01.12 - info a a nr 80_10 01 2012 anexa ethiopia

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ACCESS CAPITAL

Ethiopia: Macroeconomic Handbook 2011/12

The 2011/12 Macroeconomic Handbook is the third such annual report prepared by Access Capital. As in the past, we organize our report around ten major economic and business themes. For this year, given the launch of a new Five-Year Growth and Transformation Plan, we take a long-term look at Ethiopias overall growth prospects (Chapters 1 -4); highlight the

pressures faced by private business from certain macroeconomic and regulatory policies (Chapters 5-6); and finally present our views (inChapters 7-10) on reforms that we think can help ensure a favorableeconomic and business outlook. We also offer an Annex with AccessCapitals macroeconomic projections for the year ahead.

Access Capital Research December 30, 2011


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Ethiopia Macroeconomic Handbook 2011-12

1. Massive public investments are set to deliver a wide range of public goods roads, railways,power plants, schools, and clinics while simultaneously propping up thousands of privatecompanies involved in building and maintaining these brand new facilities.

Key Points:

Public investment, involving spending by both government and state enterprises, will be one of the primary engines of the Ethiopian economy for many years to come.

Even if not fully implemented, the scope and scale of the planned public investment is massive,and involves vast new initiatives in both traditional government activities (road-building, powerplants) as well as in much less traditional ones (sugar factories and metal industries).

An often unrecognized feature of such large-scale public investment is just how much of itactually flows into private sector companies, large segments of whom stand to be majorbeneficiaries of bigger government budgets.

Public investment has in recent years been one of the major drivers of economic growth inEthiopia. Total government spending, which is for the first time crossing Birr 100 billion this year, hasdoubled in just the last three years and quadrupled in the past six years (Table 1.1). Expressed in relatto GDP, total government spending now makes up nearly one-fifth of GDP. Besides the growth ingovernment, the activities of state enterprises have multiplied in parallel, a trend best captured by the ffold rise in their borrowing from the banking system, which is up from Birr 8 billion about five years ato an estimated 42 billion in FY 2010/11. The combined economic weight of both government and staenterprise activity has led to a situation where roughly two-thirds of all banking system credit is nowdirected to the public sector (Table 1.2).1

A five-year Growth and Transformation Plan (GTP) enacted in early 2011 has set the stage for aneven bigger role for public sector spending in the coming years . For the five-year GTP period as awhole, the sum of budgetary government spending and off-budget spending by public enterprises isprogrammed to reach Birr 1.26 trillion, or an average of 41 percent of GDP per year over five years(Table 1.3). In short, the equivalent of two-fifths of total economic activity will be linked to public secactivity in the coming years. One of the most distinctive features of the public spending envisaged abois the unusually high level of capital expenditure, which will see its share rising from 56 to 61 percent of total government expenditure.2 We find that Ethiopia now has the highest capital expenditure share ingovernment spending among African countries, where the normal capital expenditure share ingovernment spending is near 25 percent (Table 1.4). This means that much more spending is beingfunneled to capital projects (roads, power plants, water systems, etc.) and to capital equipment (machin

and equipment imports), rather than to current expenditure items such as wages, salaries, and operationand maintenance costs.

1 Data for government expenditure based on MOFED budget data. Credit to government and credit to public sector figures frthe IMF Staff Report of November 2010(www.imf.org), with FY 2010/11 representing estimates. 2

Beyond the high concentration on capital spending, two equally notable elements of the GTP public sector spending plans aits large borrowing requirements and its substantial foreign currency demands, issues that are addressed later in Chapter 7.
http://www.imf.org/http://www.imf.org/http://www.imf.org/http://www.imf.org/


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The public investments planned for the coming five years can be seen as putting in place thenecessary hardware and software needed for a modernizing economy .

Hardware investments encompass the whole range of physical and infrastructural facilitiesneeded to allow the movement of labor, goods, and services across a market economy roads,

railways, power plants to generate electricity, electricity grid networks, water and sewage facilitiesetc. Among the notable plans in this area are:

Roads: Building 71,000 kilometers of new roads, including all-weather roads to virtually allkebele administrations and a modern Birr 6 billion eight-lane expressway linking Addis AbabaAdama (a key route to facilitate export and import trade);

Railways: Constructing 2,395 kilometers of new railways linking Addis Ababa with Djibouti,linking selected domestic cities, and within Addis Ababa itself.

Air Infrastructure: Raising Ethiopian Airlines air fleet by 35 additional aircraft, including 4new cargo carriers, and building a huge new cargo hub at Bole Airport with a capacity to handle125,000 tons per day in perishable export commodities, such as high-value fruits and vegetable

Power: Generating 8000 MW of new power generation capacity; Electricity distribution: Laying132,000 kms of new electricity distribution lines and the

expansion of electricity coverage to 75 percent of the country; Telecom: Raising mobile phone accessibilityto 45 percent of the countrys population, and

mobile phone users from 10 to 40 million. Housing: Building 157,000 new condominium housing units. Water Supply: Expanding the water supply infrastructure to 99 percent of the population and th

drilling of some 3,000 water wells per year; Irrigation: Increasing in irrigation coverage from 3 to 16 percent of total farm land. Industry: Developing new or additional capacity in sectors that include textiles, metals and

engineering, cement, fertilizers, and sugar production.

Software investment s are best seen as the human capacity building required to run an increasinglymodernizing national economy- from basic health care to ensure a capable labor force to theprovision of adequate education at the primary, secondary, and tertiary level, in additional tospecialized vocational and technical training schools needed to run an increasingly complex econoAmong the key targets in this area are:

Education : Increasing (net) primary enrollment to 100 percent; raising the number of students agovernment universities to near half a million students (from 185,000 at present); ensuringuniversal education to 8th grade; raising the number of students at Technical and Vocationalschools to above 1 million (from 717,000 at present); establishing a public university studentbody that will have 40 percent of students in science/engineering fields; ensuring 9,000 newmedical school entrants on an annual basis.

Health: Reaching a 100 percent primary health services coverage (from 89 percent) throughlarge-scale expansions in public health centers and hospitals, and ensuring large reductions ininfant and maternal mortality as well as in the incidence of various diseases.


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Much of the public investment laid out above and in the GTP is needed, justified, and on the wholeappropriate, but how such investment is to be financed remains only partially addressed (seeChapter 7) and the issue of who should carry out the investments is in at least three specificcases quite questionable. The case for government investments in public goods such as roads andpower infrastructure is undeniable, as it is laying the essential foundations the necessary conduits and

circuitry of a modern economy without which a whole range of private players would be handicappedfarmers seeking to take their goods to urban population centers, industries requiring water and electricito function; exporters requiring modern air, road, or rail links to deliver their goods on time, and so forThe lessons of other large and fast-growing developing countries from Nigeria and its power shortages,to Indias road and port -related deficiencies all point to the need to address infrastructure bottleneckswell before they become handicaps to growth.The infrastructure gap is a curse fac ed by manycountries in Africa and it is only to be welcomed that public policies in Ethiopia are addressing not juspresent but also prospective needs in key public goods, all of which is something that can work to crowdin private investment . Moreover, many of the basic social sector investments that have public goodscharacteristics basic healthcare and education should be done by no other than the government sinceprivate returns in such activities are often not sufficiently attractive. However, in three specific areas,most notably the planned public sector involvement in buildingrailways, sugar factories, and a largemetal industries conglomerate, the prospect of government involvement is in our view far from ideal.3 These three activities are areas from which governments around the world have long removed themseland where private sector involvement through green-field investments by domestic or foreign groups,through public-private partnerships, or through project finance ventures would have been possible andpreferable (see Chapter 7).

Big Government, Big Business

A somewhat under-appreciated feature of the large-scale public investments highlighted above is just how much of it is actually implemented by and flows into private firms and individuals.Particularly in the Ethiopian context, where so much of the public sector spending is focused on capitaexpenditure, it is possible to identify three groups of major beneficiaries:

Contractors: The building blocks of most of planned government projects are provided by privatecontractors, as they construct roads, schools, clinics, government buildings, power plants, railways andthe like. Thus, road and building contractors are obvious public investment beneficiaries, sometimes ivery significant way for example, the single biggest item in the government budget for many years nowhas been road-building, which has benefited dozens of private companies engaged in this sector. Morespecifically, of the Birr 73 billion spent in the last 14 years on road building projects, only 6 percent wundertaken by thegovernments own agency, the Ethiopian Road Authority, while over 94 percent wasprovided to several dozen private domestic and foreign companies.4 The implied income gains for suchcontractors are substantial: assuming 10 percent profit margins on the gross value of the road projects,

3 Several large sugar producing plants are planned under a new parastatal, the Ethiopian Sugar Corporation. Another newparastatal, the Ethiopian Railways Corporation, is to spearhead work in building railways between cities and within Addis AbIn the metals, steel production, and engineering sector, a new behemoth, METEC, is an ambitious project to supply the needemetal and engineering products needed for the other mega public sector projects, including for the Abay Dam, the new state-owned Fertilizer Plant, the Ethiopian Railways Corporation, and the Ethiopian Sugar Corporation.4 See Ethiopian Roads Authoritys November 2011 publication, Assessment of 14 Years Performance: Road Sector Development Program


