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Following a nine-month postponement, last week Ethiopia held its much-anticipated general election. Originally scheduled for August 2020, the Ethiopian government had suspended the poll, citing the challenges posed by the COVID-19 pandemic, a claim contested by opposition figures. While incumbent prime minister Abiy Ahmed boldly claimed that the election would be Ethiopia’s “first attempt at free and fair elections”, their build-up was marred by civil war in the northern region of Tigray, restricted voting, opposition boycotts, and alleged electoral irregularities.
Ethiopia’s election has brought renewed focus on the significant political and social challenges that the country faces, further tarnishing its beleaguered global reputation. International sentiment towards Ethiopia has soured in the past year, marking a significant change from the optimism that greeted Abiy’s early moves to promote democracy, liberalise the economy, and make peace with long-time adversary Eritrea. While a personal PR disaster for Abiy, Ethiopia’s decline has more profound consequences. Recently viewed as one of Africa’s most promising investment jurisdictions, now investor confidence in Ethiopia is waning, as concerns around stability and the government’s commitment to promoting a private sector-friendly business environment grow.
With the election of Abiy and his Prosperity Party almost certain, restoring Ethiopia’s global reputation and investor confidence in the country should constitute immediate government priorities. Focus should centre on three key issues – the Tigrayan conflict, privatisation, and foreign exchange availability. By attempting to tackle these, Abiy can send positive signals to the international community, thereby setting Ethiopia on the path of renewing its status as a premier African investment destination.
Ending Tigray conflict number one priority for restoring investor confidence
Of all the challenges that Ethiopia currently faces, none is more detrimental to investor confidence than the ongoing civil conflict in Tigray. Erupting in November last year after political party the Tigray People’s Liberation Front (TPLF) allegedly attacked a federal army base, government forces were deployed to Tigray with severe fighting ensuing. While this week the federal government declared a ceasefire following the TPLF recapturing Tigrayan capital Mekelle, this by no means constitutes a firm resolution to the hostilities. More widely, inter-ethnic conflict is also apparent in other areas of Ethiopia, notably Abiy’s home region of Oromia, as ethnically constituted political parties contest the prime minister’s vision of increased ethnic and political integration.
From an investor perspective, the insecurity apparent in Tigray and other regions of Ethiopia has significant consequences, impacting plans for future investment. Most directly, physical assets have been damaged or are under threat, while companies have had to enact complex evacuation plans to ensure employee safety in Tigray. With thousands of Ethiopian workers in Tigray fleeing their homes, labour shortages have challenged certain business, notably in the textiles sector. Supply chain disruption over the past seven months has also been rife, as infrastructure damage or blockades have choked key transport routes in Ethiopia’s north.
Attempting to resolve the Tigrayan conflict must be Abiy’s number one priority, such is the damage it is having on investor confidence in Ethiopia. With his government and the TPLF holding strongly opposed positions, as Africa Matters explained in our November 2020 insight, finding common ground will not be easy, despite the recent ceasefire. Yet, in reality, for Ethiopia to prosper, the lull in fighting must be built on and a negotiated peace deal must be achieved. The country is at a crossroads, where Abiy can either try to bridge divides and adopt a more conciliatory stance to the grievances of Ethiopia’s different ethnic groups, or continue to push his unitary vision of political governance. The latter would be disastrous, resulting in continued conflict and declining foreign investment.
Successful privatisation key to demonstrating pro-business agenda
Historically a state-dominated, closed economy, Abiy’s promise of privatisation in 2018 sparked significant interest among the international community. Telecommunications, logistics, shipping, aviation, and power were all identified as sectors that would be opened to foreign investors. With a market of 112 million people, and sustained GDP growth rates of around 10 percent per annum, Ethiopia was widely viewed as Africa’s most promising, and untapped, commercial jurisdiction.
However, to date, the privatisation process has been both slow and limited, leading to dampened investor anticipation. Telecommunications is the only sector of those originally earmarked by Abiy in which any real progress has been made, and even this has fallen short of initial expectations. With the Ethiopian government having taken two and a half years to decide on the sale terms being offered to would-be investors, bids were only received last month. Of the 10 plus companies that had expressed interest, only two made bids for spectrum licences – a Safaricom-led consortium and MTN – in part due to the restrictive terms offered by the Ethiopian government. Under current plans, for example, new operators will be unable to provide mobile money services to customers or contract third-party companies to build infrastructure.
Expediting the privatisation of those sectors initially flagged by Abiy should be an immediate priority for his new administration. First and foremost, the telecommunications sale must be completed. With only Safaricom’s USD 850 million bid being accepted – the USD 600 million offered by MTN was deemed too low – the remaining licence must be retendered swiftly; the government cannot afford to preside over fresh delays. To ensure a prompt sale, Abiy should demonstrate willingness to listen to investor concerns, notably around the ability to provide mobile money solutions. Successful telecommunications privatisation could serve as a flagship achievement, signalling the Ethiopian government’s commitment to promoting private sector development.
Addressing foreign exchange scarcity to demonstrate commitment to tackling long-term investor challenges
While the above two issues represent relatively recent developments in Ethiopia’s political and economic landscapes, a longer-term challenge for investors has been foreign exchange availability.
Persistent shortages, caused primarily by Ethiopia’s negative trade balance and substantial government dollar-denominated debt, has led to international companies operating in the country struggling to access the foreign exchange required to import inputs. This scarcity has resulted in the Ethiopian government implementing highly restrictive laws, strongly regulated by the National Bank of Ethiopia.
Although less topical, foreign exchange scarcity nonetheless must be addressed by Abiy’s incoming government. By making concerted efforts to tackle this long-term challenge, his administration would provide a clear sign to foreign investors that it is committed to improving Ethiopia’s business environment. While Abiy will no doubt continue to promote the development of an export-led economy – predominantly through the manufacturing sector – to grow foreign exchange reserves, successful privatisation represents a lower hanging fruit. The sale of a spectrum licence to Safaricom alone will generate USD 850 million, and the successful part-privatisation of other sectors would see the Ethiopian government raise multi-billion US dollar sums, increasing the availability of foreign exchange to investors.
Entrenched challenges difficult to resolve
Given the deep-rooted and long-term nature of the challenges faced by Ethiopia, particularly ethnic-related conflict, resolving them will be by no means an easy task. Abiy’s incoming government faces an uphill task, especially given that the recent election has only exasperated many of the country’s underlying divisions and tensions. Yet, in order to restore investor confidence, and return Ethiopia to its former status as one of Africa’s most promising commercial jurisdictions, a concerted effort to do just this must be made. Attempting to tackle the major challenges faced by Ethiopia will send an important message to the international community: its government is listening, and the country is open for business.
