access capital ethiopia: macroeconomic handbook 2011/12

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 Ethiopia’s 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 (in

Chapters 7-10) on reforms that we think can help ensure a favorable

economic and business outlook. We also offer an Annex with Access

Capital’s macroeconomic projections for the year ahead.

Access Capital Research

December 30, 2011

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Ethiopia Macroeconomic Handbook 2011-12

Macroeconomic Handbook 2011/12: Executive Summary Four growth drivers—Public Investments, an Agricultural Transformation, a Consumer Goods

Revolution, and Emerging Export Industries (or ―P-A-C-E‖)—will support a rapid pace of economic

expansion in Ethiopia in the coming years.

1. Massive public infrastructure investments are set to deliver a wide range of public goods—roads,

railways, power plants, schools, and clinics—while simultaneously propping up thousands of

private sector companies involved in building and maintaining these brand new public facilities.

2. A genuine agricultural transformation—involving a proliferation of modern commercial farms

as well as a leap in the productivity of smallholder agriculture—is in our view a very realistic

possibility in the next few years, and will hence be a key driver of economy-wide growth.

3. A consumer goods revolution is just beginning among Ethiopia‘s increasingly urban population

and will no doubt gather substantial momentum in the next five years.

4. Emerging export industries—in mining, manufacturing, and exportable services—are already

making their mark as sources of growth in the Ethiopian economy and will soon overtake

traditional foreign exchange earnings from coffee and other agricultural goods.

However, two overwhelming pressures in Ethiopia’s current economic climate—inflation and

challenging new regulations—are putting strains on private business and could potentially dent the

country’s positive growth prospects:

5. High inflation has been and remains a major weakness of economic policy, and poses serious

threats to the business environment by discouraging savings and distorting investment decisions.

6. Abrupt and challenging regulatory changes have also brought additional pressures to businesses

in the areas of licensing, registration, taxation, retailing, land acquisition, real estate, and banking.

Fortunately, these recent pressures—including inflation—can be addressed and contained by

actions firmly within the control of domestic economic policymakers. Indeed, taking an economic

policymaker’s view, we would:

7. Privatize the ―BIG 5‖ state-owned companies, even if just partially, as this not only provides a

major source of GTP financing but also offers a cure for inflation.

8. Modify regulatory policies that inflate business costs and depress urban consumer incomes.

9. Go for bolder and more unconventional agricultural policies, as would be more fitting for a

developmental state.

10. Put in place a smarter set of policies for the financial sector, the lifeblood and vital ―circulatory

system‖ for any fast-growing and modernizing economy

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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 private

companies 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, power

plants) 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 it

actually flows into private sector companies, large segments of whom stand to be major

beneficiaries of bigger government budgets.

Public investment has in recent years been one of the major drivers of economic growth in

Ethiopia. Total government spending, which is for the first time crossing Birr 100 billion this year, has

doubled in just the last three years and quadrupled in the past six years (Table 1.1). Expressed in relation

to GDP, total government spending now makes up nearly one-fifth of GDP. Besides the growth in

government, the activities of state enterprises have multiplied in parallel, a trend best captured by the five-

fold rise in their borrowing from the banking system, which is up from Birr 8 billion about five years ago

to an estimated 42 billion in FY 2010/11. The combined economic weight of both government and state

enterprise activity has led to a situation where roughly two-thirds of all banking system credit is now

directed 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 an

even bigger role for public sector spending in the coming years. For the five-year GTP period as a

whole, the sum of budgetary government spending and off-budget spending by public enterprises is

programmed 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 sector

activity in the coming years. One of the most distinctive features of the public spending envisaged above

is 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 in

government spending among African countries, where the normal capital expenditure share in

government spending is near 25 percent (Table 1.4). This means that much more spending is being

funneled to capital projects (roads, power plants, water systems, etc.) and to capital equipment (machinery

and equipment imports), rather than to current expenditure items such as wages, salaries, and operational

and maintenance costs.

1Data for government expenditure based on MOFED budget data. Credit to government and credit to public sector figures from

the 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 are

its large borrowing requirements and its substantial foreign currency demands, issues that are addressed later in Chapter 7.

http://www.imf.org/

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The public investments planned for the coming five years can be seen as putting in place the

necessary ―hardware‖ and ―software‖ needed for a modernizing economy.

―Hardware‖ investments encompass the whole range of physical and infrastructural facilities

needed 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 facilities,

etc. Among the notable plans in this area are:

Roads: Building 71,000 kilometers of new roads, including all-weather roads to virtually all

kebele administrations and a modern Birr 6 billion eight-lane expressway linking Addis Ababa to

Adama (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 4

new cargo carriers, and building a huge new cargo hub at Bole Airport with a capacity to handle

125,000 tons per day in perishable export commodities, such as high-value fruits and vegetables.

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 accessibility to 45 percent of the country‘s 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 the

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‖ investments are best seen as the human capacity building required to run an increasingly

modernizing national economy-– from basic health care to ensure a capable labor force to the

provision of adequate education at the primary, secondary, and tertiary level, in additional to

specialized vocational and technical training schools needed to run an increasingly complex economy.

Among the key targets in this area are:

Education: Increasing (net) primary enrollment to 100 percent; raising the number of students at

government universities to near half a million students (from 185,000 at present); ensuring

universal education to 8th grade; raising the number of students at Technical and Vocational

schools to above 1 million (from 717,000 at present); establishing a public university student

body that will have 40 percent of students in science/engineering fields; ensuring 9,000 new

medical school entrants on an annual basis.

Health: Reaching a 100 percent primary health services coverage (from 89 percent) through

large-scale expansions in public health centers and hospitals, and ensuring large reductions in

infant 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 whole

appropriate, but how such investment is to be financed remains only partially addressed (see

Chapter 7) and the issue of who should carry out the investments is—in at least three specific

cases—quite questionable. The case for government investments in public goods such as roads and

power 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 handicapped:

farmers seeking to take their goods to urban population centers, industries requiring water and electricity

to function; exporters requiring modern air, road, or rail links to deliver their goods on time, and so forth.

The lessons of other large and fast-growing developing countries—from Nigeria and its power shortages,

to India‘s road and port-related deficiencies— all point to the need to address infrastructure bottlenecks

well before they become handicaps to growth. The ―infrastructure gap‖ is a curse faced by many

countries in Africa and it is only to be welcomed that public policies in Ethiopia are addressing not just

present but also prospective needs in key public goods, all of which is something that can work to ―crowd

in‖ private investment. Moreover, many of the basic social sector investments that have public goods

characteristics—basic healthcare and education—should be done by no other than the government since

private returns in such activities are often not sufficiently attractive. However, in three specific areas,

most notably the planned public sector involvement in building railways, sugar factories, and a large

metal 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 themselves

and 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 and

preferable (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 capital

expenditure, it is possible to identify three groups of major beneficiaries:

Contractors: The building blocks of most of planned government projects are provided by private

contractors, as they construct roads, schools, clinics, government buildings, power plants, railways and

the like. Thus, road and building contractors are obvious public investment beneficiaries, sometimes in a

very significant way—for example, the single biggest item in the government budget for many years now

has been road-building, which has benefited dozens of private companies engaged in this sector. More

specifically, of the Birr 73 billion spent in the last 14 years on road building projects, only 6 percent was

undertaken by the government‘s own agency, the Ethiopian Road Authority, while over 94 percent was

provided to several dozen private domestic and foreign companies.4 The implied income gains for such

contractors 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 new

parastatal, the Ethiopian Railways Corporation, is to spearhead work in building railways between cities and within Addis Ababa.

In the metals, steel production, and engineering sector, a new behemoth, METEC, is an ambitious project to supply the needed

metal 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 Authority‘s 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 local

beneficiaries of such spending have included ―Grade 1‖ domestic contractors (of whom there are 63

registered by the Ministry of Works and Urban Development, each generally employing more than 1000

workers) and dozens of smaller scale road and building contractors who take on piecemeal tasks from the

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 show

143 building contractors, 38 general contractors, and 6 road-specific contractors in operation, all

substantial 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 subset of

projects with high contractor use (namely roads, health, education, fertilizer and sugar industry, railways,

airlines, energy, and condominium construction), we estimate that the GTP will provide business

opportunities to contractors on the order of Birr 80 billion per year and prospective profits of 8 billion per

year (Table 1.5).5

Equipment and Service Suppliers: The delivery of goods to government institutions and facilities once

they are operational represents a second major line of business that huge public investments will be

bringing to private businesses. This beneficiary group will include, for instance: road work equipment

suppliers (graders, excavators, dump trucks); cable suppliers for the electricity company‘s huge

distribution expansion; private freight vehicle owners to transport thousands of tons of inputs and

equipment; private water drilling companies for the thousands of new water wells to be dug every year;

textbook suppliers for the thousands of schools being put in place; pharmaceutical and medical equipment

suppliers to sufficiently stock thousands of health centers; and computer hardware and software suppliers

that will deliver a whole range of information technology services to ministries, public sector agencies

and large state enterprises. Focusing on the Information Technology sector, for example, where

initiatives are underway to introduce technology-aided services in utility bill payments, social safety net

payments, and various other e-government initiatives, assuming one percent of capital expenditure is on

ICT expenditure (based on the norm in many African countries), this translates to total spending of Birr

7.5 billion in this sector and profit prospects of above Birr 1 billion given 15-20 percent margins

commonly seen in IT industries.6

Employees: Needless to say, public institutions cannot function without an associated human resource

base, and the hundreds of thousands who join the public sector as teachers, health workers, police, and

office 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 to

854,000 individuals. With the expansion of health and education services laid out in the GTP, we

estimate that 325,000 additional individuals will get public employment in the major lines of work

undertaken by the government, representing a 27 percent addition from present levels and a crossing of

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 percent

of 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 years. 7 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. This

includes goods and service suppliers to many of the direct beneficiaries of government contracts. For

example, four important input suppliers to road/building contractors are themselves large business

operations indirectly tied to government spending: quarry owners and asphalt material producers (who

provide the needed raw material and foundations for all road-building projects) as well as cement

companies and iron 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 multiplicative

effect on overall economic activity, thereby placing public investment under the GTP—already two-fifths

of 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 Enterprises

or SMEs should also become major beneficiaries. Many public projects will seek to engage directly

with SMEs, including for example in condo construction (a Birr 1.4 billion project), small-scale road

projects (such as cobblestone road or side-walk projects), and other similar activities. Moreover, direct

set-asides for SMEs include some Birr 6.5 billion in funding and land allocations of up to 15,000 hectares

for work spaces. The combined impact of the above, if the targets are realized as programmed, is to see

SMEs provide up to 3 million employment opportunities, in large part driven by public sector initiatives.

The range of businesses propelled by large public investments will, of course, not be limited to

domestic firms—indeed foreign suppliers are likely to capture an increasing share of huge public

investments given the size, complexity, and financing demands of the projects involved. Among

already active or soon to be entering foreign suppliers handling large public investment projects include:

Salini 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 China

Communication Construction Company (which is undertaking the Addis Ababa-Adama highway and the

Bole Airport-Meskel Square expressway) and the China Railway Group Ltd (which is working on the rail

link to Djibouti); and Indian companies such as the Overseas Infrastructure Alliance, which is involved in

projects linked to the state-owned sugar factories and part of the planned railway project. Beyond

contractors, there is bound to be a more prominent role for foreign capital equipment suppliers given

many 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 49

billion) in profits (Table 1.7 and 1.8). In some of these cases, the ability to arrange financing from home

country governments, institutions or banks provides these private or quasi-public companies with a

competitive edge. Finally, it is worth noting that foreign consultants and advisory service providers will

also continue to be important beneficiaries of and contributors to public sector programs. In recent years,

consultant groups involved in large-scale government or joint government/donor initiated projects have

included firms as varied as McKinsey, Booz Allen, Chemonics, ACDI/VOCA, DAI, Fintrac, and many

others—all consultancy and technical assistance providers whose volume of work will continue to

multiply in the years ahead as their specialized knowledge and expertise is sought to help in the

successful 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 million

cement factory by MIDROC Ethiopia, and new planned cement plants by Lafarge (the world‘s largest cement producer), Dangote

Industries (Africa‘s largest cement producer based in Nigeria), and local entities such as Habesha Cement.