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this amounts to around Birr 7 billion in net income to private contractors taken together. Major localbeneficiaries of such spending have includedGrade 1 domestic contractors (of whom there are 63registered by the Ministry of Works and Urban Development, each generally employing more than 10workers) and dozens of smaller scale road and building contractors who take on piecemeal tasks from largest foreign or domestic contractors. Not surprisingly, all this infrastructural investment has already

swelled the ranks of such contractors who rely heavily on government for their business; latest data sh143 building contractors, 38 general contractors, and 6 road-specific contractors in operation, allsubstantial increases from even a few years ago. Looking forward, we anticipate that the numbers,average size, and net income of this group will rise even further. For example, based on just the subseprojects with high contractor use (namely roads, health, education, fertilizer and sugar industry, railwaairlines, energy, and condominium construction), we estimate that the GTP will provide businessopportunities to contractors on the order of Birr 80 billion per year and prospective profits of 8 billion year (Table 1.5).5

Equipment and Service Suppliers : The delivery of goods to government institutions and facilities oncethey are operational represents a second major line of business that huge public investments will bebringing to private businesses. This beneficiary group will include, for instance: road work equipmensuppliers (graders, excavators, dump trucks); cable suppliersfor the electricity companys hugedistribution expansion; private freight vehicle owners to transport thousands of tons of inputs andequipment; private water drilling companies for the thousands of new water wells to be dug every yeartextbook suppliers for the thousands of schools being put in place; pharmaceutical and medical equipmsuppliers to sufficiently stock thousands of health centers; and computer hardware and software supplithat will deliver a whole range of information technology services to ministries, public sector agenciesand large state enterprises. Focusing on the Information Technology sector, for example, whereinitiatives are underway to introduce technology-aided services in utility bill payments, social safety npayments, and various other e-government initiatives, assuming one percent of capital expenditure is o

ICT expenditure (based on the norm in many African countries), this translates to total spending of Bi7.5 billion in this sector and profit prospects of above Birr 1 billion given 15-20 percent marginscommonly seen in IT industries.6

Employees: Needless to say, public institutions cannot function without an associated human resourcebase, and the hundreds of thousands who join the public sector as teachers, health workers, police, andoffice workers represent a third major private beneficiary of large public investments. Already, as of 2011, the public sector is the single largest formal sector employer in the country providing work to854,000 individuals. With the expansion of health and education services laid out in the GTP, weestimate that 325,000 additional individuals will get public employment in the major lines of workundertaken by the government, representing a 27 percent addition from present levels and a crossing o

the 1 million-mark in total public sector jobs before the end of the GTP period (Table 1.6).7

All of the above direct beneficiaries of public projects, such as road contractors, textbook suppliers,or public sector employees, are in turn often key to sustaining huge pockets of indirect beneficiaries

5 This is derived by assuming particular shares of spending in a given budget line item is spent on contractors and that 10 perof the gross value of the projects is the net income margin of contractors (see Table 1.7).6 Total capital expenditure is Birr 406.9 billion for budgetary expenditure and Birr 341 billion for off-budgetary expenditure(using a 60 percent capital spending share for off-budget items). The combined total is thus Birr 748 billion over the five yea7 We arrive at the estimate based on employment rising at half of the rate of growth of nominal government spending.


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whose primary line of business is also in the end closely tied with public investment. Thisincludes goods and service suppliers to many of the direct beneficiaries of government contracts. Forexample, four important input suppliers to road/building contractors are themselves large businessoperations indirectly tied to government spending:quarry owners andasphalt material producers (whoprovide the needed raw material and foundations for all road-building projects) as well ascement companies andiron bar producers (who provide the key ingredients in much public sector civil works).

8 Thus, with the second and third-level suppliers involved, any initial public investment has a multiplica

effect on overall economic activity, thereby placing public investment under the GTP already two-fifthsof GDP in direct spending as a force with even greater impact after accounting for associated activities.

Given huge efforts to integrate them in public sector projects, Small and Medium-Size Enterprisesor SMEs should also become major beneficiaries. Many public projects will seek to engage directlywith SMEs, including for example in condo construction (a Birr 1.4 billion project), small-scale roadprojects (such as cobblestone road or side-walk projects), and other similar activities. Moreover, direcset-asides for SMEs include some Birr 6.5 billion in funding and land allocations of up to 15,000 hectafor work spaces. The combined impact of the above, if the targets are realized as programmed, is to seSMEs provide up to 3 million employment opportunities, in large part driven by public sector initiativ

The range of businesses propelled by large public investments will, of course, not be limited todomestic firms indeed foreign suppliers are likely to capture an increasing share of huge publicinvestments given the size, complexity, and financing demands of the projects involved. Amongalready active or soon to be entering foreign suppliers handling large public investment projects includSalini Construction of Italy for the mega hydroelectric dams such as Gilgil Gibe and the Abay(Renaissance) Dam; Chinese companies such as the China Road and Bridge Corporation,the ChinaCommunication Construction Company (which is undertaking the Addis Ababa-Adama highway andBole Airport-Meskel Square expressway) and the China Railway Group Ltd (which is working on the

link to Djibouti); and Indian companies such as the Overseas Infrastructure Alliance, which is involveprojects linked to the state-owned sugar factories and part of the planned railway project. Beyondcontractors, there is bound to be a more prominent role for foreign capital equipment suppliers givenmany complex technical projects: for instance, we estimate that foreign suppliers of specialized goods(i.e., in the fertilizer, sugar, railway, airline and energy sector investment plans) stand to see $15 billion(Birr 262 billion) of public sector related business opportunities and an estimated $3 billion (Birr 49billion) in profits (Table 1.7 and 1.8). In some of these cases, the ability to arrange financing from homcountry governments, institutions or banks provides these private or quasi-public companies with acompetitive edge. Finally, it is worth noting that foreign consultants and advisory service providers walso continue to be important beneficiaries of and contributors to public sector programs. In recent yeaconsultant groups involved in large-scale government or joint government/donor initiated projects havincluded firms as varied as McKinsey, Booz Allen, Chemonics, ACDI/VOCA, DAI, Fintrac, and manothers all consultancy and technical assistance providers whose volume of work will continue tomultiply in the years ahead as their specialized knowledge and expertise is sought to help in thesuccessful execution of large and complex projects.

8 It is no accident that there are some two-dozen cement projects in the pipeline, including a recently finalized $330 millioncement factory by MIDROC Ethiopia, and new planned cement plants by Lafarge (the worlds largest cement producer), DangoteIndustries (Africas largest cement producer based in Nigeria), and local entities such as Habesha Cement.


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In short, for many years to come, government will become a big source of business for thousands of domestic and foreign private enterprises involved in supplying both the hardware componentsand the software services needed to implement the governments ambitious developmentprograms. This is, of course, not necessarily a bad thing, and is not much different from experiences inmany developing or developed countries where certain industries are heavily reliant on public sector

clients. But there are risks that arise when sizeable segments of a (still emerging) private sector have sa significant reliance on government-affiliated projects. For one, such firms may face large declines inactivity if and when government scales back its investments over time. In addition, there is a risk that favorable business conditions for thisgovernment-affiliated private sector, which benefits from biggerbudgets, misrepresents the more challenging conditions that may be faced by the rest of the private secwhose line of business lies elsewhere. In other words, the private sector that emerges in such anenvironment should ideally not lose its dynamism, ignore other domestic business opportunities, or avexport markets in light of potentially more attractive and readily available government-linked businessopportunities. More fundamentally, while government and the affiliated private sector will unavoidabbe an engine of economic growth for some time given Ethiopias need for basic public infrastructure, theeconomy must not be driven by this single engine alone but rather be supplemented by another equallydynamic private sector whose primary line of business is focused on, among other things,Ethiopias agri-business potential, on its risingdomestic consumer markets , and on its barely exploitedexport potential ,areas of activity which are all addressed in the following three chapters.

Source: MoFED Annual Report on Macroeconomic Developments (2009/10), IMF Staff Review--November 2010, F ederal Budget Summary(2010/11)


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Table 1.3 Growth and Transformation Plan-- Projected Budget and Off-Budget Spending (In Birr Millions)2010/11 2011/12 2012/13 2013/14 2014/15 2010-15

Total

Total Public Sector Spending 188,688 258,812 274,157 266,680 271,813 1,260,150

Budgetary spending 92,049 106,125 130,187 161,452 201,146 690,959Non-Budgetary spending 96,639 152,687 143,970 105,228 70,667 569,191

Budgetary Expenditure 92,049 106,125 130,187 161,452 201,146 690,959

by type

Capital Expenditure 52,003 60,901 75,804 95,975 122,222 406,905Current Expenditure 40,046 45,224 54,383 65,477 78,924 284,054

by sector

Agriculture & FoodSecurity 9,518 13,123 15,905 20,302 25,699 84,547

Education 21,703 24,562 29,579 36,354 44,025 156,223

Health 6,260 7,027 8,796 11,121 13,894 47,098Road 17,304 21,752 28,762 36,581 45,898 150,297

Water 5,897 5,701 8,088 11,888 17,321 48,895Other 31,367 33,960 39,057 45,206 54,309 203,899

Off-Budget Expenditure 96,639 152,687 143,970 105,228 70,667

Industry 16,230 51,955 56,728 42,057 26,592 193,561

Transport 35,088 43,223 41,795 30,550 11,048 161,704Ethio-Telecom 6,580 1,900 13,190 - - 21,670Energy 36,234 52,966 29,219 29,658 29,658 177,735

