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  • Writer's pictureHenry Avis-Vieira

ETHIOPIA: A Problematic Internal Landscape Combined with Investment Dependency Threatens Progress

Updated: Mar 14, 2023

14th February 2022- Approximate reading time, 6 minutes.

Although Ethiopia is a landlocked country with limited natural resources, thanks to broad economic reforms started in 2000, its growth rate between 2004 and 2009 was the highest of any non-oil-dependent African country, registering a rate in excess of 10 percent. However, not long after this achievement, Ethiopia's advancement was substantially impeded due to balance of payments problems and hyperinflation (at one point running as high as 40% year-on-year).  Even with its impressive economic transformation. per capita GDP in 2019 amounted to only USD 856, making Ethiopia a low in come country (OID Report - The Belt and Road and Chinese Enterprises in Ethiopia - Risks and Opportunities for Development.  August 2021).

Under the "Home Growth Economic Reform" program, Ethiopia has had some success in moving concentration away away from agricultural and into a manufacturing-led expansion.  The Home Growth effort had the principal aim of further opening the economy through the privatization of state assets.  Logistics and telecommunications were the primary areas that benefited from the program.

Ethiopia's government has also sought to develop its manufacturing sector in order to substantially increase exportation.  During the initial stage of development (early-to-mid 2000s), the focus was on incentivizing local investment by granting specialized credits and propitious land lease terms.  In the second stage, which commenced in 2008,  a greater emphasis was placed on attracting foreign investment.  Third stage efforts established various state mechanisms to encourage outside investors into industrial park type arrangements and foster linkages with domestic counterparts.

More recently Addis Ababa unveiled a new ten-year plan ("The Pathway to Prosperity) running from 2020 to 2030 with the principal aim of achieving middle-income status for the nation.  The plan has been situated within the larger context of governmental reform with a main goal of achieving an economic growth rate of 10 percent or more over the period.  The plan's projected targets have been set highest for the industrial and manufacturing sectors.

Ethiopia's economic progress has been significantly sided by Chinese investment.  Diplomatic ties between Ethiopia and China commenced in 1970 and in 2017 the two counties established a wide-ranging pact known as the Comprehensive Strategic Cooperative Partnership, leading to large number agreements involving trade, investment, transport, taxation, and defense.

The China partnership is of high importance for  Ethiopia, economically.  China is the second ranking importer of Ethiopian goods (the United States ranks first), and the biggest exporter.  since 2000, Ethiopia has consistently recorded  negative trade balance with China, exporting significantly more than it imports.  A major percentage of Ethiopian exports to China are non diversified agricultural products (oil deeds, in particular), although minerals have been a steadily growing component.  On the other hand, Ethiopia's imports from China is quite diversified, covering all sectors with textiles standing out.  Plastics, machinery as well as iron and steel are also represented to some degree.

A sizeable portion of Ethiopia's infrastructure projects presently under construction are being financed by Chinese entities; mainly government agencies through the Belt Road Initiative (BRI).  China is involved in the country's infrastructure at all levels, federal,provincial and municipal.  Direct Chinese infrastructure investment in Ethiopia stands as fifth largest on the African continent, behind South Africa, Democratic of Congo (DRC), Angola, and Zambia.  Total Chinese foreign direct investment (FDI) increased by more than 500 percent throughout the 2003 - 2019 period.

China origin actors are financing Ethiopia's infrastructure through large - scale lending.  An examination of loan commitments agreed during the 2000 - 2018 period reveals that Ethiopia was the second largest receiver of Chinese loans in Africa, just behind Angola.  The primary lending entities are China Export - Import Bank (Eximbank), followed by partially state - owned telecommunications companies such as Zhongxing Telecommunications Corporation and he China Development Bank (CDB).

The Covid-19 has, of course, disrupted Ethiopia's economy substantially and slowed Chinese commercial relations, with flight connections being suspended several times to date.  Despite the pandemic setbacks, most of Ethiopia's economic interchange with Beijing has remained reasonably close to normal and Chinese companies continue to invest and negotiate contracts on a somewhat regular basis.

The Chinese presence in Ethiopia is often criticized for being exploitative and is perceived as creating long - term economic dependency.  A majority of critics critics, both local and international, often describe the commercial interactions between the two countries as one-sided and essentially motivated by Beijing's self-interest, a flawed dynamic that could alter Ethiopia's future developmental trajectory.  Country exports consistently point out that, despite the large number of infrastructure projects launched by the Chinese in the last several years, few jobs have been created for Ethiopians in general - imported Chinese labor and technical technical specialists have dominated all high - profile works.  At bottom, China's capital investment are not lowering Ethiopia's acutely high unemployment rat.  A significant boost to local employment was apparently promised as part of original agreements (Global Voices - China in Ethiopia: Between Savior and Exploiter?  24th September 2021).