8


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‖ components

and the ―software‖ services needed to implement the government’s ambitious development

programs. This is, of course, not necessarily a bad thing, and is not much different from experiences in

many 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 such

a significant reliance on government-affiliated projects. For one, such firms may face large declines in

activity if and when government scales back its investments over time. In addition, there is a risk that the

favorable business conditions for this ―government-affiliated‖ private sector, which benefits from bigger

budgets, misrepresents the more challenging conditions that may be faced by the rest of the private sector,

whose line of business lies elsewhere. In other words, the private sector that emerges in such an

environment should ideally not lose its dynamism, ignore other domestic business opportunities, or avoid

export markets in light of potentially more attractive and readily available government-linked business

opportunities. More fundamentally, while government and the affiliated private sector will unavoidably

be an engine of economic growth for some time given Ethiopia‘s need for basic public infrastructure, the

economy must not be driven by this single engine alone but rather be supplemented by another equally

dynamic private sector whose primary line of business is focused on, among other things, Ethiopia‘s agri-

business potential, on its rising domestic consumer markets, and on its barely exploited export 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, Federal 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 92,049 106,125 130,187 161,452 201,146 690,959

Non-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 95,975 122,222 406,905

Current Expenditure 40,046 45,224 54,383 65,477 78,924 284,054

by sector

Agriculture & Food

Security 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 47,098

Road 17,304 21,752 28,762 36,581 45,898 150,297

Water 5,897 5,701 8,088 11,888 17,321 48,895

Other 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 11,048 161,704

Ethio-Telecom 6,580 1,900 13,190 - - 21,670

Energy 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 & Food

Security 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

848,235

Source: 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 on

Contractors

Gross expenditure on

Contractors

Estimated

Contractors' Profits

Roads 150,297 90% 135,267 13,527

Health 47,098 60% 28,259 2,826

Education 156,223 60% 93,734 9,373

Fertilizer complex 13,205 30% 3,962 396

Sugar Industry 72,781 30% 21,834 2,183

Railway 110,796 40% 44,318 4,432

EAL 31,142 0% - -

Energy 177,735 30% 53,321 5,332

AA 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 1,059,263

2013/14 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 28,115 340,065

Source: 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

Foreign

Suppliers

Gross expenditure

on Foreign

Suppliers

Estimated Foreign

Suppliers' Profits

Roads 150,297 0% - -

Health 47,098 20% 9,420 1,413

Education 156,223 0% - -

Fertilizer complex 13,205 60% 7,923 1,188

Sugar Industry 72,781 60% 43,669 6,550

Railway 110,796 60% 66,478 13,296

EAL 31,142 90% 28,028 5,606

Energy 177,735 60% 106,641 21,328

AA Condos 14,960 0% - -

Total 774,238

262,158 49,381

Source: 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-Sector

Birr

Millions Business Beneficiaries

Foreign or

Domestic

Energy 177,735

Salini for Abay Dam construction;

Cement companies; Hydro plant

equipment producers

Mainly foreign, some

domestic

Railways 110,796

China Railway Group $1.6 bn; OIA

(India); local contractors; METEC


domestic

Sugar Industry 73,575 Sugar plant equipment producers


domestic

Chemical, Pharmaceuticals &

Cement Industries 34,593 Private and state enterprises Mainly domestic

Ethiopian Airlines 31,142 Boeing, Airbus, Bombardier, Fokker Exclusively foreign

Ethio Telecom 21,670

Telecom and networking equipment

providers Exclusively foreign

Metal Engineering Industry 20,466 METEC


domestic

Mgmt & Privatization of Public

Enterprises 19,095 State enterprises Mainly domestic

Textile & Garment Industry 15,946 Private enterprises Mainly domestic

AA Condo Construction 14,960 Domestic contractors and SMEs Mainly domestic

Fertilizer Industry 13,205 New state enterprise Mainly domestic

Leather Products Industry 6,734 Private enterprises Mainly domestic

Ethiopian Maritime Transit Service 6,666 Domestic transit service providers Mainly domestic

Micro & Small Scale Enterprises 6,600 Domestic SMEs Mainly domestic

Ethiopian Airports Enterprise 6,198

Domestic contractors-- runway, civil

works producers Mainly domestic

Agro-processing Industry 3,347

Domestic contractors and agricultural

producers Mainly domestic

Ethiopian Dry Port Service 3,276 Domestic contractors Mainly domestic

Ethiopian Shipping Lines 3,187 Ship-builders (China, Korea) Mainly foreign

Total 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 a

leap in the productivity of smallholder agriculture—is a realistic and likely possibility within

the 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 the

Ethiopian 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 commercial

and 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 strong

policy 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 interventions

within 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 GTP and will

most likely achieve it in our view. The need for a structural transformation in this sector is not in doubt,

given Ethiopia‘s 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 Ethiopia‘s

smallholder farmers: (i) cover only 19 percent of potentially cultivable land; (ii) utilize irrigation for only

a tiny share (1.3 percent) of their land; (iii) apply fertilizer to only 36 percent of land, and (iv) produce

yields that are just half of the world average (Table 2.1). These four remarkably low starting conditions

offer tremendous scope for improvement with carefully planned policy interventions and with the shifting

role of farms as business enterprises, be it for smallholders moving from subsistence farming towards

production of a marketable surplus or for large modern farms with an explicitly commercial orientation.

Changes in farm types, in farm inputs, and in farm products will be the most notable features of the

agricultural sector in the coming years. To be more specific, farm types will gradually evolve to

include some large-scale, commercial farms; farm inputs will be enhanced to deliver better seeds, more

fertilizers, and other yield-increasing inputs; and farm products will expand increasingly to include high-

value, export-oriented produce. All of the above are in line with the key objectives of the GTP, which has

laid 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, rising

yields, 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, and

second because the still-dominant smallholder agricultural sector is set to benefit from a wide range of

output-increasing policy interventions (in the form of more irrigation, more fertilizers, better seeds and

better farming practices).

New Commercial Farms

14


For food-producing commercial farms, although this is a sector always vulnerable to ―execution

risks,‖ there is little reason to doubt—in our view—whether the promises of increased food output

will 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 2009

Macro Handbook over a year ago, a combination of policy initiatives have laid the groundwork for

the 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 land

leases via the Federal Government; and a strong package of incentives. The latter include: (i) income

tax holidays that range from 3 to 7 years where the grace period becomes incremental depending on

the agricultural value added created by the investment scheme and the proportion of exportable

products; (ii) duty free imports of capital goods used for projects; (iii) no restrictions on repatriation

of 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 water

sources without charged, and ; (vi) long-term leases (up to 45 years) with fixed prices (which are

generally set for a period of 10 years and then subject to an increase of only 20 percent).9 All of the

above make for very favorable supply-side factors which, alongside equally favorable demand-side

factors (rising populations, incomes, and urbanization), make for very positive prospects for rising

commercial farm production.

Second, a big part of the increased food production is coming simply from putting new lands

under commercial cultivation, a one-off and relatively ―easy‖ means of boosting food

production. Ethiopia is one of 11 African countries identified as having the largest amounts of still-

uncultivated land, estimated at 59 million additional hectares according to national statistics.10

A

large part of the still uncultivated lands are being developed via Federal Government allocations for

new commercial farms. Our compilation of the relevant data suggests that about 350,000 hectares, or

one-tenth, of the planned 3 million hectare allocation has already taken place. Of the already granted

allocations, we find that the five largest commercial land recipients are: (1) Karuturi Agro Products

Plc; (2) Shapoorji Pallonji; (3) BHO Bio Products Plc; (4) Ruchi Soya Industries; and (5) CLC

Spentex 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 5,000

hectares. We also find that the mix between foreign and domestic investors (based on land area) is

about 5-1, though this changes to just 2-1 if we exclude the top two cases. In terms of crop

production, plans by commercial farm investors are mainly focused on cereals and cash crops. The

focus on basic cereals such as wheat and maize makes particular sense, given the country‘s large

reliance on importing such food items in recent years: for example, cereal imports (which are

comprised mainly of wheat), have jumped from just $157 million about a decade ago to $480 million

in 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 hectare

per year. 10 A recent Mckinsey study notes that 60 percent of the world‘s total uncultivated arable land is within Africa, while according to

Ministry of Agriculture and CSA‘s latest land utilization data Ethiopia is showing around 74 million hectares of arable land of

which only 15.1 million hectares is currently cultivated counting both small-holder and commercial farms.

15


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 producing

their first harvests. Some of the initial beginners include Karuturi PLC, Saudi Star, and BHO Bio

Products. Many of the above have spent the past two years in the clearing and preparation of lands

for planting. Most of the largest farms expect to realize their first crops in 2012 and are targeting

yields that will be about 2 or 2½ times the norm seen from smallholder farms. If this is realized, the

initial allocation of around 227,000 hectares to the top five commercial farm allocation recipients

alone could potentially be the equivalent of almost half a million smallholder farms based on the

latter‘s 2010/11 average produce and yields.11

All of the above encouraging trends—favorable policies, the large pipeline of new projects, and the

start of several promising commercial farming operations—are of course subject to risks and two

in 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 loan

financing; or encountering operational problems related to poor infrastructure, land clearing, and so forth.

However, it is becoming increasingly unlikely for investments to fall through due to such factors. The

dedicated government unit at the Ministry of Agriculture is, for example, screening potential investors

with much stricter standards to ensure that initial capital outlays are actually put in place and tight

‗delivery periods‘ of as short as six to twelve months are being imposed as an additional check on

performance (i.e., investors who fail to develop a given tract of land as promised lose the lease to the

undeveloped parts of land). Second, there is a modest risk that a backlash against commercial farm

allocations builds up as the public discourse on this issue is sometimes dominated by highly critical

commentary focused on themes of ―land-grabbing‖, population displacement, and/or environmental

concerns. However, while possibly legitimate concerns in other parts of the world, the validity of such

criticisms 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-fragile

food security conditions; the allocations are open to and being taken up by domestic as well as foreign

investors; the scale of the land allocations involve just 3 percent of total land and cannot by any stretch be

seen as large-scale land-grabbing; and the areas of land involved are generally remote areas with no or

very little populated settlements. For these reasons, we think both of the above mentioned potential risks

are unlikely to adversely impact the production increases envisaged from most of Ethiopia‘s commercial

farms.

Expansion in already-established agricultural exports

Beyond the changes expected from new commercial farms, a large part of the anticipated

agricultural transformation in Ethiopia will come from the planned boost to six agricultural

commodities 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 18.5

million tons of cereals, which gives an average farm size of 1.2 hectares per small-holder farmer and an average yield of 1.75

tons per hectare. Using 227,000 hectares for the (initial) land-holding of the ―Top 5‖ commercial farms and applying 2½ the

yield of smallholders gives an estimated ―Top 5‖ commercial farm production of 992,000 tons which is roughly the output

produced by 475,000small-holder farmers. Accounting for the extra anticipated allocations to these same ―Top 5‖ commercial

farms would double their land size to near 500,000 hectares and imply a potential output gain that is close to that of one million

(current) smallholder farmers.

16


particularly well developed (coffee, oilseeds, pulses, and flowers) and two of which are only just

emerging (fruits and vegetables and meat and livestock). For all six commodity groups, the next five

years are expected to show large production and export increases (Table 2.4), sometimes as much as three

to five-fold increases. As these sectors are almost exclusively in the private sector, these ambitious export

increases 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 offer

promising 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 country‘s agricultural exports. With

the exception of the flower sector, which mainly comprises several dozen large, labor-intensive

greenhouse-using farms, the agricultural exports are largely grown by small-holders whose produce is

aggregated by cooperatives or traders for supply to central markets. Production and yield-improving

initiatives for the smallholder sector (see below) will thus provide part of the underlying expansion

for this sub-sector. But, in addition, changes in the ‗super-structure‘ of markets and institutions in

which these products operate will also help. Products like coffee and sesame that are currently traded

at the Ethiopian Commodity Exchange, for example, stand to benefit from two key contributions of

the ECX—the incentive to provide higher output across all quality levels (via more readily

transparent prices) as well as the incentive to focus on higher value produce (given price

differentiation by quality).

Expansion in fruits and vegetables sectors: Despite a potential for fruits and vegetable exports that is

as big or even bigger than flowers, Ethiopia‘s exports in this area have only recently and very

gradually begun to take off. This is a promising development, as the production of fruits and

vegetables tends to offer a high-margin and more stable business opportunity in contrast with the

flower sector, which tends to be a low-margin, high volume business and one that, as a

luxury/discretionary good, tends to be susceptible drops in demand during difficult economic

conditions in European markets. Moreover, the potential for growth in fruits and vegetables is as

large as what occurred in the flower industry: Kenya, for example, exports almost the same amount of

flowers ($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 and

vegetable export sector is still only beginning ($32 million in exports). Two notable challenges do, of

course, exist in this area and explain part of the divergent performance: (i) global health and hygiene

certification 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 difficult

since fruits and vegetables (much more so than flowers) have demanding temperature control and

time-to-market requirements. Both these challenges are gradually being addressed, however, as air

cargo issues are being eased with Ethiopian Airlines rapid expansion and some pioneering firms with

the requisite global certification standards are emerging. For example, several firms now have

―Global Gap‖ certification and regularly supply UK and other European supermarkets with vegetable

exports of several million USD dollars per year.

Expansion in Livestock and Meat Sectors: The livestock segment of the agricultural sector and one

of its primary end-products (meat) are likely to become a major part of the agricultural transformation

in Ethiopian given the country‘s livestock population (first in Africa, tenth in the world) and a

17


proximity to export markets that happen to have high demand for such products (North Africa and

Middle East). The GTP targets in this area foresee a quantum jump in activity levels, as seen from

the planned export increase in livestock exports (from 334,000 cattle heads in FY 2009/10 to 2.3

million cattle heads in FY 2014/15) and in meat exports (from 10,182 tons in FY 2009/10 to 111,000

tons 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 88

percent in just the first quarter of this fiscal year). For meat exports, in particular, most of the growth

can be handled by large capacity-raising and/or expansion plans from some the largest players such as

Luna, 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 doing

so—given the very promising market opportunities in this area.