AA Condominium projects 2,640 2,640 3,080 3,080 3,520 14,960

In Percent of GDP 2010/11 2011/12 2012/13 2013/14 2014/15 2010-15

Total Public Sector Spending 42% 49% 45% 37% 32% 41%

Budgetary spending 21% 20% 21% 22% 24% 22%Non-Budgetary spending 22% 29% 23% 15% 8% 19%

Budgetary Expenditure 21% 20% 21% 22% 24% 22%

by type

Capital Expenditure 12% 12% 12% 13% 14% 13%

Current Expenditure 9% 9% 9% 9% 9% 9%by sector

Agriculture & FoodSecurity 2% 2% 3% 3% 3% 3%

Education 5% 5% 5% 5% 5% 5%

Health 1% 1% 1% 2% 2% 1%Road 4% 4% 5% 5% 5% 5%Water 1% 1% 1% 2% 2% 1%

Other 7% 6% 6% 6% 6% 6%

Off-Budget Expenditure 22% 29% 23% 15% 8% 19%

Industry 4% 10% 9% 6% 3% 6%

Transport 8% 8% 7% 4% 1% 6%Ethio-Telecom 1% 0% 2% 0% 0% 1%

Energy 8% 10% 5% 4% 3% 6%AA Condominium projects 1% 1% 0% 0% 0% 0%

Memo items:

Nominal GDP 448,348 526,853 616,047 723,157 848,235Source: Growth and Transformation Plan (2010/11--2014/15); Nominal GDP of GTP used for FY 2010/11 even though inflation has resulted in higher starting

base.


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Table 1.4. Capital Expenditure in Ten Largest African Economies 2011

Country Capital Expenditure(USD mn)Total Government Expenditure

(USD mn)Percent of Total

Expenditure

Ethiopia 4,103 6,849 59%Tanzania 2,045 5,686 36%Kenya 2,899 9,175 32%Ghana 1,973 6,681 30%Zambia 1,224 4,432 28%Cameroon 1,271 4,693 27%Angola 8,543 33,330 26%Nigeria 6,887 27,307 25%Ivory Coast 686 4,718 15%

South Africa 3,383 135,321 2.5%

Source: IMF Country Staff Reviews (2011), Ethiopian Federal Budget Summary (2010/11)

Table 1.5 GTP Public Investments and Estimated Expenditure on Contractors

Total 5-yr Expenditure on Sector

Percent onContractors

Gross expenditure onContractors

Estimated Contractors' Profits

Roads 150,297 90% 135,267 13,527Health 47,098 60% 28,259 2,826

Education 156,223 60% 93,734 9,373Fertilizer complex 13,205 30% 3,962 396Sugar Industry 72,781 30% 21,834 2,183Railway 110,796 40% 44,318 4,432EAL 31,142 0% - -Energy 177,735 30% 53,321 5,332AA Condos 14,960 90% 13,464 1,346

Total 774,238 394,159 39,416

Source: Growth and Transformation Plan (2010/11--2014/15) & Access Capital Estimates


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Table 1.6 GTP Public Sector Employee Projections Public Sector Employment

Public Sector Employment o/w Federal Civil Service o/w Regional Civil Service

2009/10 854,316 65,238 789,078

2010/11 919,636 70,226 849,410

2011/12 1,023,892 78,187 945,705

2012/13 1,146,838 87,576 1,059,2632013/14 1,287,817 98,341 1,189,476

2014/15 1,287,817 98,341 1,189,476

New employees after 2010/11 368,181 28,115 340,065Source: Ministry of Civil Service (2009/10 Human Resource Statstics) & Access Capital Estimates based on employement

rising at fifty percent of the rate of growth of nominal government spending

Table 1.7 GTP Public Investments and Estimated Expenditure on Foreign Suppliers

Total 5-yr Expenditure on

Sector

Percent on ForeignSuppliers

Gross expenditure on Foreign

Suppliers Estimated Foreign

Suppliers' Profits

Roads 150,297 0% - -Health 47,098 20% 9,420 1,413Education 156,223 0% - -Fertilizer complex 13,205 60% 7,923 1,188Sugar Industry 72,781 60% 43,669 6,550Railway 110,796 60% 66,478 13,296EAL 31,142 90% 28,028 5,606Energy 177,735 60% 106,641 21,328AA Condos 14,960 0% - -

Total 774,238 262,158 49,381Source: Growth and Transformation Plan (2010/11--2014/15) & Access Capital Estimates


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Table 1.8: GTP Off-Budget Spending on Infrastructure & Industrial Projects-- Ranked by Value

Sector/Sub-SectorBirrMillions Business Beneficiaries

Foreign orDomestic

Energy 177,735

Salini for Abay Dam construction;Cement companies; Hydro plantequipment producers

Mainly foreign, somedomestic

Railways 110,796China Railway Group $1.6 bn; OIA(India); local contractors; METEC

Mainly foreign, somedomestic

Sugar Industry 73,575 Sugar plant equipment producersMainly foreign, somedomestic

Chemical, Pharmaceuticals &Cement Industries 34,593 Private and state enterprises Mainly domesticEthiopian Airlines 31,142 Boeing, Airbus, Bombardier, Fokker Exclusively foreign

Ethio Telecom 21,670Telecom and networking equipmentproviders Exclusively foreign

Metal Engineering Industry 20,466 METECMainly foreign, somedomestic

Mgmt & Privatization of PublicEnterprises 19,095 State enterprises Mainly domestic

Textile & Garment Industry 15,946 Private enterprises Mainly domesticAA Condo Construction 14,960 Domestic contractors and SMEs Mainly domesticFertilizer Industry 13,205 New state enterprise Mainly domesticLeather Products Industry 6,734 Private enterprises Mainly domesticEthiopian Maritime Transit Service 6,666 Domestic transit service providers Mainly domesticMicro & Small Scale Enterprises 6,600 Domestic SMEs Mainly domestic

Ethiopian Airports Enterprise 6,198Domestic contractors-- runway, civilworks producers Mainly domestic

Agro-processing Industry 3,347Domestic contractors and agriculturalproducers Mainly domestic

Ethiopian Dry Port Service 3,276 Domestic contractors Mainly domestic

Ethiopian Shipping Lines 3,187 Ship-builders (China, Korea) Mainly foreignTotal Off-budget spending 569,191

Source: Growth and Transformation Plan (2010/11--2014/15); Sectors Ranked by Total Spending level.


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2. An Agricultural transformation involving a proliferation of modern, commercial farms and aleap in the productivity of smallholder agriculture is a realistic and likely possibility withinthe course of the next few years, and will hence be a key driver of economy-wide growth.

Key Points:

Agriculture will have to be a key sector to drive any economic transformation in theEthiopian context, via changes in farm types, in farm inputs, and in farm products.

Plans for large gains in food production face daunting execution risks , both for commercialand small-holder farms, but will still materialize in our view.

The main reason for optimism with respect to the food production outlook is: (i) the strongpolicy push and investor response to put in place hundreds of modern commercial farms and(ii) the equally determined plans in place for comprehensive, output-increasing interventionswithin the still-dominant smallholder agricultural sector.

The agriculture sector, representing 41 percent of GDP but a much higher share (85%) of employment, is set to carry the burden of the transformation sought under the G TP and willmost likely achieve it in our view . The need for a structural transformation in this sector is not in doubt,given Ethiopias long -standing challenges in ensuring nation-wide food security for its population.Moreover, the scope for an agricultural transformation is significant when one notes that Ethiopiassmallholder farmers: (i) cover only 19 percent of potentially cultivable land; (ii) utilize irrigation for oa tiny share (1.3 percent) of their land; (iii) apply fertilizer to only 36 percent of land, and (iv) produceyields that are just half of the world average (Table 2.1). These four remarkably low starting conditionoffer tremendous scope for improvement with carefully planned policy interventions and with the shiftrole of farms as business enterprises, be it for smallholders moving from subsistence farming towardsproduction of a marketable surplus or for large modern farms with an explicitly commercial orientatio

Changes in farm types, in farm inputs, and in farm products will be the most notable features of theagricultural sector in the coming years. To be more specific, farm types will gradually evolve toinclude some large-scale, commercial farms; farm inputs will be enhanced to deliver better seeds, morfertilizers, and other yield-increasing inputs; and farm products will expand increasingly to include higvalue, export-oriented produce. All of the above are in line with the key objectives of the GTP, whichlaid out detailed agriculture sector targets as laid out in Table 2.2 below.

For two main reasons, we think an agricultural transformation involving rising acreage, risingyields, and rising exports is a very realistic possibility within the next few years. Why? First, there is

now a deliberate push to put in place hundreds (perhaps thousands) of modern commercial farms, andsecond because the still-dominant smallholder agricultural sector is set to benefit from a wide range ofoutput-increasing policy interventions (in the form of more irrigation, more fertilizers, better seeds andbetter farming practices).

New Commercial Farms


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For food-producing commercial farms, although this is a sector always vulnerable to executionrisks, there is little reason to doubt in our view whether the promises of increased food outputwill turn into a reality . We think this is the case for at least three reasons.

