April 23, 2018 / 12:14 PM / a month ago

Ethiopian businesses disappointed by new PM's economic stance

ADDIS ABABA(Reuters) - Local business leaders at a banquet in Ethiopia’s capital last week were hoping the new prime minister Abiy Ahmed would tell them he planned to loosen the state’s grip on the economy.

FILE PHOTO: Ethiopia's newly elected prime minister Abiy Ahmed attends a rally during his visit to Ambo in the Oromiya region, Ethiopia April 11, 2018. REUTERS/Tiksa Negeri/File Photo

He took power on April 2 promising a “new political beginning”. But four people who heard his dinner speech said he signaled he would stick with policies to keep the government’s hand in sectors such as infrastructure, banking and telecoms.

Ethiopia has let foreign companies such as fashion chain H&M set up factories in a decade-long push to change the economic focus from agriculture exports, such as coffee, to manufacturing. Other sectors are also open to investors.

Analysts say the government must free up the economy further to sustain annual growth rates it estimates averaged nearly 10 percent in the past decade and to create jobs.

Anger over high unemployment fueled violence over ethnic tensions that led to the resignation of Abiy’s predecessor Hailemariam Desalegn in February.

But those at the speech said Abiy did not outline plans to open up new sectors, a move which could also ease a shortage of foreign exchange. He said state spending on infrastructure, which has crowded out local companies, would continue.

“Point blank, Abiy said that demanding the state be out of the business sector is not feasible,” said a hotel owner who was at the dinner. He said Abiy was responding to the business leaders’ requests.

“The state will remain in the business sector.”

Abiy named 10 new ministers to his cabinet on Thursday to clear a path for political reform. He told the new ministers to tackle graft and streamline bureaucracy. [L8N1RW1OI]

But he retained the rest of Hailemariam’s 34-strong cabinet, including the finance minister.

That is consistent with remaining a “developmental state”, the term the four businessmen said Abiy used at the banquet. His office did not respond to requests from Reuters for comment on his policies.

Economists describe a “developmental state” as one where the government is deeply involved in the economy. The philosophy was embraced by rebel-turned-statesman Meles Zenawi, who died in power in 2012. It continued under Hailemariam.

“It’s frustrating to see that for all Abiy’s intentions to bring about changes in politics, that is not translating into the economic sector,” said Tsedale Lemma, the editor of the Addis Standard news website.

“MORALISTIC TONE”

Local businesses say they find it hard to compete against the state.

The government has spent hundreds of millions of dollars in recent years building roads and railways to support the manufacturing expansion.

Many of the projects are funded with foreign exchange. Some is borrowed domestically, depriving local businesses of loans to fund their own projects.

It also depletes foreign exchange reserves that could be used to support other areas of the economy. This means it is hard for foreign businesses to send profits home and for local businesses to import.

Access to loans and hard currency is the “biggest headache” for businesses, Endalkachew Sime, secretary general of the Ethiopian Chamber of Commerce said.

The International Monetary Fund said foreign reserves at the end of the 2016/17 fiscal year stood at $3.2 billion, less than the cost of two months of imports. The government does not regularly release foreign reserves figures.

The hotel owner said Abiy had lectured the business leaders at the dinner with a “moralistic” tone for buying foreign cars during a foreign exchange shortage.

Endalkachew said Abiy should listen to the participants with a “big open ear”.

FACTORIES OPENING UP

State investment in infrastructure has been the largest driver of gross domestic product growth.

Coffee is the biggest export, and over 70 percent of the population is employed in farming. Gold, sesame, khat and livestock are also major exports.

Abiy looks set to continue Hailemariam’s plan to shift away from agriculture to manufacturing, currently 8 percent of GDP.

The government has already welcomed Chinese, Turkish, Indian and Western investors in factories making textiles, garments, leather goods and processed agricultural products.

This has contributed to a sharp rise in foreign direct investment. The Ethiopia Investment Commission’s spokesman said FDI was $2.2 billion for the first half of the 2017/18 fiscal year, a 22 percent increase from the same period a year earlier.

Other sectors have also had foreign participation. The government sold the tobacco company, National Tobacco Enterprise, to a Japanese tobacco company in December for $434 million. Heineken and Diaigeo bought the 2 state-run breweries.

Unilever opened a factory producing soap and other products in 2016 and wants to expand.

The government is also looking for partners in the sugar industry.

In retail, foreign companies may not open their own branches although they can bid for contracts with a state wholesalers.

Sheraton (SHPF.BO), Hilton (HLT.N), Radisson, and Marriott (MAR.O) have hotels in the capital. AccorHotels (ACCP.PA) is planning to open three.

Ethiopia has also said it would like to create a secondary local currency bond market, which could increase liquidity for local and foreign companies.

SHUT OUT

Nevertheless, some of the big sectors are still closed. Ethio Telecom is one of Africa’s few remaining telecoms monopolies and the state-owned Commercial Bank of Ethiopia the largest financial institution.

Economists say industries growing in neighboring Kenya, such as technology start-ups, are stifled by red tape and low internet penetration. There is also no stock market.

Alemayehu Geda, economics professor at Addis Ababa University, estimates the unemployment rate, while officially at 18 percent, is closer to 50 percent. Reducing it will be key for long-term stability in Ethiopia, he said.

“The prioritization by the government of the manufacturing sector is logical as it would create many jobs,” said Michael Ghebru, Chief Executive of Belayab Foods and Franchise PLC, which opened the first of ten planned Pizza Hut restaurants in Ethiopia this month, the first major foreign food franchise.

“But there are other sectors that are bringing in a lot of revenue and employment as well so their challenges should also be put into consideration.”

Editing by Anna Willard

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