Smallholder farms

A leap in the productivity of smallholder agriculture—involving the 12 million small farms

currently operating in Ethiopia—is the second and simultaneous transformation expected within

agriculture to boost food production levels and thereby stimulate overall economic growth. In this

case, although the outcomes involved are influenced by a much greater range of variables than is the case

for commercial farms, the overall prospects are still strong enough in our view that a major increase in

smallholder agriculture is achievable. We would question whether a doubling of agricultural output—as

envisaged under the GTP—is possible without a more radical set of policies (see Chapter 9), but there is

still a package of policies and interventions that in all likelihood can sustain agricultural growth by at

least 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 are

welcome for their comprehensive and complementary nature. Many of the policies have already

been in place gradually in recent years and explain the rising production and yield figures registered so far

(Table 2.5). At the same time, the intention is for an intensification of these early efforts, including

through the efforts of a newly formed Agricultural Transformation Agency that is backed with high-level

funding from the Gates Foundation and other donors and that can potentially play a spear-heading role in

precisely the task—of agricultural transformation—for which it is assigned. Most notable among the

public interventions planned under the GTP for the smallholder agriculture sector include improving seed

quality and supplies, expanding irrigation, intensifying fertilizer use, upgrading farmer extension services,

and 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 Ethiopia’s agriculture; this includes upstream industries

that provide inputs to farms as well as downstream industries that make use of the outputs

produced by farms. The striking element of Ethiopia‘s agricultural sector has been the limited number

of such upstream and downstream industries, especially in the form of commercially established operators

that have joined these activities for long-term, profit-making motives as with any other business

opportunity. In this connection, there is much scope for the emergence and growth of upstream input-

providing industries in areas such as the provision of: organic and chemical fertilizers; higher-yielding

seeds and plantings; irrigation systems and their associated parts such as water pumps and steel pipes;

18


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 discussed in

Chapter 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 downstream

businesses, 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 Ethiopian

context, this implies that an extra Birr 70 billion can potentially be derived from agriculture-affiliated

upstream and downstream industries over time, including (based on the McKinsey‘s indicative

proportions for African countries) activity levels that—focusing on three large segments alone—could be

as large as Birr 17 billion in fruits and vegetables processing, Birr 15 billion in grain processing, and Birr

8 billion in livestock related downstream industries.13

To summarize, given Ethiopia’s very low base when it comes to agriculture productivity and value

added, a combination of policy interventions and investor initiatives can bring quick and

potentially 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 a

transformative impact in boosting demand for a wide range of basic consumer goods, as is elaborated

further 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) 215 318 530 997

Source: CSA Agricultural Sample Surveys, FAO Country Stat, IFPRI

12 A recent synthesis report of diagnostic studies and recommendations on Ethiopia‘s agricultural sector entitled ―Accelerating

Ethiopian 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 the

Agricultural 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 McKinsey‘s estimate—

based on African country norms—of potential upstream industries equivalent to 4 percent of agriculture value-added and

downstream industries of 28 percent of agricultural value-added. Within the latter, the largest potential opportunities are

identified as being with fruits/vegetables processing (28 percent of downstream industry value-added), cereals processing (24

percent) and livestock processing related industries (14 percent).

19


Table 2.2 GTP Targets for Agriculture and Rural Development

Description of Targets 2009/10 2014/15

Cultivated Land

1. Total cultivated land utilized by major food crops (mln ha) 11.25 12.17

2.Production of cereals (mln ha) 9.1 9.6

3. Cereals productivity (qt/ha) 17 22

Coffee production and productivity

4. Cultivated land by smallholder farmers (ha) 462,000 815,000

5. Coffee production (tons) 341,000 831,000

Livestock development

6.Cattle fed production (qt) 50,000 145,000

7. Improved cattle breeds (%) 10.3 37

8.Production and distribution of improved livestock gene (mln dose) 0.35 2

9. Proportion of livestock vaccinated (%) 40 65

10. Proportion of low grade hides and skins (%) 50 15

11. Production of improved animal fodder seeds (qt) 50,000 145,000

Agricultural inputs supply

12. Supply of improved seeds (mln qts) 0.56 3.6

13. Supply of chemical fertilizers (both DAP and Urea) (mln tons) 0.83 1.66

Agricultural extension

14. Number of beneficiaries of agricultural extension services (mln) 5.1 14.6

15. Of the beneficiaries of agricultural services proportion of women and youth (%) 40.0

Improving soil fertility

16. Areas under vertisol development( mln ha) 1 3

17.Acidic land treated with lime (ha) 2,210 37,850

Natural resource conservation program

18. Area of land rehabilitated (mln ha) 3.21 10.21

19. Land developed under community based water shade development program (mln ha) 3.77 7.78

20. Total area of land subjected to soil fertility research (mln ha) 0.894 2.82

21. Total area of land covered with forest and with forest master plan (mln ha) 0.7 2.2

22. Area of land covered with multipurpose trees (mln ha) 6.06 16.21

23. Forest coverage (mln ha) 13 18.23

24. Increase multipurpose trees (ha) 5,062 10,154

25. Natural resources conservation activities in pastoral areas( ha) 200,000 350,000

Small scale irrigation program

26. Land developed under small scale irrigation (mln ha) 0.853 1.850

Food security

27. Number of households participate in safety net programs (mln) 7.1 1.3

28. Food reserve (mln tones) 0.41 3

Agricultural marketing

29. Coffee export (tons) 172,210 600,970

30. Coffee export earnings (mln USD) 528 2037

31.Increase export earning of oil seeds (mln USD) 358 1120

32.Increase export earnings of pulses (tons) 129.86 882

33. Increase the export of oil seeds (tons) 299,198 724,216

34. Increase the export of pulses (tons) 225,446 1,120,981

35. Increase the live animals exported (no.) 333,743 2,353,000

36. Meat export (tons) 10,180 111,000

37. Live animals and meat export earnings (mln USD) 125 1000

38. Earning from flowers export (mln USD) 170 535

39. Earning from export of vegetable, herb and fruits (mln USD) 31.7 948

40. Earning from export spices (mln USD) 18.57 30

41. Export of spices(tons) 15,594 34,240

42. Export of gums and incense(tons) 4,370 10,233

43. Export earnings from gums and incense( mln USD) 12.68 33.43

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 of agricultural products, 5859 mln flower cuts and 2.35 mln live animals

Cooperative development

45. Number of primary cooperatives 33,636 56,904

46. Number of cooperatives unions 212 546

20


Agricultural research

At the end of the plan period new technologies development in cereals, livestock, soil, forest development and agricultural mechanization will reach 265,140,41,219and 836, respectively

Private investment in the agricultural sector

47.Production of coffee and and tea and other exports crops(mln tons) 0.251 1.81

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 3,000

50. Flowers production(mln cuts) 2,748.0 5,859.1

51. Land under the production of vegetables, fruits and herbs(ha) 2,472 33,000

52. Production of vegetables, fruits and herbs(tons) 58,400 979,600

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

21


Table 2.3 Federal Land Allocations to Commercial Farm Investors in Ethiopia

No. Name of Investor Year Country of Origin Region of Investment Investment Activity Hectares

1

Karuturi Agro Products

Plc. 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 Industries

Limited 2010 India

Benshangul Gumuz &

Amahara Growing Cotton 25,000

6

Huanan Dafengyuan

Agriculture 2010 China Gambella Growing Sugarcane 25,000

7 Adama

2010 Ethiopia SNNPR Growing Cotton 18,516

8 White field

2010 Indian SNNPR Growing Cotton 10,000

9

Saudi Star Agricultural

Development 2008 Saudi arabia Alwero, Gambella Wheat, maize and rice farming 10,000

10

Sannati Agro Farm

Enterprises 2011 India Gambella

Growing Rice and rotational pulses

& cereal crops 10,000

11

Daniel Agricultural

Development Enterprise 2010 Diaspora SNNPR Growing Cotton and Grains 5,000

12

Mela Agricultural

Development PLC 2010 Ethiopia SNNPR Growing Cotton 5,000

13

Access Capital Services

2011 Ethiopia Benshangul Gumuz Development of Sesame, Cereals & Pulses 5,000

14 Tracon Trading PLC

2011 Ethiopia Benshangul Gumuz Growing Cotton 5,000

15 Dr. Tamie Hadgu

2011 Diaspora SNNPR Growing cotton and seeds 5,000

16 Bruhoye

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

17

Lucci Agricultural

Development 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

20

ASKY Agricultural

Development 2011 Ethiopia Benshangul Gumuz Growing Cotton 3,000

21

Tsegaye Demoz

Agricultural Development 2010 Diaspora SNNPR

Growing Cotton, Sesame and

Soyabean 1,000

22 Reta

2010 Diaspora SNNPR Growing Cotton and Grains 2,137

23 Keystone

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

22


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 2,037

Major Food Crops 19,392 26,774 Oilseeds 358 1,120

Root Crops 1,806 5,907 Pulses 130 882

Industrial Crops 630 1,175 Flowers 170 535

Spice Crops 182 322 Spices 19 30

Stimulant Crops (Chat) 462 1,040 Fruits & Vegetables 32 948

Flowers (Mn. Stems) 2,748 5,859 Natural Gum 13 33

Fruits & 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 FOR

PRIVATE PEASANT HOLDINGS

Production levels (Millions of tons)

Cultivated Area (Millions of

hectares)

Yield (Tons per hectare)

2007/0

8

2008

/09

2009/

10

2010/11 2007

/08

2008/

09

2009/

10

2010/11 2007/08 2008/

09

2009/

10

2010/1

1

Total

Grain 16.1 17.8 19.4 21.2

Total

Grain 10.9 12.4 12.7 13.0

Total

Grain 1.5 1.4 1.5 1.6

Cereals 13.7 15.1 16.7 18.6 Cereals 8.7 9.8 10.2 10.6 Cereals 1.6 1.5 1.6 1.7

Pulses 1.8 2.0 2.0 2.0 Pulses 1.5 1.8 1.7 1.6 Pulses 1.2 1.1 1.2 1.3

Oilseeds 0.6 0.7 0.6 0.6 Oilseeds 0.7 0.9 0.8 0.8

Oilseed

s 0.9 0.8 0.8 0.8

GROWTH RATES (%) GROWTH RATES (%) GROWTH RATES (%)

2007/08 2008/09 2009/

10

2010/11 2007/

08

2008/0

9

2009/

10

2010/1

1

2007/08 2008/

09

2009/

10

2010/1

1

Total

Grain 7.8% 10.5% 8.9% 9.6%

Total

Grain 3.5% 13.4% 2.7% 1.9%

Total

Grain 4.1% -2.6% 6.1% 7.5%

Cereals 6.5% 10.1% 10.6% 11.1% Cereals 3.1% 11.9% 4.9% 3.7% Cereals 3.3% -1.6% 5.5% 7.2%

Pulses 12.9% 14.7% -0.2% 0.2% Pulses

10.1

% 18.2% -4.5% -8.3% Pulses 2.6% -2.9% 4.5% 9.2%

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% -2.4%

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

23


3. A Consumer Goods revolution among Ethiopia’s 85 million-plus population is just beginning

and 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 all

increasingly evident in Ethiopia.

We estimate that the collective buying power of Ethiopia’s urban consumers is now $6

billion (or Birr 95 billion), and this figure is set to expand by at least $1 billion (Birr 18

billion) 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 despite

plentiful 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 propel

the emergence and expansion of firms in the consumer goods space in the coming years. By

―consumer 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, basic

consumer 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 rising

by 30 percent annually in recent years and are set to rise by a somewhat reduced but still-high 20 percent

in the coming years.14

Within the past year, a step salary adjustment averaging 30 percent granted to

public sector employees in early 2011 has driven equal or higher step increases in many large private

sector employers.15

Such increases are enabling a gradually increasing number of urban Ethiopians to

spend rising portions of their income on consumer goods. For example, two separate sources of wage

statistics found median urban wages to be near Birr 1100 per month in 2009/10.16

However, driven by

government salary increases averaging 30 percent since then, median salaries would now be close to Birr

1430 per month. Moreover, based on the civil service scale and modified for the recent salary

14 Assuming real GDP growth of 11 percent and inflation of around 10 percent for the next few years, nominal GDP growth

should exceed 20 percent for all of the coming five year period. 15 Access Capital‘s Price Database shows, for example, large salary increases across many categories of wage earners between

January 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 the

urban employed population (Table 5.25). Focusing only on manufacturing firms, the ―Large and Medium Scale Manufacturing

and Electricity Industries Survey‖ released in 2011 shows average manufacturing wages of near Birr 1122 per month (Table

4.11).