First, the conducive policy framework put in place for commercial agricultural ventures in 2009

remains in place and has recently been strengthened even further. As we highlighted in our 2009Macro Handbook over a year ago, a combination of policy initiatives have laid the groundwork forthe take-off in commercial agriculture, including: a government allocation of 3 million hectares of land for commercial farming investors; a streamlined process of providing large agricultural landleases via the Federal Government; and a strong package of incentives. The latter include: (i) incotax holidays that range from 3 to 7 years where the grace period becomes incremental depending othe agricultural value added created by the investment scheme and the proportion of exportableproducts; (ii) duty free imports of capital goods used for projects; (iii) no restrictions on repatriatioof corporate profits; (iv) no restrictions on the use of the land for particular crops or purposes (e.g.exports); (v) absence of water charges, allowing investors to dig for and utilize underground watersources without charged, and ; (vi) long-term leases (up to 45 years) with fixed prices (which aregenerally set for a period of 10 years and then subject to an increase of only 20 percent).9 All of theabove make for very favorable supply-side factors which, alongside equally favorable demand-sidefactors (rising populations, incomes, and urbanization), make for very positive prospects for risingcommercial farm production.

Second, a big part of the increased food production is coming simply from putting new landsunder commercial cultivation, a one-off and relatively easy means of boosting foodproduction. Ethiopia is one of 11 African countries identified as having the largest amounts of stilluncultivated land, estimated at 59 million additional hectares according to national statistics.10 Alarge part of the still uncultivated lands are being developed via Federal Government allocations fo

new commercial farms. Our compilation of the relevant data suggests that about 350,000 hectaresone-tenth, of the planned 3 million hectare allocation has already taken place. Of the already grantallocations, we find that the five largest commercial land recipients are: (1) Karuturi Agro ProductsPlc; (2) Shapoorji Pallonji; (3) BHO Bio Products Plc; (4) Ruchi Soya Industries; and (5) CLCSpentex Industries Limited (see Table 2.3). The average size of the land leased is 15,000 hectares,but excluding the top two exceptional cases, the median commercial farm size allocation is 5,000hectares. We also find that the mix between foreign and domestic investors (based on land area) isabout 5-1, though this changes to just 2-1 if we exclude the top two cases. In terms of cropproduction, plans by commercial farm investors are mainly focused on cereals and cash crops. Thfocus on basic cereals such as wheat and maize makes particular sense, given thecountrys largereliance on importing such food items in recent years: for example, cereal imports (which arecomprised mainly of wheat), have jumped from just $157 million about a decade ago to $480 milliin 2010 , or from 2 to 4 percent of total imports.

9 Lease rates for the majority of large commercial farm allocations have ranged from Birr 100-200 (or USD 6 to 12) per hectaper year.10 A recent Mckinsey study notes that 60 percent of the worlds total uncultivated arable land is within Africa, while according toMinistry of Agriculture and CSAs latest land utilization data Ethiopia is showing around 74 mill ion hectares of arable land of which only 15.1 million hectares is currently cultivated counting both small-holder and commercial farms.


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Third, among commercial farms with land allocations, several of them are already operational,often well past the land-clearing process and either in the planting phase or already producingtheir first harvests. Some of the initial beginners include Karuturi PLC, Saudi Star, and BHO BioProducts. Many of the above have spent the past two years in the clearing and preparation of landfor planting. Most of the largest farms expect to realize their first crops in 2012 and are targeting

yields that will be about 2 or 2 times the norm seen from smallholder farms. If this is realized, thinitial allocation of around 227,000 hectares to the top five commercial farm allocation recipientsalone could potentially be the equivalent of almost half a million smallholder farms based on thelatters 2010/11 average produce and yields.11

All of the above encouraging trends favorable policies, the large pipeline of new projects, and thestart of several promising commercial farming operations are of course subject to risks and twoin particular could jeopardize the promised gains from an expansion in commercial farms. First, there is the usual fear that promised and committed investments may not materialize due to a host of execution risks : investors failing to put in their equity contributions; becoming unable to find loanfinancing; or encountering operational problems related to poor infrastructure, land clearing, and so foHowever, it is becoming increasingly unlikely for investments to fall through due to such factors. Thededicated government unit at the Ministry of Agriculture is, for example, screening potential investorswith much stricter standards to ensure that initial capital outlays are actually put in place and tightdelivery periods of as short as six to twelve months are being imposed as an additional check onperformance (i.e., investors who fail to develop a given tract of land as promised lose the lease to theundeveloped parts of land).Second, there is a modest risk that a backlash against commercial farmallocations builds up as the public discourse on this issue is sometimes dominated by highly criticalcommentary focused on themes of land-grabbing , population displacement , and/or environmentalconcerns. However, while possibly legitimate concerns in other parts of the world, the validity of succriticisms is quite weak in the Ethiopian case and the potential for a domestic backlash particularly

unlikely: Ethiopia is a country where any gains to food production are to be welcomed given still-fragfood security conditions; the allocations are open to and being taken up by domestic as well as foreigninvestors; the scale of the land allocations involve just 3 percent of total land and cannot by any stretchseen as large-scale land-grabbing; and the areas of land involved are generally remote areas with no orvery little populated settlements. For these reasons, we think both of the above mentioned potential risare unlikely to adversely impact the production increases envisaged frommost of Ethiopias commercialfarms.

Expansion in already-established agricultural exports

Beyond the changes expected from new commercial farms, a large part of the anticipatedagricultural transformation in Ethiopia will come from the planned boost to six agriculturalcommodities in which the country has already established an export record four of which are

11 According to CSA data for 2010/11, a total of 12.7 million smallholders farmed 10.6 million hectares in the production of million tons of cereals, which gives an average farm size of 1.2 hectares per small-holder farmer and an average yield of 1.7tons per hectare. Using 227,000 hectares for the (initial) land-holding of the Top 5 commercial farms and applying 2 theyield of smallholders gives an estimated Top 5 commercial farm production of 992,000 tons which is roughly the outputproduced by 475,000small-holder farmers. Accounting for the extra anticipated allocations to these same Top 5 commercialfarms would double their land size to near 500,000 hectares and imply a potential output gain that is close to that of one milli(current) smallholder farmers.


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particularly well developed (coffee, oilseeds, pulses, and flowers) and two of which are only justemerging (fruits and vegetables and meat and livestock). For all six commodity groups, the next fiveyears are expected to show large production and export increases (Table 2.4), sometimes as much as thto five-fold increases. As these sectors are almost exclusively in the private sector, these ambitious exincreases will have to be generated by existing private sector firms who are capable and ready to

undertake the large capacity expansions and by prospective new entrants to whom these sectors still ofpromising green-field opportunities.

Expansion in four well-established agricultural exports : Four large agricultural products coffee,oilseeds, pulses, and flowers currently make up the bulk of the countrys agricultural exports. Withthe exception of the flower sector, which mainly comprises several dozen large, labor-intensivegreenhouse-using farms, the agricultural exports are largely grown by small-holders whose producaggregated by cooperatives or traders for supply to central markets. Production and yield-improviinitiatives for the smallholder sector (see below) will thus provide part of the underlying expansionfor this sub-sector. But, in addition,changes in the super -structure of markets and institutions inwhich these products operate will also help. Products like coffee and sesame that are currently tradat the Ethiopian Commodity Exchange, for example, stand to benefit from two key contributions othe ECX the incentive to providehigher output across all quality levels (via more readilytransparent prices) as well as the incentive to focus onhigher value produce (given pricedifferentiation by quality).

Expansion in fruits and vegetables sectors : Despite a potential for fruits and vegetable exports that isas big oreven bigger than flowers, Ethiopias exports in this area have only recently and verygradually begun to take off. This is a promising development, as the production of fruits andvegetables tends to offer a high-margin and more stable business opportunity in contrast with theflower sector, which tends to be a low-margin, high volume business and one that, as aluxury/discretionary good, tends to be susceptible drops in demand during difficult economicconditions in European markets. Moreover, the potential for growth in fruits and vegetables is aslarge as what occurred in the flower industry: Kenya, for example, exports almost the same amounflowers ($380 million) as it does fruits, vegetables, and other horticultural products ($335 million),yet in Ethiopia the flower sector has taken hold ($170 million exports last year) but the fruit andvegetable export sector is still only beginning ($32 million in exports). Two notable challenges docourse, exist in this area and explain part of the divergent performance: (i) global health and hygiecertification standards are required and often quite demanding for fruits and vegetables; and (ii)securing regular and adequate air cargo transportation to key European markets has been difficultsince fruits and vegetables (much more so than flowers) have demanding temperature control andtime-to-market requirements. Both these challenges are gradually being addressed, however, as ai

cargo issues are being eased with Ethiopian Airlines rapid expansion and some pioneering firms wthe requisite global certification standards are emerging. For example, several firms now haveGlobal Gap certification and regularly supply UK and other European supermarkets with vegetablexports of several million USD dollars per year.

