trade between the two countries.
At the macro level, Sino-Ethiopian trade is impressive. In 2014, Chinese exports to Ethiopia stood at $4.5 billion, whist Ethiopia’s exports to China stood at $456 million. Yet, as China’s economy begins to stagnate, it will be in Ethiopia’s interest to further diversify its economic ties.
Ethiopia is already an attractive market for Western countries. For example, from 2010 to 2014, UK exports to the country increased by 37%.
In particular, the apparel industry is pivoting away from Asian markets due to increased labour costs, and are now looking toward Ethiopia. The country provides competitively cheap labour and has attracted major Western brands.
Ethiopia aims to offer a “dirt-to-shirt” service for the sector, seeking to act as a one-stop-shop in order to harness sustainable economic growth. The government has encouraged this trend with fiscal incentives such as export credits, duty-free imports and tax holidays.
In turn, the apparel industry is expected to account for $1 billion worth of exports by the end of 2016. This is in line with the government’s aim to increase manufacturing’s proportion of contribution to the GDP as part of the GTP II. Read more from globalriskinsights