24


adjustments, the distribution of income for those above the median would show 14 percent of urban civil

servants 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 earnings

profile across urban areas: substantial portions of the urban population are of course not as privileged as

the group of 854,000 civil servants (implying civil service salaries might over state average salaries) but,

at the same time, a sizeable group of employees in the manufacturing, banking, insurance, and

NGO/service sectors earn substantially higher monthly wages. On balance, we think the civil servant

wage 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 Ethiopia‘s urban employed, or roughly 2.5 million individuals, already earn the equivalent of at

least $1000 per year (equivalent to about Birr 17,200 per year or Birr 1430 per month), a noteworthy

threshold after which demand for basic consumer goods jumps sharply based on international experience

of consumer spending patterns.18

Favorable Demographics: With respect to demographics, Ethiopia will increasingly stand out favorably

from the consumer goods space perspective on account of its huge size (second largest population in

Africa, 14 largest in the world) and a very young demographic (44 percent of the population is under 15

and 73 percent under 30).

Urbanization-linked changes in consumption: Finally, adding to the impact of rising incomes and

demographic changes, will be the increasing urbanization and emerging living patterns evident across the

country, most notably in the form of condominiums, organized neighborhoods, and other high-density

living arrangements. Ethiopia‘s urban population has, for instance, recently crossed the 10 million

threshold according to national statistics, with 5.1 million of these employed and 2.5 million engaged in

salaried, wage-earning occupations. In line with the consumption patterns seen in other developing and

urbanizing 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 to

make up a large share of the consumption basket of most developing country consumers, its composition

will 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 food

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. Second,

as the share of food in total spending declines, this is typically taken up in by spending on housing/rents;

consumable basic household goods (toiletries, soaps, detergents); clothing and footwear; discretionary

consumables (soft drinks, beer, cigarettes, pastries/sweets); and durable household goods (simple

electronic goods; televisions; furniture; kitchen appliances). Consumption also shifts towards services,

including increased spending on telecom services (mobile phones and airtime); restaurants/cafes; private

education/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 the

Ministry of Labor and Social Affairs. 18 See McKinsey Quarterly‘s ―Africa‘s Path To Growth: Sector by Sector‖ report of June 2010 and its section on consumer

goods markets across Africa.

25


In the Ethiopian context, where within the consumer goods space is spending going to be most

concentrated? The clues are available from existing spending patterns as revealed by household surveys

and the composition of the consumer price index. We review both of these in turn:

Household expenditure patterns based on survey data: Data on urban household consumption

patterns are provided by periodic surveys conducted by the Central Statistical Agency. The most

recent survey showed that the typical urban Ethiopian household spent its income of the

following categories, in order of importance: food (34 percent); housing, fuel, water and energy

(24 percent); household furnishings (6.5 percent); clothing and footwear (6.2 percent); and

education (3 percent) (Table 3.2).

Composition of the Consumer Price Index: A much more disaggregated picture of the make-up

of urban consumption in Ethiopia is provided by the composition of the consumer price index. In

terms of broad categories, the largest items on which individuals spend their income are as

follows: food (41 percent), rental (11 percent), clothing and footwear (8 percent), transportation

(8 percent), household furnishings (4 percent) and education spending (4 percent). These

proportions show some differences, but not major deviations, from the household expenditure

surveys.

Putting together the data on the composition of urban spending (from the CPI) with data on overall

urban incomes makes it possible to arrive at reasonably good estimates of total urban spending in

the main categories of consumer goods. Starting with the calculation of overall urban incomes, we note

from CSA‘s urban employment and wages data that there was—as of 2011—a total of Birr 62 billion in

urban purchasing power from wage income alone (Table 3.3). Adding in three other sources of urban

incomes—dividend income, rental income, and remittance income— we estimate the collective buying

power of urban consumers to be Birr 95 billion (nearly $6 billion), or about 19 percent of aggregate GDP

(Table 3.4).19

Based on this aggregate urban consumer purchasing power, and applying the composition

of spending used by the CPI reveals the annual amounts spent in many specific consumer goods

categories (Table 3.5). Thus, for example, focusing on the largest items we estimate Birr 10.3 billion in

cereals-related spending (wheat, teff and maize primarily), Birr 10.3 billion in rent/home ownership

expenses, Birr 7.4 billion on transportation, Birr 6.6 billion on home furnishings, Birr 5.5 billion on

clothing, Birr 3.9 billion spent on education, and Birr 3.9 billion each on both ―food away from home,‖

and on edible oils. Beyond these major categories, consumer goods on which at least Birr 2 billion is

spent annually by urban consumers include vegetables, injera, peas and lentils, electricity charges,

kerosene, building materials, communication expenses, footwear and personal care items. Focusing on

implied future growth in these items (Table 3.5), the implied extra purchasing power from nominal GDP

growth rates of near 20 percent per year implies that at least 5 categories of consumer goods will see Birr

1 billion or more in annual market size increases (cereals, housing costs, household furnishings, transport,

and clothing), while another 8 will see market size increases of at least Birr 500 million (beef, food-away-

from-home, edible oils, bread, vegetables, electricity, education, communications).

19 As would be expected, the share of urban purchasing power in total GDP is much higher (17 percent) than its share in the

population (10 out of 84 million, or 12 percent). All data on urban employees, salaried numbers, and average wage levels are

from the Central Statistical Authority‘s August 2011 ―The 2011 Urban Employment-Unemployment Survey.‖

26


Based on the above data showing initial market size and anticipated annual increases, we think the

consumer goods space in Ethiopia over the coming years will be dominated by three high-potential

sub-categories: (i) consumer goods in which there is currently limited domestic value-added despite

plentiful supplies of needed inputs; (ii) consumer goods produced by basic, labor-intensive manufacturing

industries and that offer huge import substitution opportunities; (iii) consumer goods for which demand

jumps sharply once incomes cross a certain low threshold. A representative sampling of such consumer

goods 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 demand

for products such as different types of bread, pastas, baby food products, and confectionery products.

Based on the urban CPI index and estimated urban incomes, for example, the market for bread and

―pasta and macaroni‖ is already Birr 2.6 billion and Birr 0.5 billion respectively (Table 3.4), with

potential 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 rather

than consumed domestically as edible oils. Only a handful of edible oil plants operate (Addis Modjo,

Hamaressa, Adama, and Bahir Dar Food Oil factories), though these are now being joined by some

new foreign ventures (Ashraf and Acazis). Reflecting the still limited number of producers, edible oil

imports have risen 14-fold from just $18 million in 1999 to $248 million in 2010, equivalent to a Birr

3.2 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, this

implies that only 57 percent of the market is supplied by local producers, a ratio that can easily jump

in the years ahead.

Vehicles: Although not a mass market consumer good for the Ethiopian context, passenger vehicles

represent a very fast growing niche segment (annual vehicle registrations are rising by 65 percent per

year) despite extremely high tariffs on auto imports (up to 250 percent of the vehicle‘s value). Not

surprisingly, taking advantage of low taxes on parts for car assembly, several such firms are already

in or entering the market, including Holland Car, Lifan Automotive, Belayab PLC, Marathon Motors

(Hyundai), Mesfin Industrial Engineering (Geely cars), and Betret International PLC (BYD cars). All

of these, including possible additional entrants, could easily multiply their sales volumes given latent

demand 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 areas

outside the main cities. The current dominant suppliers (Coca Cola and Pepsi) have large capacity

expansion plans, including a doubling of production volumes within a couple years through new

production 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 positioned

within the top 30 global markets in per capita consumption of soft drinks in 2010, indicating yet more

scope for on-going capacity expansions.

27


Household consumables (such as soaps, toiletries, detergents) and basic medicines currently absorb

an estimated 2.1 billion in household spending but would grow by 420 million per year in the coming

years 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 household‘s incomes once basic

food needs are addressed. In many developing and developed country contexts, it is the norm for 25-

40 percent of a household‘s income to be devoted to meeting that household‘s housing needs, whether

in 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 estimated

shortfall of more than 400,000 housing units in Addis Ababa alone.20

Taking our urban income

estimate, allocating 25 percent of household income to rental/purchase costs would imply Birr 24

billion in opportunities for builders/renters of housing units.

Mobile phone ownership and service usage: Projections to raise mobile phone coverage from its

current levels of 10 million to 40 million in 2014/15 (as per the GTP) imply huge growth in mobile

phone hardware and telecom airtime sales. An extra 30 million mobile phone units implies sales of

625,000 mobile phone units per month or 21,000 per day. With respect to airtime, an extra 30 million

users in four years time, assuming Birr 50 (≈$3) airtime usage per user per month, implies an extra

Birr 18 billion (≈$1 billion) in annual telecom service sales from new subscribers and voice services

alone.

Private health and education services: Although still dominated by government institutions,

especially for basic health and education services, privately owned and run health and educational

institutions have mushroomed in recent years and appear likely to continue their rapid growth. In

Addis Ababa alone, for example, there were (as of 2011) 20 registered private hospitals, 342 private

clinics, 487 nurseries/kindergartens, 283 private schools and 38 private colleges/universities. Rising

populations, a preference for better quality services, and a demand for specialized offerings will all

push growth in this area. In terms of key pharmaceuticals used in the health industry, medicine

imports have jumped from $35 million to $321 million over the last decade, equivalent to a market of

Birr 5.5 billion that is also ready for at least partial import substitution in the case of basic ―mass-

market‖ medicines.

Entertainment services and venues: Based on their weights in the CPI, ―food taken away from

home‖ (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 1.4

billion respectively. The size and scope of the markets in this area is certainly corroborated by other

data, such as Addis Ababa business registrations which show: 4,380 registered restaurants/bars/cafes,

1,792 personal care & effects service provides (barbers, beauty salons, spas, etc.), and 395

exclusively ―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. For

Addis Ababa alone, for example, business registration data show close to 30,000 registered retail

traders, 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 lottery

of April 2010. A total of 485,000 individuals (almost one-seventh of Addis residents) applied for condominium units though

only 10,700 were made available (2.2 percent of total demand).

28


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 by

recent developments in just one corner of the consumer goods space: beer. Once an industry solely

operated by lethargic state-owned enterprises, the Ethiopian beer industry has in just the past year been

fully taken over by private operators (including two large foreign investors) and is set to see even more

entrants in the years ahead from at least three additional domestic brewers (Habesha Beer, Raya Beer, and

Zebidar Beer). What is particularly remarkable is the entry of two global multinational beverage

companies and their determined drive to join the domestic beverages market, even if this meant paying

premium prices to secure their investments: Heineken bought Harar Brewery for $78 million and Bedele

Brewery for $85 million while Diageo bought Meta Brewery for $225 million, resulting in a combined

sum of $388 million for the three breweries. By our calculations, the purchase prices paid amount to 15

times earnings for Harar Brewery, 23 times earnings for Bedele Brewery, and an astonishing 48 times

earnings for Meta Brewery. While it is the case that beer is a unique consumer product in some ways, the

bullishness shown by foreign investors in this sector does reveal many of the opportunities available from

Ethiopia‘s other consumer goods markets, including the potential to quickly increase sales given very low

levels of product penetration. Precisely for these reasons, foreign interest in the fast-moving consumer

goods 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 excluded

Source: Ministry of Civil Service (2009/10 Human Resource Statistics)

29


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 and

Services 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 group

Urban Non-

salaried group

Total Wage Paid

(in Birr) In USD terms

Numbers 2,544,615

2,595,216 … …

Mean Monthly

wage 1,063

957 … …

Monthly wage

paid 2,704,925,745

2,482,843,147

5,187,768,892 302,141,461.40

Annual wage paid 32,459,108,940

29,794,117,766

62,253,226,706 3,625,697,537

Source: 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 62,253,226,706

Dividend income 3,439,396,810

Rental income 6,225,322,671

Remittance 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

30


Table 3.5. Urban Consumption Estimates For 2011 (based on CPI Index)

Commodity Types

Weight in CPI

(%)

2011 Spending Level

(In Birr)

Estimated Annual

Incrase in Spending

(In Birr)