Expansion in Livestock and Meat Sectors: The livestock segment of the agricultural sector and oneof its primary end-products (meat) are likely to become a major part of the agricultural transformatin Ethiopian given the countrys livestock population (first in Africa, tenth in the world) and a


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proximity to export markets that happen to have high demand for such products (North Africa andMiddle East). The GTP targets in this area foresee a quantum jump in activity levels, as seen fromthe planned export increase in livestock exports (from 334,000 cattle heads in FY 2009/10 to 2.3million cattle heads in FY 2014/15) and in meat exports (from 10,182 tons in FY 2009/10 to 111,0tons in FY 2014/15). These targets are, in our view, certainly within the realm of the achievable

given growth rates being observed in both livestock and meat exports (up 74 percent last year and percent in just the first quarter of this fiscal year). For meat exports, in particular, most of the growcan be handled by large capacity-raising and/or expansion plans from some the largest players suchLuna, Elfora Agro-Industries, Organic Export Abattoir, and Modjo Modern Export, in addition of course to the inevitable new entrants that are likely to join the sector and would be justified in doingso given the very promising market opportunities in this area.

Smallholder farms

A leap in the productivity of smallholder agriculture involving the 12 million small farmscurrently operating in Ethiopia is the second and simultaneous transformation expected within

agriculture to boost food production levels and thereby stimulate overall economic growth . In thiscase, although the outcomes involved are influenced by a much greater range of variables than is the cfor commercial farms, the overall prospects are still strong enough in our view that a major increase insmallholder agriculture is achievable. We would question whether a doubling of agricultural output asenvisaged under the GTP is possible without a more radical set of policies (see Chapter 9), but there isstill a package of policies and interventions that in all likelihood can sustain agricultural growth by atleast at the same strong growth rate of 8 percent per year as what was registered in the past five years.

The set of GTP policies and interventions aimed at boosting smallholder agricultural output arewelcome for their comprehensive and complementary nature. Many of the policies have alreadybeen in place gradually in recent years and explain the rising production and yield figures registered so

(Table 2.5). At the same time, the intention is for an intensification of these early efforts, includingthrough the efforts of a newly formed Agricultural Transformation Agency that is backed with high-lefunding from the Gates Foundation and other donors and that can potentially play a spear-heading roleprecisely the task of agricultural transformation for which it is assigned. Most notable among thepublic interventions planned under the GTP for the smallholder agriculture sector include improving squality and supplies, expanding irrigation, intensifying fertilizer use, upgrading farmer extension serviand adapting farm products to varying land and soil characteristics.

Upstream and downstream industries around agriculture

A host of business activities closely tied to agriculture are set to contribute to, and get a big boost

from, the prospective transformation in Ethiopias agriculture; this includes upstream industriesthat provide inputs to farms as well as downstream industries that make use of the outputs produced by farms. Thestriking element of Ethiopias agricultural sect or has been the limited numberof such upstream and downstream industries, especially in the form of commercially established operathat have joined these activities for long-term, profit-making motives as with any other businessopportunity. In this connection, there is much scope for the emergence and growth of upstreaminput-

providing industries in areas such as the provision of: organic and chemical fertilizers; higher-yieldingseeds and plantings; irrigation systems and their associated parts such as water pumps and steel pipes;


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agricultural tools and equipment; pest control systems; and modern cooling and cold storage facilities.12 In parallel, there is wide scope for downstream industries that utilize farm outputs (as is later discussedChapter 3), including for example wheat derivatives, dairy products, and the processing of edible oil,fruits, and vegetables to name just a few. The full development of such upstream and downstreambusinesses, as highlighted in a 2010 McKinsey report covering African agriculture, has the potential to

add as much as an extra one-third of the value of agricultural produce. If extrapolated to the Ethiopiancontext, this implies that an extra Birr 70 billion can potentially be derived from agriculture-affiliatedupstream and downstream industries over time, including (based on the McKinseys indicativeproportions for African countries) activity levels that focusing on three large segments alone could beas large as Birr 17 billion in fruits and vegetables processing, Birr 15 billion in grain processing, and B8 billion in livestock related downstream industries.13

To summar ize, given Ethiopias very low base when it comes to agriculture productivity and valueadded, a combination of policy interventions and investor initiatives can bring quick andpotentially large payoffs to the incomes of a wide base of smallholder and commercial farmers . The jump in farm sector incomes, where at least 80 percent of the population live, will in turn have atransformative impact in boosting demand for a wide range of basic consumer goods, as is elaboratedfurther in the following chapter on this very topic.

Table 2.1: Ethiopia's Agriculture Potential: Starting From a Low Base

Ethiopia SSA Asia World

Land Cultivated (%) 25% 44% 51% 38%

Fertilizer Usage (Kg/Hectare of Cultivated land) 36 24 148 96

Irrigation usage (% of Cultivated land) 1.3% 4% 18%Cereal Yields (tons/hectare) 1.7 1.3 3.6 3.5

Agriculture Value Added per worker (USD) 215 318 530 997Source: CSA Agricultural Sample Surveys, FAO Country Stat, IFPRI

12 A recent synthesis report of diagnostic studies and recommendations on Ethiopias agricultural sector entitled AcceleratingEthiopian Agriculture Development for Growth, Food Security, and Equity and compiled by the Gates Foundation highlights in

particular the role for capable, well resourced private sector actors that could have impact in key (agriculture) value chains,including efficient, well-regulated, and socially-responsible input suppliers and distributors for supplies of seeds, fertilizers,and agricultural equipment inputs. At present, key input markets tend to be dominated by parastatal agencies such as theAgricultural Input Supply Enterprise and the Ethiopian Seeds Enterprise.13 This is based on the Birr 220 billion in agriculture value-added for Ethiopia as of FY 2010/11, and McKinseys estimate based on African country norms of potential upstream industries equivalent to 4 percent of agriculture value-added anddownstream industries of 28 percent of agricultural value-added. Within the latter, the largest potential opportunities areidentified as being with fruits/vegetables processing (28 percent of downstream industry value-added), cereals processing (24percent) and livestock processing related industries (14 percent).


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Table 2.2 GTP Targets for Agriculture and Rural DevelopmentDescription of Targets 2009/10 2014/15Cultivated Land 1. Total cultivated land utilized by major food crops (mln ha) 11.25 2.Production of cereals (mln ha) 9.1 3. Cereals productivity (qt/ha) 17 Coffee production and productivity4. Cultivated land by smallholder farmers (ha) 462,000 85. Coffee production (tons) 341,000 83

Livestock development6.Cattle fed production (qt) 50,000 147. Improved cattle breeds (%) 10.3 8.Production and distribution of improved livestock gene (mln dose) 0.35 9. Proportion of livestock vaccinated (%) 40 10. Proportion of low grade hides and skins (%) 50 11. Production of improved animal fodder seeds (qt) 50,000

Agricultural inputs supply12. Supply of improved seeds (mln qts) 0.56 13. Supply of chemical fertilizers (both DAP and Urea) (mln tons) 0.83

Agricultural extension14. Number of beneficiaries of agricultural extension services (mln) 5.1 15. Of the beneficiaries of agricultural services proportion of women and youth (%)

Improving soil fertility16. Areas under vertisol development( mln ha) 1 17.Acidic land treated with lime (ha) 2,210 3

Natural resource conservation program18. Area of land rehabilitated (mln ha) 3.21 19. Land developed under community based water shade development program (mln ha) 3.77 20. Total area of land subjected to soil fertility research (mln ha) 0.894 21. Total area of land covered with forest and with forest master plan (mln ha) 0.7 22. Area of land covered with multipurpose trees (mln ha) 6.06 23. Forest coverage (mln ha) 13 124. Increase multipurpose trees (ha) 5,062 125. Natural resources conservation activities in pastoral areas( ha) 200,000 Small scale irrigation program

26. Land developed under small scale irrigation (mln ha) 0.853 Food security27. Number of households participate in safety net programs (mln) 7.1 28. Food reserve (mln tones) 0.41

Agricultural marketing29. Coffee export (tons) 172,210 6030. Coffee export earnings (mln USD) 528 31.Increase export earning of oil seeds (mln USD) 358 32.Increase export earnings of pulses (tons) 129.86 33. Increase the export of oil seeds (tons) 299,198 734. Increase the export of pulses (tons) 225,446 1,135. Increase the live animals exported (no.) 333,743 2,336. Meat export (tons) 10,180 11137. Live animals and meat export earnings (mln USD) 125

38. Earning from flowers export (mln USD) 170 39. Earning from export of vegetable, herb and fruits (mln USD) 31.7 40. Earning from export spices (mln USD) 18.57 41. Export of spices(tons) 15,594 342. Export of gums and incense(tons) 4,370 143. Export earnings from gums and incense( mln USD) 12.68 44. At the end of the plan period it has been planned to generate USD 6.58 bln from the agriculture sector export market by exporting 3.81 mln ton oproducts, 5859 mln flower cuts and 2.35 mln live animalsCooperative development45. Number of primary cooperatives 33,636 546. Number of cooperatives unions 212


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Agricultural researchAt the end of the plan period new technologies development in cereals, livestock, soil, forest development and agricultural mechanization will reach265,140,41,219and 836, respectively

Private investment in the agricultural sector47.Production of coffee and and tea and other exports crops(mln tons) 0.251 48. Transfer nearly 3.3 mln ha land to commercial farming investors in transparent and accountable manner

Horticulture development

49. Land area under flowers production(ha) 1,586 50. Flowers production(mln cuts) 2,748.0 551. Land under the production of vegetables, fruits and herbs(ha) 2,472 52. Production of vegetables, fruits and herbs(tons) 58,400

Source: Growth and Transformation Plan (2010/11-2014/15)