Of major concern is the country's extensive indebtedness to China.  In the years 2017 and 2108, Ethiopia was under financial stress and did mange to negotiate some loan forgiveness from Beijing.  Despite this reduction, the current reported debt levels do not appear to be sustainable in the medium-to-long-term.  Another complication is lack of complete information with respect to the types of collateral pledges that are backing Chinese infrastructure loans.  And, even more troubling is the number of "private" Chinese loans are owed by government entities that have not been disclosed to credit rating agencies and multilateral lenders.  Speculation is that when we factor private Chinese loans into Ethiopia's debt profile, it's total indebtedness may be far higher than what has this far been promulgated.  This private loan story line is something that has become rather commonplace in developing countries where China is highly invested in so it is hardly surprising such exists in Ethiopia (ibid.  Global Voices).

A key assortment of reforms along notable increases in foreign investment have fueled an exceptional 20-year growth period for Ethiopia.  However, in addition to questionable financial stability, serious socio-political issues are seriously stressing the nation.  Specifically, the Tigray rebel conflict appears to not be fully resolved; despite a recent halt in the fighting, the government declaring an end to its 15-month state of emergency and amnesty granted to some high-profile members of the Tigray People's Liberation Front.  The full  political, social and economic implications of the Tigray war, in all probability, will not be known for some time.

At the moment, it is evident that the Ethiopian government, led by Abiy Ahmed, has no reasonable plan to secure a sustainable peace with Tigray province.  His call for "national dialogue" is fraught with deficiencies.  Among them, the failure to include the TPLF and Oromo Liberation Army (OLA), an armed organization the Ethiopian military has been fighting against regularly since 2018.  Furthermore, no consensus has been reached in Addis Ababa on long-term reconciliation with not only militant actors but other (non-combative) dissenting groups as well.  Some regional political scholars believe that Ahmed is simply buying time to rearm and attempt to win the Tigray war decisively ( Ethiopia's New 'National Dialogue" Cannot Deliver Inclusive Peace.  27th January 2022).

The Tigray has already had a highly deleterious impact on agricultural production and, in some regions, the planting season was disrupted quite substantially.  A large percentage of farmers were displaced and a variety of crops lost through lack of maintenance, looting, and an extended period of drought.  Livestock production has also  suffered.  These factors, in combination, have created a severe hunger crisis in Ethiopia's southern regions, and further exacerbated unemployment, since farming employs about two-thirds of the nation's work force (  Unprecedented Crises Trigger Severe Hunger in Southern Ethiopia.  3rd February 2022).

Ethiopia's political and socio-cultural complexities coupled with economic and financial strains and pandemic setbacks will hurt foreign investment flows, at least throughout the 2022-2023 period.  There are a few analysts who are projecting faster growth in the mining sector, citing rising commodity prices and efforts by the central government to integrate artisanal mining into the conventional markets (Standard Bank.  Ethiopia: High Degree of Uncertainty.  January 2022).  The belief is that mining expansion will help diversify away from agriculture.  Regardless, any gains in mining will not be sufficient to noticeably boost social and economic recovery over the short run.

During the last several years, Ethiopia's series of misfortunes has created an atmosphere of high uncertainty, much of it recently reflected in its USD bond issue which matures in 2024. After trading at just over 100 during the spring of 20121, It plummeted into the mid-60s this past December. The bond has since recovered a bit (in the main because of a halt in the Tigray fighting), but continues trading far below - now hovering in the low-to-mid-70s range - historical highs due to a slew of extraordinary pressures: decreasing foreign investment, questions concerning general financial stability and surging inflation that has hit as high as the mid-30s. Given this questionable landscape, investors should be uneasy about Ethiopia's future path.

Going forward, Ethiopia's set of multifaceted problems will certainly impede its development. The country's core stability is presently questionable; with the Tigray situation not equitably resolved, lingering Covid related problems, serious economic weakness, mounting concerns over agricultural performance, and problematic finances that are heavily reliant on Chinese lending. All things taken into consideration, Ethiopia's immediate portrait does not inspire confidence in its prospect for at least the short-to-medium term. The country's recovery will prove difficult.

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