Food Items 41.0% 39,332,342,342 7,866,468,468

Cereals( teff, wheat, maize, etc) 10.7% 10,267,286,242 2,053,457,248

Beef 3.9% 3,742,281,901 748,456,380

Chicken & Mutton 1.4% 1,362,574,436 272,514,887

Food away from home 3.2% 3,070,590,278 614,118,056

Edible oils 3.2% 3,070,590,278 614,118,056

Bread 2.7% 2,590,810,547 518,162,109

Vegetables 2.6% 2,514,045,790 502,809,158

Injera 2.6% 2,494,854,601 498,970,920

Peas and Lentils 2.4% 2,302,942,708 460,588,542

Spices 1.9% 1,851,949,761 370,389,952

Sugar 1.8% 1,727,207,031 345,441,406

Coffee and Tea 1.6% 1,554,486,328 310,897,266

Milk and Eggs 0.8% 767,647,569 153,529,514

Potatoes, Other Tubers and Stems 0.7% 642,904,839 128,580,968

Milling Charge 0.5% 498,970,920 99,794,184

Pasta & Macaroni 0.5% 479,779,731 95,955,946

Other Foods 0.2% 220,698,676 44,139,735

Fruits 0.2% 172,720,703 34,544,141

Home-related 27.7% 26,582,675,772 5,316,535,154

Rent 10.8% 10,337,334,083 2,067,466,817

Household furnishing 6.9% 6,592,173,503 1,318,434,701

Electricity charges 2.7% 2,571,619,358 514,323,872

Kerosene 2.4% 2,274,155,925 454,831,185

Building material 2.1% 1,986,288,086 397,257,617

Charcoal & Firewood 1.6% 1,487,317,166 297,463,433

Water charges 1.4% 1,333,787,652 266,757,530

Services 17.4% 16,696,334,637 3,339,266,927

Transport 7.7% 7,388,607,856 1,477,721,571

Education 4.1% 3,934,193,794 786,838,759

Communication 2.8% 2,686,766,493 537,353,299

Entertainment 1.5% 1,439,339,193 287,867,839

Medical Care 1.3% 1,247,427,300 249,485,460

Clothing and footwear 7.8% 7,484,563,803 1,496,912,761

Clothing 5.8% 5,565,444,879 1,113,088,976

Footwear 2.0% 1,919,118,924 383,823,785

Personal care products 2.1% 2,015,074,870 403,014,974

Personal care 2.1% 2,015,074,870 403,014,974

Beverages 2.0% 1,919,118,924 383,823,785

Beer 1.5% 1,439,339,193 287,867,839

Soft drinks 0.5% 479,779,731 95,955,946

Other items 1.9% 1,823,162,978 364,632,596

Total Urban Consumption

Basket

100% 95,955,946,187 19,191,189,237

Source: CSA CPI COMPOSITION & WEIGHTS--Addis Ababa & Access Capital estimates

31


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

Trade Fields No. of Service

Providers

Combined Registred Capital

(in Birr)

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

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

HOTEL, RESTAURANTS , BARS & CAFÉS 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 Retailers

Combined

Capital

(in Birr)

Durable Goods Retailers 4,864 555,898,751

Household Appliances & Utensils 1,871 127,463,249

Vehicles & Transport Equipment for "Personal" Use, Spare Parts & Accessories 1,591 265,815,678

Furniture, Furnishings, & Floor Coverings 764 86,780,192

Audio-Visual, Photographic, & Other Electronic Equipment (excluding ICT Products) 638 75,839,632

Non-Durable Goods Retailers 24,805 1,620,062,381

Food 9,893 339,925,910

Articles of Leather, Textiles, & Footwear (Wearing Apparels & Accessories) 7,303 300,338,810

Intermediate/Semi-Finished Products 3,111 252,772,346

Alcoholic Beverages & Tobacco Products 1,594 14,940,958

Others 1,401 512,635,291

Newspapers, Books & Stationery 756 123,078,504

Products of Personal Effects 408 27,161,608

Healthcare Products 224 42,939,348

Non-Alcoholic Beverages 115 6,269,606

TOTAL RETAIL TRADERS 29,669 2,175,961,132

Source: Addis Ababa Trade & Industry Bureau

32


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

Foreign Company Origin

Ethiopian

Subsidiary/Affiliate/Partner Notes

1 Heinken Netherlands Bedele and Harar Brewery

Heineken purchased Bedele

Brewery at $80 million and Harar

Brewery at $75 million in 2011.

2 Diageo UK Meta Brewery

Diageo purchased Meta Brewery

at a cost of $220 million in late

2011. Diageo plans to invest 10

million dollars on expansion of

the brewery and may introduce

new line of products to the

Ethiopian beer market

3 SAB Miller South Africa Ambo Mineral Water

SABMiller has improved

technology, boosted marketing,

and expanded into several new

product lines such as flavored

water and new bottle types.

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

Joint venture with collaboration

expected 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 including

Ariel, Pampers and Gillette

products, Powder Milk &

Sunflower.

6 Nestle Switzerland Mulege Plc

Sole distributor of Nestle's Nido

Milk Powder

7 Unilever UK/Netherlands Alfaraj

Sole distributor of Unilever

products, including children's

products, detergent, sanitary

items, cosmetics (i.e., Sun silk),

and razors

8 Sony Japan Glorious PLC

Expanding sales and aggressive

promotions, especially in flat

panel TV sales

9 Samsung South Korea Garad

Samsung is planning set up an

assembly plant for refrigerators

and home appliances and to open

a state-of-the-art engineering

institution that aims to educate

more than 10,000 electronic

engineers in few years time.

12 Multichoice Africa South Africa Multichoice Ethiopia

Rapid expansion in operations

with rising choice of subscription

offerings targeting different price

points

12 Rina International India Aqua Addis Bottled Water

13 Coca Cola Sabco (CCS) South Africa

East African Bottling Share Company

(EABSC)

Rapid expansion in operations to

meet fast-growing and unmet

demand, especially in regions.

Source: Various News Articles and companies' profile notes

33


4. Emerging export industries—in mining, manufacturing, and foreign exchange generating

services—are already making their mark in the Ethiopian economy and will soon overtake

traditional 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 industries

and the prospects that these plans will be realized are quite solid in our view.

By our calculations, the combined foreign exchange earnings of Ethiopia’s emerging export

industries will very shortly eclipse that of Ethiopia’s traditional agricultural exports.

Emerging export-oriented industries have recently been among the strongest sources of Ethiopia’s

economic growth. Three such ―emerging export-oriented industries‖ are particularly notable: mining;

manufacturing (namely textiles and leather products); and services with large foreign exchange generating

capacity (airlines, shipping, electricity). All three industries have tended to grow at or above the growth

rates of overall GDP in recent years (Table 4.1), and the prospects for continued growth in all these sub-

industries is promising, aided by policy reforms, favorable demand prospects, and on-going capacity

expansions

Mining

Mining has long been an industry with huge untapped potential but little actual delivery in the past

several decades—this is now changing for good, however. The past few decades have seen false

promises from the mining sector many times, including for example from anticipated oil discoveries in

the Ogaden/Somali region in the 1970s and from extensive natural gas explorations in the 1980s. None of

these materialized, however, in large part due to an inhospitable policy environment that discouraged the

large foreign investments typically required for successful mining projects.

With improving policy conditions and given the country’s substantive resources, Ethiopia is

beginning to appear on the radar screen of international mining investors. Driving this interest is the

size and scope of commercially exploitable mineral deposits. According to data from the Ministry of

Mines, Ethiopia‘s notable mining resources include an estimated: 61,000 tons of gold; 72 million tons of

iron; around 200 million tones of potash/phosphate; 3 million tones of marble; 430,000 barrels of proven

oil reserves; and much more (Table 4.2). Some very crude calculations of the gross market value of these

mineral resources is in the tens of billions of US dollars were all these prospects realized as estimated and

actually explored. The prospect of reaching $1.36 billion in annual mining exports by 2014/15 is thus

very much within the realm of the possible if investors capable of exploring these largely untapped

mineral resources are able to commence operations in the coming years.

Signs of the mining sector’s promising potential are already being witnessed in the gold sub-sector.

Gold has been the single biggest area of active mining, with export values rising nearly 100-fold from just

$5 million in 2001 to $485 million last year. Volumes exported reached 11 tons last year, reflecting the

roughly 4 tons output from the dominant producer, Midroc Gold‘s Legadembi Gold Mine, as well as

34


supplies of about 7 tons from hundreds of small-scale, artisanal miners. In a surprisingly short period,

gold exports have risen sharply to become Ethiopia‘s second largest export commodity ($485 million for

gold versus $842 million for coffee), surpassing long-standing traditional agricultural exports such as

oilseeds ($323 million), chat ($238 million), flowers ($175 million) and pulses ($139 million). This trend

is set to continue as additional gold explorations are in the pipeline: in FY 2010/11 alone, 54 mineral

exploration licenses were granted by the Ministry of Mines, up from just 15 licenses five years ago.

Existing firms also have large expansion plans: Midroc Gold, for example, plans to start underground

extraction at the (previously only open-pit) Lega Dembi mine and anticipates 2.4 tons per year of gold

from 2012 to 2014 and 1.8 tons per year from 2015 to 2021, to be supplemented further by a new mining

development (Werseti Mine) that would add 3.5 tons per year by 2016; total output from Midroc Gold

would thus amount to about 6 tons per year by 2014.21

Driven by such expansions within existing firms

and a pipeline of new commercial and artisanal mining operations, gold exports can realistically reach 20-

25 tons per annum within a few years time, equivalent to near $1 billion in export earnings assuming

prices do not fall much from their current levels in the years ahead.

Beyond gold, other notable minerals with significant exploration and export prospects include oil,

potash, platinum and tantalum. Of these, tantalum is the only one already mined in significant

amounts by the Ethiopian Mineral Development Share Company, with 66 tons of exports last year

earning $28 million. As for the other potentially large prospects, data compiled by the USGS Minerals

Yearbook and other sources show: oil exploration is taking place by South West Development and Africa

Oil Corporation of Canada; potash is being explored by Alana Potash and the Ethiopian Potash

Corporation; and platinum exploration is taking place by Australian company Nyota Minerals, a firm also

engaged in gold exploration (See Table 4.3).

Manufacturing

The manufacturing sector in Ethiopia is still in its infancy and its recent growth record has been

good but far from spectacular. Growth rates in the sector have been around 10 percent per year in

recent years, and given similar real growth rates in the rest of the economy, the share of manufacturing

has remained essentially unchanged at just 5 percent of GDP over the past decade (the manufacturing

sector is one part of the ―Industry‖ sector that also includes mining, electricity/water, and construction in

Ethiopia‘s GDP statistics). In terms of numbers, an estimated 2,172 medium- and large-manufacturing

firms operate in Ethiopia, up from around 700 in 2001 and the five largest sub-sectors are (in order of

their GDP contribution) food processing, cement, rubber and plastics, metals, textiles and garment22

(Table 4.4).

Despite a still small manufacturing base, an important sub-set of the sector focused on exports is

beginning to grow sharply from a small base. At an economy-wide level, this growth and expansion is

most evident from steadily rising manufactured exports, especially of leather products and textiles and

garments. Exports of these two commodity groups reached a combined $165 million in 2010/11, a

doubling from just five years ago and not far short of the highly successful and much-publicized

performance of the flower sector ($175 million in exports). Moreover, there is a strong momentum going

21 USGS Minerals Yearbook, quoting from Midroc Gold Mine PLC 2009 22 See CSA‘s 2009/10 Large and Medium Manufacturing Survey.

35


forward, with the first five months data for this fiscal year (July-November 2011) showing 88 percent

year-on-year growth in leather product exports and a more than doubling of textile and garment exports.

With the strong momentum of the past year, the GTP targets of raising textile/clothing exports to

$1 billion and leather product exports to near $500 million by 2014/15 is within the realm of the

possible. Indeed, prospects for the coming years are arguably much stronger than they have been in the

past on account of at least three factors:

Major new textile and leather industry investments by foreign firms: Although the

textile/clothing and leather manufacturing sectors each have some 40 and 86 private enterprises

respectively already in operation, a big jump in output will be driven by large, modern facilities

being established by foreign investors. In textiles/clothing, this includes the Turkish company

AYKA, which has started operations on one Ethiopia‘s largest manufacturing firms with a $100

million investment and plans to produce $70 million in annual textile/clothing exports and

employ 10,000 workers. In the leather sector, new investments by UK-based Pittards Company

(which bought Ethiopian Tannery Share Company) and by large existing players with expansion

plans—Kangaroo, Anbesa Shoes Share Company, Ramsey Shoe Factory, Hafde Tannery—are

expected to drive rising exports. Chinese investors are also already beginning operations in both

the textile and leather sectors. Plentiful and competitively-priced labor will continue to assist the

performance of such firms, given unskilled manufacturing sector wages that are about one-fourth

to one-fifth those of China and India, and roughly one-twelfth of European levels. The planned

introduction in early 2012 of a directive discouraging unprocessed leather exports will also have

the effect (perhaps after some initial difficulties) in encouraging higher value-added leather

product exports in the coming years.

Significant policy and infrastructural support for manufacturing exports: Manufacturing

exports are aided by a mixture of policy and infrastructural support that includes regular high-

level official meetings to track their progress and help address their issues, financial support from

the Development Bank (with long-term financing at favorable interest rates), and streamlined

customs arrangements in certain cases (for example, the ability to process export clearance at

their sites for some of the largest firms). Going forward, industrial zones will provide ―factory

shells‖ that contain a ready-made package of factory floor space, warehouse facility, and utilities

such as electricity, water, and telecom networks.23

Additional impetus is also likely from

planned economic growth corridors that—if implemented as envisaged—could provide a well-

integrated and inter-connected network of input suppliers and logistics services beyond just the

establishment of industrial parks.

Continued favorable treatment in key markets such as the US and EU, via the AGOA and

EBA initiatives, respectively continues to guarantee large and open-ended markets for Ethiopian

products that can meet the requisite quality standards. In both cases, Ethiopia‘s exports are

currently only a tiny fraction of its allowed quota or potential market share, indicating a huge

23 In this connection, a large Chinese Industrial Park about 40 kilometers from Addis Abeba, already showing sizeable progress

in the completion of the civil construction works, is set to become one of the first such industrial parks to provide ready-made

factory facilities.