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Table 2.3 Federal Land Allocations to Commercial Farm Investors in EthiopiaNo. Name of Investor Year Country of Origin Region of Investment Investment Activity Hectares

1Karuturi Agro ProductsPlc. 2008 India Gambela

Development of Palm, Cereals &Pulses 100,000

2 Shapoorji Pallonji 2010 India Benshangul Gumuz Growing biofuel seeds, edible oil 50,000

3 BHO Bio Products PLC 2009 India Gambela Palm, Cereals & Pulses 27,000

4 Ruchi Soya Industries 2010 India Gambela Growing Soya bean 25,000

5

CLC Spentex IndustriesLimited

2010 IndiaBenshangul Gumuz &Amahara Growing Cotton 25,000

6Huanan DafengyuanAgriculture 2010 China Gambella Growing Sugarcane 25,000

7Adama

2010 Ethiopia SNNPR Growing Cotton 18,516

8White field

2010 Indian SNNPR Growing Cotton 10,000

9Saudi Star AgriculturalDevelopment 2008 Saudi arabia Alwero, Gambella Wheat, maize and rice farming 10,000

10Sannati Agro FarmEnterprises 2011 India Gambella

Growing Rice and rotational pulses& cereal crops 10,000

11Daniel AgriculturalDevelopment Enterprise

2010 Diaspora SNNPR Growing Cotton and Grains 5,000

12Mela AgriculturalDevelopment PLC 2010 Ethiopia SNNPR Growing Cotton 5,000

13Access Capital Services

2011 Ethiopia Benshangul GumuzDevelopment of Sesame, Cereals& Pulses 5,000

14Tracon Trading PLC

2011 Ethiopia Benshangul Gumuz Growing Cotton 5,000

15Dr. Tamie Hadgu

2011 Diaspora SNNPR Growing cotton and seeds 5,000

16Bruhoye

2011 Ethiopia Benshangul Gumuz Growing Cotton and soya bean 5,000

17Lucci AgriculturalDevelopment Plc 2010 Ethiopian SNNPR Growing Cotton 4,003

18 Vedanta Harvests PLC 2010 India Gambella Tea, biofuel and spices production 3,012

19 Rahwa 2010 Ethiopian SNNPR Growing Cotton and Grains 3,000

20ASKY AgriculturalDevelopment 2011 Ethiopia Benshangul Gumuz Growing Cotton 3,000

21

Tsegaye DemozAgricultural Development

2010 Diaspora SNNPRGrowing Cotton, Sesame andSoyabean 1,000

22Reta

2010 Diaspora SNNPR Growing Cotton and Grains 2,137

23Keystone

2010 Diaspora Benshangul Gumuz Horticulutural and Crops 431

TOTAL COMMERCIAL LAND ALLOCATION 347,099

Note: This listing may not be comprehensive since some allocations are done at the regional level

Source: Ethiopian Agricultural Portal (Ministry of Agriculture), www.eap.gov.et


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Table 2.4: Agricultural Exports-- GTP Production and USD earnings projections

Production ('000 Tons) USD Exports Earnings (Mn. USD)

Established Crops 2009/10 2014/15 Established Crops 2009/10 2014/15

Coffee 341 831 Coffee 528 2,037Major Food Crops 19,392 26,774 Oilseeds 358 1,120Root Crops 1,806 5,907 Pulses 130 882Industrial Crops 630 1,175 Flowers 170 535Spice Crops 182 322 Spices 19 30Stimulant Crops (Chat) 462 1,040 Fruits & Vegetables 32 948Flowers (Mn. Stems) 2,748 5,859 Natural Gum 13 33Fruits & Vegetables 966 5,907 Live Animals & Meat 125 1,000

Total 1,374 6,585

Source: Growth and Transformation Plan Policy Matrix (2010/11--2014/15)

Table 2.5 SUMMARY OF AREA, PRODUCTION & YIELD OF GRAIN CROPS FORPRIVATE PEASANT HOLDINGS

Production levels (Millions of tons)Cultivated Area (Millions of

hectares) Yield (Tons per hectare)2007/0

82008 /09

2009/ 10

2010/11 2007 /08

2008/ 09

2009/ 10

2010/11 2007/08 2008/ 09

2009/ 10

TotalGrain 16.1 17.8 19.4 21.2

TotalGrain 10.9 12.4 12.7 13.0

TotalGrain 1.5 1.4 1.5

Cereals 13.7 15.1 16.7 18.6 Cereals 8.7 9.8 10.2 10.6 Cereals 1.6 1.5

Pulses 1.8 2.0 2.0 2.0 Pulses 1.5 1.8 1.7 1.6 Pulses 1.2 1.1

Oilseeds 0.6 0.7 0.6 0.6 Oilseeds 0.7 0.9 0.8 0.8Oilseeds 0.9 0.8 0.8

GROWTH RATES (%) GROWTH RATES (%) GROWTH RATES (%)2007/08 2008/09 2009/

102010/11 2007/

082008/0

92009/

102010/1

12007/08 2008/

092009/

10TotalGrain 7.8% 10.5% 8.9% 9.6%

TotalGrain 3.5% 13.4% 2.7% 1.9%

TotalGrain 4.1% -2.6% 6.1% 7.

Cereals 6.5% 10.1% 10.6% 11.1% Cereals 3.1% 11.9% 4.9% 3.7% Cereals 3.3% -1.6%

Pulses 12.9% 14.7% -0.2% 0.2% Pulses10.1% 18.2% -4.5% -8.3% Pulses 2.6% -2.9% 4.5%

Oilseeds 24.2% 6.4% -1.9% -1.3% Oilseeds-

4.3% 21.9% -8.1% 1.2% Oilseeds 29.9%-

12.8% 6.8%

Source: CSA's Agricultural Sample Survey Reports (2006/07-2010/11)


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3. A Consumer Goods revolution among Ethiopias 85 million-plus population is just beginningand will no doubt gather substantial momentum in the next five years.

Key Points: The usual drivers of consumer goods markets in developing country contexts rising

incomes, favorable demographics, and behavioral changes linked to urbanization are allincreasingly evident in Ethiopia.

We estimate that the collective buying power of Ethiopias urban consumers is now $6billion (or Birr 95 billion), and this figure is set to expand by at least $1 billion (Birr 18billion) per year according to our projections.

We identify three high potential sub-categories in the Ethiopian consumer goods space,including: (i) sectors where there has been very little domestic value-added so far despiteplentiful local supplies of needed inputs (e.g., processing of cereal grains, edible oils); (ii)sectors where goods can be produced from basic, labor-intensive manufacturing facilities(clothing, footwear), and; (iii) sectors where demand jumps sharply once incomes cross a

certain low threshold (such as for home rentals/purchases, beverages, household supplies,mobile phone usage, and private health/education services).

An explosion in demand for a wide range of basic consumer goods and services will no doubt propelthe emergence and expansion of firms in the consumer goods space in the coming years. Byconsumer goods space we are referring to items that fall under two broad groups: first, basic consumer goods (foods, beverages, clothing, household consumables, and durable goods) and, second, basicconsumer services (rentals, private health, private education, telecom services, and banking services).

The usual drivers of consumer goods markets in developing country contexts rising incomes,favorable demographics, and behavioral changes linked to urbanization are all increasingly

evident in Ethiopia:

Rising Incomes : Nominal economy-wide incomes, if proxied by nominal GDP growth, have been risinby 30 percent annually in recent years and are set to rise by a somewhat reduced but still-high 20 percin the coming years.14 Within the past year, a step salary adjustment averaging 30 percent granted topublic sector employees in early 2011 has driven equal or higher step increases in many large privatesector employers.15 Such increases are enabling a gradually increasing number of urban Ethiopians tospend rising portions of their income on consumer goods. For example, two separate sources of wagestatistics found median urban wages to be near Birr 1100 per month in 2009/10.16 However, driven bygovernment salary increases averaging 30 percent since then, median salaries would now be close to B

1430 per month. Moreover, based on the civil service scale and modified for the recent salary14 Assuming real GDP growth of 11 percent and inflation of around 10 percent for the next few years, nominal GDP growthshould exceed 20 percent for all of the coming five year period.15 Access Capitals Price Database shows, for example, large salary increases across many categories of wage earners betweenJanuary 2010 and October 2011, including close to 20 percent annual wage increases for job categories such as secretaries,accountants, business managers and public hospital doctors.16 The 2011 Urban Employment -Unemployment Survey of August 2011 shows median wages of Birr 1063 per month for theurban employed population (Table 5.25). Focusing only on manufacturing firms, the Large and Medium Scale Manufacturingand Electricity Industries Survey released in 2011 shows average manufacturing wages of near Birr 1122 per month (Table4.11).


