Ethiopia: Africa’s next powerhouse?

Ethiopia’s prime minister, Dr. Abiy Ahmed—the youngest African leader at 42 years old—has initiated a series of unprecedented economic and political reforms in his first 12 months in office. The core challenge that he faces is moving the economy from state-led to market-based growth while overseeing far-reaching political reforms. Success is far from guaranteed but his accomplishments so far have created an enormous sense of opportunity within the country.

Ethiopia has been one of the continent’s best economic performers, growing at a rate of 10 percent for the past 15 years. It has been a model of state-directed development with a government that permitted no political opposition but invested heavily in infrastructure, agriculture, education, and other sectors. Since Ahmed’s emergence as prime minister, there has been a sweeping political opening with indications that economic reforms will be almost as significant. If Ahmed is able to succeed with his reforms, Ethiopia will emerge as one of Africa’s undisputed leaders.

REFORMING THE ECONOMY

The prime minister has ambitious plans for the economy. According to the Ethiopian private equity firm, Cepheus Growth Capital, the government plans to fully privatize state-owned sugar plants, railways, and industrial parks. It will partially privatize the four crown jewels of the economy: Ethiopian Airlines, Ethio Telecom, Ethiopian Electric Power Corporation, and Ethiopian Shipping & Logistics Services Enterprises. With more than 60 million mobile and fixed-line subscribers, the government is also planning to publish tenders for two new operating licenses in the telecom sector, which inevitably will lead to competition in new financial and mobile-based services.

The one sector that does not appear to be opening in the near term is the banking sector. With 16 private banks that have averaged a shareholder return of 33 percent annually over the past decade, there appears to be little incentive to move quickly in reforming the financial sector. As the state-owned Commercial Bank of Ethiopia controls at least half of the sector’s assets, continued poor services and an inability to transfer funds between banks will be a constraint on the government’s reform efforts. Inevitably, there will be pressures to allow other African and international banks into this sector. Read more...