36


scope for volume expansion. Although the US and EU markets may be under some economic

pressures for the near future, the size of these two destination markets, the nature of the products

involved, and Ethiopia‘s low starting base all mean that the tough near-term economic conditions

of the destination markets need not be too severe of a constraint.

It is worth noting there the emerging manufacturing sector is not exclusively export-focused and

that, as highlighted in Chapter 3, domestic consumers will still remain the primary target for many

other industrial sub-categories.24

Indeed, beyond the leather and textile/clothing sectors which are

targeting foreign markets, most of the rest of the emerging manufacturers are focused on the huge

domestic market, as is the case for the production of cement, sugar, steel/metals, glass, chemicals and

pharmaceutical products.25

Most of these domestic-oriented industries are made up of privately-owned

operators, except for the case of cement and sugar producers who are partly or fully publicly-owned.

Among publicly-owned manufacturers, it is noteworthy that most of them focus on the domestic market,

with the case of sugar being about the only notable exception (Table 4.5).

Export Services

Services provided by what are currently three large public enterprises—Ethiopian Airlines,

Ethiopian Shipping Lines, and the Ethiopian Electric Power Corporation—are a third emerging

export sector that will provide an increasing source of foreign exchange inflows in the coming

years. Each of these large companies has major expansion plans and their growth will not only help

boost GDP growth in itself but will also help propel other sectors as they provide critical inputs and/or

intermediation services.

Ethiopian Airlines: Ethiopia‘s flag carrier is already a highly successful state-owned carrier that

registered a gross revenue of Birr 24.6 billion and a net profit of Birr 1.1 billion in 2010/11. As

we estimate that near 90 percent of its revenue is collected in foreign currency, given its largely

international customer base, Ethiopian Airlines alone already generates around $1.1 billion in

gross foreign exchange earnings, equivalent to roughly 40 percent of Ethiopia‘s goods exports of

$2.8 billion last year. Very ambitious expansion plans should see its gross foreign exchange

earnings jump sharply: a recently launched 15-year strategic plan envisages the Airline increasing

gross revenue to $10 billion, increasing its fleet size to 70 aircraft (from 36 at present), and

making it Africa‘s largest and most profitable airline. Much of this anticipated growth will occur

in the near-term, with ten Boeing 787s expected beginning 2012, an additional 12 Airbus A350s

on order for delivery between 2016 and 2019 and four dedicated cargo Boeing 777s anticipated to

double cargo capacity in the next few years. With a large fleet and expanding flight destinations,

particularly to Asian and Middle Eastern locations, USD growth of 20 percent per annum should

24 The GTP singles out 8 manufacturing sectors for special attention and promotion: (1) textile and garments; (2) leather

products; (3) sugar; (4) cement; (5) metal and engineering products; (6) chemicals; (7) pharmaceuticals; and (8) agro-processing

industries (See GTP Main Text page 57). It is notable that 4 are primarily export-oriented (textiles, leather, sugar, agro-

processing) while 4 are mainly domestic focused (cement, metals & engineering, chemicals and pharmaceuticals). 25 Sugar is a partial exception as part of the plan is—after meeting domestic demand—to enable annual exports of some $662

million by 2014/15. Work in this area is being spear-headed by the state-owned Ethiopia Sugar Corporation, which aims to

develop sugarcane on hundreds of thousands of hectares and establish 10 new sugar producing factories.

37


be a comfortably achievable target, thus raising its gross FX earnings to near $2 billion by

2014/15.

Ethiopian Shipping Lines: The country‘s shipping services provider currently has a fleet of

eight vessels that provide services to Ethiopia‘s fast-growing export and import commodities. The

company‘s gross income last year was Birr 4.6 billion, equivalent to $285 million, and has shown

growth of 100 percent per annum in the last five years. Like other transport operators, ESL has

vast plans to expand its capacity and has completed a $294 million order to secure nine new ships

from China‘s Huanghai Ship Building by 2012. Given such expansion plans and the expected

growth in import and export volumes (most of which still utilize shipping rather than air freight),

we anticipate 25-30 percent volume and FX income growth rates for the ESL, which would bring

its gross revenues to near $625 billion by 2014/15.

Ethiopian Electric Power Corporation: Ethiopia‘s electricity generator anticipates electricity

exports will become among the country‘s largest exports within this coming decade. Driving this

expectation are huge hydro electric dam projects in the pipeline that are seen to collectively raise

the country‘s power capacity from 2,000 to 10,000 MW by 2014/15; these projects include the

Abay Dam (also known as the Grand Renaissance Dam), Genale III, Gibe III, and Chemoga Yeda

(Table 4.6). A major advantage that EEPCO will continue to enjoy in providing exports to

neighboring countries is its low cost of electricity generation. It costs just $1.5 million cost to

generate one MW of power in Ethiopia versus a world average of $2.5 million per MW generated

and a cost of $1.73 million and $4 million per MW in Kenya and Djibouti respectively. Based on

EEPCO‘s power generation plans, recent power sharing agreements with Djibouti and Kenya

(plus prospective ones with others), electricity exports of $200-300 million are a realistic

possibility by 2014/15.

The combined expansion in the activities of these emerging export industries implies that their

collective foreign exchange earnings will very soon eclipse that of Ethiopia’s traditional exports

from its historically-dominant agricultural sector. By our estimates, the combined foreign exchange

earnings from the three exportable services was just below that of traditional agricultural exports in the

recently completed fiscal year. However, we forecast that this will be reversed this fiscal year, 2011/12,

given faster rates of growth for mining and service exports than for agricultural products. Focusing more

narrowly on just Ethiopia‘s commodity exports, based on an assumed doubling of gold export volumes (to

22 tons/year) and given the anticipated declines in medium-term coffee prices (from their exceptional

high levels of recent years), we forecast that gold will become Ethiopia‘s single largest commodity export

by 2014 (Table 4.7).

38


Table 4.1. Recent Growth in Ethiopia's Emerging Export-Oriented Industries

REAL GDP VALUED ADDED 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

5-year

Average

Growth

1. Mining and Quarrying (in '000 birr) 393,819 333,144 404,483 456,160 657,633 1,037,238

Annual Growth Rate

-15.4% 21.4% 12.8% 44.2% 57.7% 15.7%

2. Service Sector (in '000 birr) 37,747,674

43,534,59

3 50,506,447

57,632,43

3 65,208,665

73,368,16

5

Annual Growth Rate

15.3% 16.0% 14.1% 13.1% 12.5% 14.6%

3. Manufacture of Textiles and Wearing

apparel--Gross Value of Production (in

'000 birr) 228,940 331,423 185,022 521,126 907,567 … …

Annual Growth Rate

44.8% -44.2% 181.7% 74.2% … 64.1%

4. Manufacture of Leather and

Footwear-- Gross Value of

Production (in '000 birr) 1,022,744 1,213,791 1,447,236 1,332,345 1,639,518 … …

Annual Growth Rate

18.7% 19.2% -7.9% 23.1% … 13.3%

GDP at Constant Basic Prices (in

millions of birr) 93,474 104,499 116,190 127,857 141,368 157,463

Annual Growth Rate

11.8% 11.2% 10.0% 10.6% 11.4% 10.9%

Source: MoFED's GDP Estimates for 2010/11, CSA's Large and Medium Scale Manufacturing Survey 2009/10

39


Table 4.2. Reserves of Major Mineral Commodities in Ethiopia

Mineral Commodity Unit

Unit

Price in

USD for

the Year

2010/11

Proven

Reserve Location

I. Precious and Metallic Minerals

1 Primary Gold ton N/A 61,208 Lege Dembi Southern Ethiopia

2 Platinum ton N/A 12.5 Yubdo, Western Ethiopia

3 Iron Million ton 72 32.5 Bikilal, Western Ethiopia

4 Tantalum ton 280,000 2,358 Kenticha, Southern Ethiopia

II. Industrial and Construction Minerals

1 Kaolin ton 595 225,397 Bombawoha, Southern Ethiopa

2 Diatomite Million ton N/A 36,602 In different parts of the rift valley

3 Feldspar ton 225 501,000 Kenticha, Southern Ethiopia

4 Quartz ton 17,500 55,000 Kenticha, Southern Ethiopia

5 Silica Sand Million ton 17,200 3.4 Mugher valley, Central Ethiopia

6 Potash Million ton 420 15 Afar region, Northern Ethiopia

7 Phosphate Million ton 210 181 Bikilal, Western Ethiopia

8 Soda Ash Million ton 200 460 Ziway in the rift valley

9 Brine Salt Million ton N/A 290 Lake Afdera, Northern Ethiopia

10 Rock Salt Million ton 180 1,000 Afar region, Northern Ethiopia

11 Limestone Million ton 12,250 136.7

Mugher-Central Ethiopia, Mesobo-

Northern Ethiopia and Dire Dawa-

Eastern Ethiopia

12 Limestone Million M3 12,250 60 Hakim Gara, Eastern Ethiopia

13 Marble Million ton 27,500 2.8 Daleti, Western Ethiopia

14 Granite Million M3 28,000 15 Harar, Eastern Ethiopia

III. Energy Minerals

1 Coal Million ton 265 13.73 Delbi and Moye, Western Ethiopia

2 Coal Million ton 265 64.5 Yayu, Western Ethiopia

3 Oilshale Million ton N/A 108.1 Yayu and Delbi, Western Ethiopia

4 Natural Gas TCF 3,600 2.7 Calub, Eastern Ethiopia

5 Geothermal Resource MW

33.5

Aluto-Lamgamo and Tendaho in the rift

valley

IV. Gemstone

1 Opal

Million kg 1.07 2.8 North Shoa, Central Ethiopia

Source: Ministry of Mines, Investment Guide to Ethiopia (EIA, 2009)

40


Table 4.3 Mineral Industry Operators in Ethiopia-- by Commodity

No. Firm Origin Country Capacity

(Metric Tons) Location

CAUSTIC SODA

1 National Mining Corporation (Govt-owned) Ethiopia 10,000 Ziway

CEMENT

1 Mugher Cement Enterprise (Govt- owned) Ethiopia 900,000 Mugher

2 Addis Ababa Cement Factory Ethiopia 120,000 Addis Ababa

3 Messebo Building Materials Production S.C.(Govt- owned) Ethiopia 900,000 Mekelle

4 National Cement S.C. Ethiopia 300,000 Dire Dawa

5 Jema Cement plc 240,000 North Shoa Zone

6 Abyssinia Cement plc 150,000 Chancho

7 CGC Overseas Construction Ltd. (CGCOC) China 150,000 Koka

8 Derba Midroc Cement plc Saudi Arabia 90,000 Dejen

COAL

Ethio-Pak Coal Mining plc Joint Venture 20,000e Dilby

DOLOMITE

Ethiopian Mineral Development S.C.(Govt- owned) Ethiopia 8000 Soloka

GLASS

Ethiopia Hansom International Glass plc China 8,000 Addis Ababa

Addis Ababa Bottle and Glass S.C. Ethiopia 8,000 Addis Ababa

GOLD

Midroc Gold Mine plc (subsidiary of Midroc Ethiopia plc) Saudi Arabia 1,500,000 Lega Dembi

LIME

Senkele Lime Factory Ethiopia 6,000 Ambo

MARBLE

Ethiopian Marble Industries Ethiopia N/A harar and various sites in western Ethiopia

National Mining Corp. (subsidiary of Midroc Ethiopia plc) Saudi Arabia 10000 m3 Dalleti and harar

OIL

1 South West Development Ethiopia N/A Ogaden

2 Africa Oil Canada N/A Ogaden

3 Tullow Oil Ireland N/A South Omo

PLATINUM

1 Nyota Minerals Australian 10e Kg Yubdo

POTASH

1 Allana Potash Canada 105 Dallol

2 Ethiopian Potash Corporation Canada 128,000,000 Danakil Depression

SILICA SAND

CGC Overseas Construction Ltd. (CGCOC) China 180,000 Lemi

SODA ASH

National Mining Corporation plc Saudi Arabia 20,000 Lake Abiyata

STEEL

Abysinia Integrated Steel Plc Ethiopia 150,000 Debre Ziet

Sheba Steel Mills Plc Ethiopia 20,000

Ethiopia Steel Smelting Enterprise (Government owned) Ethiopia 7,000 N/A

Zuquala Steel Rolling Mill Enterprise (Government owned) Ethiopia 36,000

Wallia Steel Factroy Ethiopia 36,000 N/A

Akaki Metal products Ethiopia 14,000 Akaki

Source: USGS 2009 Minerals Yearbook. Some commodity items may not show an exhaustive listing. eEstimated

41


Table 4.4. Manufacturing Sector in Ethiopia (2009/10)

No. Sub-sector

Total

Value-

added

(ETB

Million)

Private

Sector

Share

No.

of

firms

Employment

('000) Notable Operating Firms

1 Food processing

5,845 43% 572 60.1 BGI Ethiopia, NAS Foods, Dire Dawa Food Complex, Sebeta Agro Industry, Luna,