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adjustments, the distribution of income for those above the median would show 14 percent of urban ciservants earning between Birr 1850-2600 per month and 8 percent earning above Birr 2500 per month(Table 3.1).17 The pay patterns within the civil service should reasonably capture the median earningsprofile across urban areas: substantial portions of the urban population are of course not as privileged athe group of 854,000 civil servants (implying civil service salaries might over state average salaries) bu

at the same time, a sizeable group of employees in the manufacturing, banking, insurance, andNGO/service sectors earn substantially higher monthly wages. On balance, we think the civil servantwage distribution offers a reasonably good indication of the median wage distribution in urban areas.And on the basis of the median civil service wage, we find it reasonable to estimate that around 50

percent of Ethiopias urban employed, or roughly 2.5 million individuals, already earn the equivalent of aleast $1000 per year (equivalent to about Birr 17,200 per year or Birr 1430 per month), a noteworthythreshold after which demand for basic consumer goods jumps sharply based on international experienof consumer spending patterns.18

Favorable Demographics : With respect to demographics, Ethiopia will increasingly stand out favorablyfrom the consumer goods space perspective on account of its huge size (second largest population inAfrica, 14 largest in the world) and a very young demographic (44 percent of the population is under 1and 73 percent under 30).

Urbanization-linked changes in consumption: Finally, adding to the impact of rising incomes anddemographic changes, will be the increasing urbanization and emerging living patterns evident across country, most notably in the form of condominiums, organized neighborhoods, and other high-densityliving arrangements.Ethiopias urban population has, for instance, recently crossed the 10 millionthreshold according to national statistics, with 5.1 million of these employed and 2.5 million engaged isalaried, wage-earning occupations. In line with the consumption patterns seen in other developing anurbanizing countries, the following main groupings of consumer goods and services typically become

important as a country rises up the income ladder. First, while food products will of course continue tomake up a large share of the consumption basket of most developing country consumers, its compositiwill increasingly turn from basic staples to a more varied diet involving, for example, dairy, poultry,meats, fruits, vegetables, and processed foods (e.g., wheat products, dairy products, etc). Beyond the itself, the way it is prepared and consumed itself also typically shifts over time, with increased use of prepared inputs, food being purchased for taking home, and food being eaten away from home. Seconas the share of food in total spending declines, this is typically taken up in by spending on housing/renconsumable basic household goods (toiletries, soaps, detergents); clothing and footwear; discretionaryconsumables (soft drinks, beer, cigarettes, pastries/sweets); and durable household goods (simpleelectronic goods; televisions; furniture; kitchen appliances). Consumption also shifts towards servicesincluding increased spending on telecom services (mobile phones and airtime); restaurants/cafes; privaeducation/training services; entertainment venues; and personal care services (private health facilities,barber/beauty salons).

17 Wage distribution data for the 850,000-strong civil service is from the June 2011 Labor Market Information Bulletin of theMinistry of Labor and Social Affairs.18 See McKinsey Quarterlys Africas Path To Growth: Sector by Sector report of June 2010 and its section on consumergoods markets across Africa.


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Based on the above data showing initial market size and anticipated annual increases, we think theconsumer goods space in Ethiopia over the coming years will be dominated by three high-potentialsub-categories : (i) consumer goods in which there is currently limited domestic value-added despiteplentiful supplies of needed inputs; (ii) consumer goods produced by basic, labor-intensive manufactuindustries and that offer huge import substitution opportunities; (iii) consumer goods for which deman

jumps sharply once incomes cross a certain low threshold. A representative sampling of such consumgoods with notable prospects in each of the main sub-categories is provided below.

Goods with limited domestic value-added despite abundant supplies of needed inputs Cereal products : This sector still shows very limited value-addition despite the huge potential to

process wheat, maize, teff, and barley by-products for an urbanizing population with rising demanfor products such as different types of bread, pastas, baby food products, and confectionery producBased on the urban CPI index and estimated urban incomes, for example, the market for bread andpasta and macaroni is already Birr 2.6 billion and Birr 0.5 billion respectively (Table 3.4), withpotential annual increases of Birr 500 and 100 million per annum in the coming years (Table 3.5).

Edible oils : Despite a huge supply of different oil seeds, most of this is exported in seed form ratherthan consumed domestically as edible oils. Only a handful of edible oil plants operate (Addis ModHamaressa, Adama, and Bahir Dar Food Oil factories), though these are now being joined by somenew foreign ventures (Ashraf and Acazis). Reflecting the still limited number of producers, edibleimports have risen 14-fold from just $18 million in 1999 to $248 million in 2010, equivalent to a B3.2 billion potential market that is ready for import substitution by local firms.

Consumer goods produced by basic, labor-intensive manufacturing industries Clothing and footwear : We estimate the urban clothing and footwear market at Birr 7.5 billion for

2011, given its 8 percent share in the urban consumption basket. This figure represents a mix of imports and local produce; given import figures of Birr 3.2 billion for clothing and footwear, thisimplies that only 57 percent of the market is supplied by local producers, a ratio that can easily jumin the years ahead.

Vehicles : Although not a mass market consumer good for the Ethiopian context, passenger vehiclesrepresent a very fast growing niche segment (annual vehicle registrations are rising by 65 percent pyear) despite extremely high tariffs on auto imports (up to 250 percent of the vehicles value). Notsurprisingly, taking advantage of low taxes on parts for car assembly, several such firms are alreadyin or entering the market, including Holland Car, Lifan Automotive, Belayab PLC, Marathon Moto(Hyundai), Mesfin Industrial Engineering (Geely cars), and Betret International PLC (BYD cars). of these, including possible additional entrants, could easily multiply their sales volumes given latedemand in this sub-sector.

Goods with large demand increases once incomes cross a certain threshold Soft drinks: Soft drinks are chronically in short supplies relative to demand, especially in areasoutside the main cities. The current dominant suppliers (Coca Cola and Pepsi) have large capacityexpansion plans, including a doubling of production volumes within a couple years through newproduction lines as well as additional bottling facilities. Even with a doubling of annual sales,however, this will still be well below sales in Kenya and Nigeria, both found to be firmly positionewithin the top 30 global markets in per capita consumption of soft drinks in 2010, indicating yet mscope for on-going capacity expansions.


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Household consumables ( such as soaps, toiletries, detergents) and basic medicines currently absorban estimated 2.1 billion in household spending but would grow by 420 million per year in the comyears given the sharp jump in usage of such products as low levels of income rise over time.

Home rental and purchase costs are typically the largest share of a households incomes once basicfood needs are addressed. In many developing and developed country contexts, it is the norm for 240 percent of a households income to be devoted to meeting that household s housing needs, whetherin the form of rents or mortgage payments for purchased homes. Despite a large construction of government-built condominiums, this sector still shows huge potential for growth given an estimatshortfall of more than 400,000 housing units in Addis Ababa alone.20 Taking our urban incomeestimate, allocating 25 percent of household income to rental/purchase costs would imply Birr 24billion in opportunities for builders/renters of housing units.

Mobile phone ownership and service usage : Projections to raise mobile phone coverage from itscurrent levels of 10 million to 40 million in 2014/15 (as per the GTP) imply huge growth in mobilephone hardware and telecom airtime sales. An extra 30 million mobile phone units implies sales o625,000 mobile phone units per month or 21,000 per day. With respect to airtime, an extra 30 mil

users in four years time, assuming Birr 50($3) airtime usage per user per month, implies an extraBirr 18 billion($1 billion) in annual telecom service sales from new subscribers and voice servicesalone.

Private health and education services: Although still dominated by government institutions,especially for basic health and education services, privately owned and run health and educationalinstitutions have mushroomed in recent years and appear likely to continue their rapid growth. InAddis Ababa alone, for example, there were (as of 2011) 20 registered private hospitals, 342 privaclinics, 487 nurseries/kindergartens, 283 private schools and 38 private colleges/universities. Risinpopulations, a preference for better quality services, and a demand for specialized offerings will allpush growth in this area. In terms of key pharmaceuticals used in the health industry, medicineimports have jumped from $35 million to $321 million over the last decade, equivalent to a marketBirr 5.5 billion that is also ready for at least partial import substitutionin the case of basic mass -market medicines.

Entertainment services and venues : Based on their weights in the CPI,food taken away fromhome (3.2 percent)and entertainment services (1.5 percent), the market for eating venues(restaurants, bars, etc.) and entertainment services is on the order of Birr 3.1 billion and Birr 1.4billion respectively. The size and scope of the markets in this area is certainly corroborated by othdata, such as Addis Ababa business registrations which show: 4,380 registered restaurants/bars/caf1,792 personal care & effects service provides (barbers, beauty salons, spas, etc.), and 395exclusively recreation, music and entertainment venues (see Table 3.6).

Retail Trade : As in most developing countries, the retail distribution of many goods and services

comprises a large part of the business landscape and Ethiopia is no different in this respect. ForAddis Ababa alone, for example, business registration data show close to 30,000 registered retailtraders, with the largest categories concentrated on selling food produce (9,893), clothing (7,303),intermediate goods, household appliances, and vehicle/transport equipment (Table 3.7).

20 A very simple and revealing indicator of the scale of housing demand can be seen from the Government condominium lottof April 2010. A total of 485,000 individuals (almost one-seventh of Addis residents) applied for condominium units thoughonly 10,700 were made available (2.2 percent of total demand).


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The scope and scale of business opportunities offered by the convergence of the above trends rising incomes, favorable demographics, and increased urbanization are all nicely captured byrecent developments in just one corner of the consumer goods space: beer. Once an industry solelyoperated by lethargic state-owned enterprises, the Ethiopian beer industry has in just the past year beenfully taken over by private operators (including two large foreign investors) and is set to see even mor

entrants in the years ahead from at least three additional domestic brewers (Habesha Beer, Raya Beer, Zebidar Beer). What is particularly remarkable is the entry of two global multinational beveragecompanies and their determined drive to join the domestic beverages market, even if this meant payingpremium prices to secure their investments: Heineken bought Harar Brewery for $78 million and BedeBrewery for $85 million while Diageo bought Meta Brewery for $225 million, resulting in a combinedsum of $388 million for the three breweries. By our calculations, the purchase prices paid amount to 1times earnings for Harar Brewery, 23 times earnings for Bedele Brewery, and an astonishing 48 timesearnings for Meta Brewery. While it is the case that beer is a unique consumer product in some ways,bullishness shown by foreign investors in this sector does reveal many of the opportunities available frEthiopias other consumer goods markets, including the potential to quickly increase sales given very lolevels of product penetration. Precisely for these reasons, foreign interest in the fast-moving consumegoods space has not been limited to just beer, but is also evident in areas as varied as foodstuffs,household goods, soft drinks, bottled water, and others as is summarized by a partial compilation of recent deals and notable participants in Table 3.8.

Table 3.1. Urban Distribution of Income-- Proxied by Civil Servant Wages (FY 2009/2010)

Salary Bracket (In Birr)Sex

%Male Female Total

300-399 22,785 17,207 39,992 5%400-599 47,501 28,955 76,456 9%600-799 68,579 44,351 112,930 13%800-999 92,949 45,694 138,643 16%1000-1199 60,581 30,228 90,809 11%1200-1399 35,781 12,139 47,920 6%1400-1599 23,062 8,649 31,711 4%1600-1799 22,759 6,156 28,914 3%1800-1999 12,099 3,116 15,214 2%2000-2199 7,957 2,390 10,348 1%2200-2399 8,405 1,561 9,965 1%2400-2599 5,697 1,484 7,181 1%2600-2799 6,365 1,419 7,783 1%2800-2999 4,294 1,328 5,622 1%3000+ 9,706 1,787 11,493 1%Not mentioned 145,570 73,764 219,334 26%Total 574,089 280,227 854,316 100%

Note: For calculating wage groupings the ' Not mentioned' category is excludedSource: Ministry of Civil Service (2009/10 Human Resource Statistics)


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Table 3.2: Composition of Urban Spending by Broad Categories

MAJOR GROUPS Proportion of Expenditure (%)

Food and Non Alcoholic Expenditure 34.0%

Alcohol and Tobacco 0.4%Clothing and Footwear 6.2%

Housing, Water, Fuel, Energy 23.9%

Furnishing Household Equipment and Maintenance Goods andServices for Routine Household Maintenance 6.5%

Health Medical Treatment 0.8%

Education 3.1%

Other (including Transport, Communication, miscellaneous) 25.2%

Total Expenditure per capita 100%

Source: Household Income, Consumption and Expenditure (HICE) Survey 2004/05

Table 3.3.Urban Purchasing Power Based on Aggregate Wage Income

Urban Salaried groupUrban Non-

salaried groupTotal Wage Paid

(in Birr) In USD terms

Numbers 2,544,615 2,595,216 Mean Monthlywage 1,063 957 Monthly wagepaid 2,704,925,745 2,482,843,147 5,187,768,892 302,141,4

Annual wage paid 32,459,108,940 29,794,117,766 62,253,226,706 3,625,69Source: CSA 2011 Urban Employment & Unemployment Survey & Access Capital Estimates

Table 3.4 Total Urban Income Estimate in 2011(in Birr)

Birr per year

Wage Income 62,253,226,706Dividend income 3,439,396,810Rental income 6,225,322,671Remittance income 24,038,000,000

Total Urban income 95,955,946,187

Total Income in Percent of GDP 19%Source: CSA 2011 Urban Employment & Unemployment Survey & Access Capital Estimates


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Table 3.6. Composition of Private Service Providers in Addis Ababa in 2010

Trade Fields No. of ServiceProvidersCombined Registred Capital

(in Birr)

TRANSPORT PROVIDERS 20,438 2,800,504,373

OTHER SERVICES 4,740 2,955,586,440

HOTEL, RESTAURANTS , BARS & CAFS 4,380 530,185,936

CONTRACTORS 3,436 1,987,888,152

RENTAL ACTIVITEIS 2,443 2,251,546,707

PERSONAL CARE & EFFECTS 1,792 20,898,764

PRINTING, PHOTOGRAPHING and SECRETAREIL SERVICES 1,454 199,695,696

EDUCATION & TRAINING CENTERS 1,280 807,785,498

REPAIRING, INSTALLATION & MAINTENANCE 666 92,542,871

PROMOTION & PRODUCTION 609 85,792,772

CONSULTANCY 532 235,473,886

CLINIC HEALTH SERVICES 403 135,395,291

RECREATION , MUSIC & ENTERTAINMENT 395 70,169,674

CLEANING &SANITATION SERVICES 342 28,862,429

COMMUNICATION 382 69,086,371

ENGINEERING SERVICES 209 81,821,052

TOTAL SERVICE PROVIDERS 43,501 12,353,235,912

Source: Addis Ababa Trade & Industry Bureau

Table 3.7 Composition of Retail Traders in Addis Ababa (2010)

Trade Fields No. of RetailersCombined

Capital(in Birr)

Durable Goods Retailers 4,864 555,898,751Household Appliances & Utensils 1,871 127,463,249Vehicles & Transport Equipment for "Personal" Use, Spare Parts & Accessories 1,591 265,815,678Furniture, Furnishings, & Floor Coverings 764 86,780,192Audio-Visual, Photographic, & Other Electronic Equipment (excluding ICT Products) 638 75,839,632

Non-Durable Goods Retailers 24,805 1,620,062,381Food 9,893 339,925,910Articles of Leather, Textiles, & Footwear (Wearing Apparels & Accessories) 7,303 300,338,810Intermediate/Semi-Finished Products 3,111 252,772,346

Alcoholic Beverages & Tobacco Products 1,594 14,940,958Others 1,401 512,635,291Newspapers, Books & Stationery 756 123,078,504Products of Personal Effects 408 27,161,608Healthcare Products 224 42,939,348Non-Alcoholic Beverages 115 6,269,606

TOTAL RETAIL TRADERS 29,669 2,175,961,132Source: Addis Ababa Trade & Industry Bureau


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Table 3.8 Sampling of Foreign Firms in Fast Moving Consumer Goods (FMCG) Sector in Ethiopia

Foreign Company OriginEthiopianSubsidiary/Affiliate/Partner Notes

1 Heinken Netherlands Bedele and Harar Brewery

Heineken purchased BedeleBrewery at $80 million and HararBrewery at $75 million in 2011.

2 Diageo UK Meta Brewery

Diageo purchased Meta Breweryat a cost of $220 million in late2011. Diageo plans to invest 10million dollars on expansion of the brewery and may introducenew line of products to theEthiopian beer market

3 SAB Miller South Africa Ambo Mineral Water

SABMiller has improvedtechnology, boosted marketing,and expanded into several newproduct lines such as flavoredwater and new bottle types.

4 Tiger Brands South Africa East African Group (Ethiopia) plc*

Joint venture with collaborationexpected in the areas of home and

personal care products, biscuits,flour, detergents and pasta

5 Proctor & Gamble US Petram Plc & Al-Impex Plc

Rapid expansion in operations,with products in market includingAriel, Pampers and Gilletteproducts, Powder Milk &Sunflower.

6 Nestle Switzerland Mulege PlcSole distributor of Nestle's NidoMilk Powder

7 Unilever UK/Netherlands Alfaraj

Sole distributor of Unileverproducts, including children'sproducts, detergent, sanitaryitems, cosmetics (i.e., Sun silk),and razors

8 Sony Japan Glorious PLCExpanding sales and aggressivepromotions, especially in flatpanel TV sales

9 Samsung South Korea Garad

Samsung is planning set up anassembly plant for refrigeratorsand home appliances and to opena state-of-the-art engineeringinstitution that aims to educatemore than 10,000 electronicengineers in few years time.

12 Multichoice Africa South Africa Multichoice Ethiopia

Rapid expansion in operationswith rising choice of subscriptionofferings targeting different pricepoints

12 Rina International India Aqua Addis Bottled Water

13 Coca Cola Sabco (CCS) South AfricaEast African Bottling Share Company(EABSC)

Rapid expansion in operations tomeet fast-growing and unmetdemand, especially in regions.

Source: Various News Articles and companies' profile notes


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4. Emerging export industries in mining, manufacturing, and foreign exchange generatingservices are already making their mark in the Ethiopian economy and will soon overtaketraditional exports of coffee and other agricultural goods.

Key Points:

Three sets of industries focused mainly on selling to foreign markets mining, manufacturing,and foreign currency generating services have shown sharp growth in recent years.

Very large capacity expansion plans are in place in all three of these emerging export industriesand the prospects that these plans will be realized are quite solid in our view.

By our calculations, the combined foreign exchange earnings of Ethiopias emerging exportindustries will very shortly eclipse that of Ethio pias traditional agricultural exports.

Emerging export- oriented industries have recently been among the strongest sources of Ethiopiaseconomic growth . Threesuch emerging export-oriented industries are particularly notable: mining; manufacturing (namely textiles and leather products); and services with large foreign exchange genera

capacity (airlines, shipping, ele

01.12 - info a a nr 80_10 01 2012 anexa ethiopia

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