Modjo and Organic Export Slaughter houses, Addis Modjo Edible Oil Complex, Meta Abo,

Bedele, Dashen, Harar, Ambo Mineral Water,

Babile Mineral Water, Moha Soft Drinks, East African Bottling (EAB), Upper Awash

Agro Industry,

2 Cement and Non-metalic minerals

1,471 11% 482 20.2 Muger, Messebo, Abyssinia, National

Cement, Jema Cement

3 Rubber & Plastics

1,217 79% 139 13.9 Ethio-Plastic Share Company, Matador-

Addis Tyre Share Company, Excel Plastics

PLC, Unique Plastic Industry, Mohan Kothari

Group

4 Fabricated Metal

products

1,180 76% 154 10.1 MaruMetal Industry (MMI); Mesfin Industrial Engineering, Alemgenet Trade and

Industry PLC

5 Textiles & Garments

1,138 54% 91 30.8 AYKA Addis, Almeda Textile PLC,

Kombolcha Textile PLC, Ediget Yarn S.C, MAA Garment, Ambassador Garment,

Garment Express

6 Chemical Products 1,068 89% 85 11.2 Adami Tulu Anti Pest, Chora Gas &

chemical Enterprise, Al-Kyd Resin S.C

7 Paper & Printing

756 65% 123 10.0 Artistic Printing Press, Berhanena Selam

Printing Press, Bole Printing Press, Commercial Printing Press

8 Wood and Furniture

Products

577 73% 335 12 Salvatore Fiore, 3F, GM Furnitures, Yonatan B.T., Sunmate Furniture

9 Iron & Steel 414 75% 39 4.0 Yesu PLC, Zuquala Steel Rolling Mill

Enterprise, Abyssinia Integrated Steel

10 Leather & Footwear

Manufacuring

405 94% 114 10.8 Ethiopia Tannery S.C, Hafde Tannery PLC,

Anbessa Shoe S.C.,Ramsey Shoes Factory

11 Tobacco 368 0% 1 0.99 National Tobacco

12 Vehicles & Trailers

341 76% 11 1.7 Yangfan Motors, Holland Car, Mesfin

Industrial Enginnering, Belay Ab enterprises and BT Trading, Metal and Engineering

Corporation

13 Pharmaceuticals

227 68% 11 Ethiopian Pharmaceutical Manufacturing

(EPHARM), Addis Pharmaceutical Factory,

East African Pharmaceuticals (EAP) , Sino Ethiop Associate (Africa); Asmi

Pharmaceuticals

14 Machinery & Equipments

84 100% 15 0.87 Akaki Spare Parts and Hand Tools S.C.;

Mohan Kothari Group

Total 15,090 64% 2,172 186

Source: An Enterprise Map of Ethiopia (2010), The Private Sector in Ethiopia: The Current Landscape and Key Issues (2011), CSA

Large and Medium Scale Manufacturing Industries Survey (2009/100

42


Table 4.5: A Typology of Ethiopia's Manufacturers by

Ownership and Market Orientation

Mainly PRIVATE firms

Mainly PUBLIC firms

1. Export-market Textiles/Clothing Sugar

oriented Leather products

Food processing Steel

Cement Cement

2. Local-market Glass Sugar

oriented Chemicals Fertilizers

Rubber & Plastics

Paper & Printing

Pharmaceuticals

Table 4.6 Hydro Power Projects in the Pipeline

No. Project Status Capacity (MW) Energy (GWH)

Project

Completion

(Year)

1 GIBE III 42% completed 1,870 6,400 2013

2 GENALE 3rd Under Construction 258 1,200 2014

3 HELELE WERABESA Under W.B finance 422 2,233 2015

4 CHEMOGA YEDA Under Construction 278 1,250 2015

5 GENALE 6th MOU Signed 256 1,000 2015

6 GEBA I & II Under ADB Finance 366 1,788 2015

7

GRAND RENAISSANCE

DAM ("ABAY DAM")

Under Construction

5,250 15,000 2014-15

Total

8,700 28,871

Source: EEPCO's "Highlights on Power Sector Development Program (2010-2015 G.C.)"

43


Table 4.7: The Outlook for Emerging Exports vs. Traditional/Agricultural Exports

2010/11 2011/12 2012/13 2013/14 2014/15

Total Gold Exports-- USD mns. 485 737 846 1,085 1,323

Gold export volume total 11.0 13.4 16.9 21.7 26.5

Midroc Gold 4.0 4.5 5.0 6.0 6.0

Other gold mines 0.0 0.5 1.0 1.5 2.0

Artisinal mines 7.0 8.4 10.9 14.2 18.5

Gold price 44.1 55.0 50.0 50.0 50.0

Total Coffee Exports-- USD mns 841 902 986 1,074 1,235

Coffee export volume total 196.1 225.5 259.4 298.3 343.0

Coffee price 4.3 4.0 3.8 3.6 3.6

Total Emerging Exports---USD mns. 1,985 2,722 3,623 4,748 6,281

Mineral exports 519 837 1,146 1,485 1,823

Gold 485 737 846 1,085 1,323

Other minerals 34 100 300 400 500

Manufacturing exports 166 273 457 775 1,333

Textiles 62 118 223 425 807

Leather products 104 156 234 351 526

Exportable services 1,300 1,612 2,020 2,488 3,125

Ethiopian Airlines 1,100 1,342 1,637 1,997 2,437

Ethiopian Shipping Lines 200 250 313 391 488

EEPCO - 20 70 100 200

Traditional Agricultural Exports--USD mns. 1,993 2,501 3,247 4,345 6,095

Coffee 841 902 986 1,074 1,235

Oilseeds 324 421 547 711 925

Chat 238 310 403 524 681

Flowers 175 228 296 385 500

Live Animals 148 192 250 325 422

Meat 63 120 227 432 821

Spices 33 43 56 73 94

Pulses 139 222 356 569 910

Fruits and Vegetables 32 63 126 253 506

Source: Ethiopian Trade data for 2010/11, Access Capital projections for 2011/12 to 2014/15.

44


5. High inflation has been and remains a major weakness of economic policy and poses serious

threats to the business environment by discouraging savings and distorting investment

decisions.

Key Points:

Ethiopia’s inflation rate recently became the highest in Africa and second highest in the world.

Contrary to some widely held views, we do not think Ethiopia’s inflation is mainly due to

external factors or somehow an intrinsic and unavoidable feature of fast-growing countries.

Our reading of the relevant data instead points to inflation being linked largely to domestic and

policy-related sources, something we see as offering grounds for optimism since this implies that

internal policy adjustments can help contain it quickly and decisively.

Ethiopia finished the 2010/11 fiscal year with the worst inflation record in Africa. In June 2011,

inflation hit a level of 38.1 percent on year-on-year basis (June 2011 versus June 2010) and 18.1 percent

on a year-average basis (comparing the average price of the 12 months to June 2011 to the prior 12

months). The inflation level is not only the worst in Africa, where the average rate is 8.4 percent, but

also the second worst in the world, behind only Belarus (Table 5.1). Given the sharp jump in inflation in

2010/11 and its still elevated level this year, inflation is now mathematically almost assured to average in

the double digits for the GTP period—even with zero inflation for the next three years, average inflation

for the five-year period will turn out to be near 10 percent.26

Looking closely at the latest inflation data from November 2011, we find that price increases are

showing unusually large regional differences, are now mainly being driven by food prices and,

within this latter group, stem largely from price increases in widely consumed staples such as

grains (teff, wheat) and pulses (peas, lentils, and beans). More specifically (see Table 5.2 below):

All regions are showing high inflation but differences among them are becoming unusually

large. Food inflation rates among Ethiopia‘s 11 regions range from a low of 27 percent in Addis

Ababa to a high of 99 percent in Beni-Shangul Gumuz, with many of the highly populated

regions somewhere in the middle (Oromia showing 51 percent, Amhara showing 50 percent, and

SNNP showing 62 percent). Some remote and less-populated regions are indeed showing high

inflation (Beni-Shangul Gumuz and Gambela) but others are not (Afar and Somalia). Our only

conjecture is that the Beni-Shangul Gumuz and Gambela regions remain less connected to the

main urban centers than Afar and Somalia (the latter two are on the more developed eastern

corridor), and that their inflation rates may be a reflection of weak transportation links that have

become binding within the past year following rising investments in those regions of late.

26

The GTP targeted that average inflation for the five years from 2010/11 to 2014/15 would be in the single digits. However, the

CPI is already up 38 percent in the first year and will be up by near 10 percent for this year (see Annex), leading to an increase in

the index of 48 percent in just the first two years. Even with zero inflation for the coming three years, the five-year average

inflation will be just at the double digit threshold (48 divided by 5, or 9.6 percent); with a more realistic inflation of about 10

percent for the next three years, inflation over the GTP period will average 15 percent.

45


Persistently high food prices—especially in widely consumed staples—are mainly to blame

for the recent jump in overall inflation.27

Rather remarkably, food inflation now stands at 50

percent (year-on-year) and has remained at this elevated level for about four months now. The

food price increases are taking place in an environment where favorable weather conditions led to

a has been seen as a good harvest in late 2010. All widely consumed food components are

showing large year-on-year price increases, including for cereals (65 percent), pulses (76

percent), spices (72 percent) and potatoes/tubers (54 percent). Only one food grouping, fruits and

vegetables, showed falling prices (-5.4 percent) but its small overall weight (2.5 percent of the

CPI) does not provide much of a counterweight to the rising prices in all other food categories.

Beyond the notable variation in inflation rates seen by location or commodity, we think one helpful

way to view the recent inflation increase is by focusing on four distinctive groupings within the

price index used to compute inflation: More specifically, we split all the main components of the price

index into what we see as four analytically meaningful categories (Table 5.3).

Domestically-produced and domestically-consumed commodities: Inflation for this sub-

group is at the highest rates (47 percent) and reflects very large price increases seen for cereals

(wheat, corn, teff), pulses, and potatoes/tubers. There are virtually no exports of these goods so

price developments should, in principle, mainly reflect domestic supply and demand conditions

and not external influences.

Domestically-produced but heavily exported commodities: Even for goods that are

domestically produced, the impact of international price increases can filter through to domestic

inflation if that domestically produced good is exported in large quantities. In such contexts, high

prices in external markets become more attractive options for local producers/exporters and this

would tend to push up domestic prices too if producers are to keep supplying the local market.

And indeed, based on July-September export data, unit prices for coffee were up 67 percent from

a year ago, those for spices were up 14 percent and those for fruits and vegetables were down by

about 14 percent. However, given the small weights of these three commodities in the CPI index

(4.3% for coffee/tea, 2.5% for fruits/vegetables, and 2% for spices, or a combined 8.8%), the net

impact of such external price effects would not be expected to be significant for the overall

domestic price index.

Commodities with large import components: Commodities that can reasonably be judged to

have large import components, such as edible oils, ―other foods‖ (mainly sugar), personal care

items, and clothing and footwear show relatively lower inflation than the overall price index, or

only about 24 percent compared to 39 percent.

Services: Finally, CPI components that are largely in the nature of services, including food

milling charges, medical care, transportation, and recreation/entertainment service, show the

27 Non-food inflation had long been well above food inflation for many years, but this situation reversed in March 2011 and has

remained so ever since.

46


lowest price increases of all sub-categories with an average year-on-year price increase of just 18

percent.

The above decomposition of Ethiopia’s price index, as well as other indicative factors, suggest that

domestic rather than foreign factors were more important determinants of Ethiopia’s recent

inflation. In particular, it is notable that inflation rates were far lower for goods that are influenced by

international prices—imports and domestically produced goods that are largely destined to export

markets—than they were for other categories of goods. More broadly, it is worth noting that Ethiopia is a

relatively closed economy and one where imports are only 26 percent of GDP; given this small share of

imports in GDP and in the consumer basket (around 30 percent by our estimates, excluding about half of

the items in the ―rent, construction materials, and utilities‖ category), the inflation of imported items

simply cannot explain the underlying sources of the remaining 70-75 percent of goods which are domestic

in origin. Moreover, neighboring and other African countries with similar degrees of openness to the

world economy have had much lower inflation rates, suggesting strongly that international prices cannot

be seen as the primary culprit for Ethiopia‘s inflationary pressures.28

The commonly held view that recent inflation was ―caused mainly by external factors‖ is not the

only widely held misperception regarding Ethiopia’s inflation; others include the view that inflation

has been a tolerable and temporary problem, that it is mainly due to poorly functioning

wholesale/retail market structures, and that it is simply the price to be paid for ―growing so fast‖.

In our judgment, these views are simply not supported by the relevant data.

o Has inflation been a temporary and passing problem? While this year‘s inflation rate spiked

to a level of near 40 percent, it is often overlooked that average inflation in the previous five

years was still a high of 20 percent per annum. This was 2½-times the norm in other African

countries over the same period, and is also double to the 10 percent inflation rate that was the

norm in Ethiopia during the previous 20-year period. Indeed, we find no five-year period in

Ethiopia when inflation has averaged 20 percent since modern inflation statistics began to be

compiled. This reveals the highly exceptional price rise pressures of recent years compared to

what has been the country‘s historical experience.

o Are wholesale and retail market structures at fault? Explaining Ethiopia‘s high inflation as

arising from insufficiently competitive and functioning wholesale and retail markets is difficult,

in our view, since there is no strong case to be made that such markets became particularly

monopolistic or dysfunctional within the past year. Of course, there are sometimes legitimate

criticisms—for example that wholesalers and retail segments for a given commodity are

sometimes controlled by the same business or that only a few wholesale importers/distributors

dominate a given commodity in some rare cases—but why these market characteristics would

suddenly contribute so strongly to inflation when they did not in the past is not clear and thus

seriously undermines whether this can be seen as an explanatory factor.

28 On the basis of the imports of goods and services to GDP, Ethiopia shows a ratio of 36 percent which is actually identical to

the African average according to the IMF (Regional Economic Outlook of October 2011); still, inflation rates were four times

higher in Ethiopia in 2011 compared to the region.

47


o Isn’t inflation the necessary cost of fast growth?: A simple review of inflation data from all

high-growth countries demonstrates quite convincingly that there is no necessary correlation

between fast growth and high inflation. Average inflation in the twenty other fastest growing

countries in the world was just 8 percent, or less than one-fourth the level in Ethiopia (Table 5.4).

Indeed, among the world‘s fastest growing countries, the second highest rate of inflation observed

(after Ethiopia‘s 38 percent) was just 15 percent in Mongolia. Even looking solely at inflation in

Addis Ababa, which has been in the mid-20s, inflation is still around three times the norm for all

the other fastest-growing countries in the world. Indeed, the indication from other countries is

that policy adjustments can and do offset domestic pressures that may arise on account of fast

growth and even those pressures linked to external and exogenous inflation sources.

Given the weak explanatory power of these commonly assumed contributory factors, the much

more plausible culprit in explaining Ethiopia’s high inflation has been—in our view—the specific

combination of fiscal, monetary, and exchange rate policies in place since the second half of 2010.

Looking at each one of these in turn:

Direct NBE advances to finance government spending: One of the strongest correlates of

inflation in the past six years has been the sharp increase in public sector spending and especially

the financing of such spending directly via central bank advances (or ―printing money‖).

According to Ministry of Finance debt statistics, the use of direct central bank advances to

finance government spending reached Birr 46 billion for the first time last year, or a jump of Birr

10 billion (2 percent of GDP) in just a single year. The correlation between such increases in

central bank advances and inflation is quite striking (see Table 5.5) and far from coincidental in

our view.

Monetary and exchange rate policies in place since mid-2010 have also made an important

difference. An unusually sharp devaluation contributed to some extent to inflation by a direct

pass-through channel in raising the cost of imports.29

But, in and of itself, this would not

necessarily have been highly inflationary given the relatively low import-content of domestic

consumption noted earlier. However, the monetary policy response to the sharp devaluation

mattered a lot and, in this connection, it is notable that when the early signs of rising inflation

quickly began to appear following the devaluation (in the months of September to December

2010), credit conditions were not adjusted in any significant degree via either direct controls or

through increases in interest rates. In fact, credit growth in the banking system as a whole

(including credit extended by public banks) rose by an unusually high rate of 36 percent in the

year to June 2011 according to IMF data; such growth was the highest growth in money supply

that Ethiopia has seen in over a decade and double the growth rate of the low-inflation years of

2004-08. It is notable that this growth rate was also the highest money supply growth recorded

among African countries in 2011 and was correlated—again not by coincidence in our view—

with the highest inflation rate in the continent.30

Looking further at interest rate responses, which

29 See Access Capital‘s assessment of the unusually large devaluation issued the day following September 1, 2010 devaluation. 30

See IMF‘s October 2011 Regional Economic Outlook, pages 73 and 82, for inflation and money supply data across African

countries, available at www.imf.org. Although credit caps on private banks remained in place to April 2011, credit growth in the

banking system as a whole still reached 36 percent, reflecting strong lending growth by public banks and the non-trivial (21

percent) lending growth allowed for private banks even under the system of credit caps. We estimate that the lending growth of

http://www.imf.org/

48


was marked by a 1 percentage point increase in Ethiopia, one finds a noteworthy contrast with

central banks in other African countries, which encountered much smaller jumps in inflation but

nonetheless reacted much more forcefully in raising rates—by 12 percentage points in Kenya, 6

percentage points in Uganda, 6 percentage points in Nigeria, and 4 percentage points in Zambia

(Table 5.6).

Response to large foreign exchange inflows: Finally, the monetary policy response to

Ethiopia‘s unexpectedly large foreign exchange inflows in FY 2010/11 also mattered. In this

respect, the sharp devaluation significantly improved Ethiopia‘s balance of payments allowing the

country to benefit from large net foreign exchange inflows. One argument on the impact of

external factors in causing Ethiopia‘s inflation is that such large foreign exchange inflows in

2010/11 necessarily resulted in the central bank injecting local currency into the banking system

as a counterpart to those rising foreign assets. But this again is an erroneous conclusion: even

with large inflows of foreign exchange, a central bank can easily ―sterilize‖ or withdraw the local

currency that is injected into the banking system following large foreign exchange inflows. In

Ethiopia‘s case, such ―sterilization‖ was not undertaken, with the result that large amounts of net

extra local currency was created within the banking system, as evidenced in the broad money

supply figures. In short, there have been significant domestic and policy-related sources to

Ethiopia‘s exceptional inflation of the past year.

Irrespective of the sources of inflation, why is the need to tackle it so important? For Ethiopia and

other low-income countries, the main damage from inflation is the heavy tax it imposes on the poor and

those with fixed incomes. Inflation wipes away nominal wage gains and depresses real incomes not just

for urban households (who are net food consumers) but even for large segments of the rural population

(such as for pastoralists, for those without farms, and for those in food-deficit regions) who are actually

net food consumers. In addition, from a broader macroeconomic perspective, inflation damages the

needed expansion and growth of savings; this has been the case in Ethiopia where, despite nominal

increases in deposits year-after-year, the real value of deposits in the banking system (relative to GDP)

has actually shrunk significantly in the past decade from 31 percent of GDP to just 21 percent of GDP.

This represents a 10 percentage points of GDP in ―real‖ savings and investment that has been foregone

because deposits have not grown in proportion to the growth in the overall economy.31

Moreover,

because savings is so unattractive in an environment of high inflation, it contributes to an excessive

allocation of resources to inflation hedges such as real estate and commodities, thus perverting normal

investment allocation decisions. Finally, and perhaps most relevant from the perspective of exporting

private businesses, external competitiveness (the ability to sell goods in export markets by maintaining

sufficiently strong returns for domestic producers) is eaten away by inflation. The September 2010

devaluation of 20 percent initially provided—all else equal—a similar 20 percent income boost to

exporters back in late 2010, but this competitive advantage to exporters has subsequently been wiped

public banks has been just above 50 percent, using the 36 percent broad money growth as a proxy for total credit growth, the

observed lending growth in private banks (21 percent according to their annual reports—see Chapter 10), and the respective

shares of public versus private banks in total lending seen in recent years. 31 In the Ethiopian context, it is also notable that huge amounts of wealth are being transferred from a large group of (relatively

poorer) depositors to a small group of (relatively richer) investors/borrowers who are able to access credit from the banking

system at negative real rates of interest.

49


away by the much higher jump in local input, wage, and other costs they now face in the context of 38

percent overall inflation.

Despite the adverse inflation impacts that played out in the past year, the largely domestic nature of

its sources actually offers grounds for optimism as this implies that internal policy adjustments can

help contain it quickly and decisively. In other words, with the right set of fiscal and monetary policies,

most notably adjustments in the size of direct government financing and in the growth of public sector

credit, inflation can be reduced sharply and decisively. The government‘s recent commitment to avoid

central bank financing throughout the current 2011/12 fiscal year is encouraging and significant in this

respect.

Table 5.1: High Inflation countries in Africa and the World

Highest Inflation Rates-- Africa Highest Inflation Rates-- World

Country Inflation--2011

Country Inflation--2011

1 Ethiopia 38.1

Belarus 65.3

2 Sudan 22.0

Ethiopia 38.1

3 Guinea 18.4

Republic of Yemen 25.5

4 Democratic Republic of Congo 16.4

Venezuela 24.5

5 Sierra Leone 16.0

Sudan 22.0

6 Uganda 15.7

Suriname 19.9

7 Angola 15.0

Vietnam 19.0

8 Burundi 14.0

Guinea 18.4

9 Eritrea 12.3

Democratic Republic of Congo 16.4

10 Swaziland 12.3

Sierra Leone 16.0

Top 10 average 18.0

Top 10 average 26.5

Source: IMF Data Mapper of September 2011 WEO at www. imf.org

50


Table 5.2. Decomposition of Inflation for November 2011

FOOD INFLATION ACROSS

REGIONS

FOOD INFLATION BY

COMPONENTS NON-FOOD INFLATION BY COMPONENTS

Month

-on-

month

Year

on-

year

Weight*

Month

-on-

Month

Year-

on-

Year

Weight*

Month

-on-

Month

Year-

on-

Year

COUNTRY -1.1 50.3

Food

total 57.0% -1.1 50.3 Non-food total 43.0% 0.9 24.0

ADDIS

ABABA -2.8 27.0 Cereals 22.5% -0.3 64.8 Beverages 2.0% 1.8 35.2

AFAR 0.2 36.1 Pulses 4.3% -1.8 75.7 Cigarettes & Tobacco 0.5% -0.6 14.7

AMHARA -1.5 49.6

Bread

& other 1.9% 3.8 31.9 Clothing & Footwear 8.3% 1.5 33.5

B.GUMUZ 4.3 99.1 Meat 2.8% 2.4 40.9

Rent, construction materials,

utilities 20.6% 0.1 18.8

DIREDAWA -0.1 39.8

Milk,

eggs, cheese 2.0% 1.3 24.9

Furniture, Household equipments 3.7% 2.0 24.6

GAMBELA -3.3 63.1

Oils

and

Fats 2.4% -6.2 41.6 Medical care & Health 1.1% 1.0 10.5

HARAR 2.7 28.8

Vegetables &

Fruits 2.5% -2.5 -5.4

Transport &

Communications 2.5% -2.3 25.7

OROMIA -0.7 51.3 Spices 2.0% -14.7 71.6

Recreation, Entertainment,

Education 1.1% 1.0 16.6

SNNP -2.3 61.5

Potatoe

s,

tubers,

stems 4.2% 4.3 53.5 Personal care and effects 0.8% 2.8 35.1

SOMALIA 5.0 28.2

Coffee,

tea 4.3% -1.3 67.5 Misc goods 2.3% 6.2 17.4

TIGRAY -3.0 36.1

Other

food 1.2% 0.5 9.8

Milling charges 1.2% 1.8 7.8

Food away

from

home 5.8% 1.1 31.6

*Weight in the overall Consumer Price Index

Source: CSA Consumer Price Index Monthly Survey--November 2011

51


Table 5.3: Inflation Analytics by Type of Commodity/Service

CPI Weights Inflation

A Domestically produced and domestically consumed 46.7

1 Cereals 22.5% 64.8

2 Pulses 4.3% 75.7

3 Bread & other 1.9% 31.9

4 Meat 2.8% 40.9

5 Milk, eggs, cheese 2.0% 24.9

6 Potatoes, tubers, stems 4.2% 53.5

7 Beverages 2.0% 35.2

Sub-Total 39.7%

B Domestically produced but also heavily exported 44.5

1 Coffee, tea 4.3% 67.5

2 Vegetables & Fruits 2.5% -5.4

3 Spices 2.0% 71.6

Sub-Total 8.8%

C Import-heavy commodities

24.4

1 Oils and Fats 2.4% 41.6

2 Other food 1.2% 9.8

3 Cigarettes & Tobacco 0.5% 14.7

4 Clothing & Footwear 8.3% 33.5

5 Rent, construction materials, utilities 20.6% 18.8

6 Furniture, Household equipments 3.7% 24.6

7 Personal care and effects 0.8% 35.1

8 Misc goods 2.3% 17.4

Sub-Total 39.9%

D Services

18.4

1 Milling charges 1.2% 7.8

2 Food away from home 5.8% 31.6

3 Medical care & Health 1.1% 10.5

4 Transport & Communications 2.5% 25.7

5 Recreation & Entertainment 1.1% 16.6

Sub-Total 11.6%

All CPI components 100.0%

Source: Access Capital analysis based on Central Statistical Authority Nov 2011 inflation data

52


Table 5.4. Inflation and Broad Money Growth Rates for Top 20 Fastest Growing

Countries in 2011

Rank Country GDP Growth

at Constant

Prices

Inflation Rate

Year Average End of Period

1 Qatar 18.7 2.3 2.3

2 Ghana 13.5 8.7 9.0

3 Mongolia 11.5 10.2 15.1

4 Turkmenistan 9.9 6.1 7.5

5 Iraq 9.6 5.0 5.0

6 China 9.5 5.5 5.1

7 Papua New Guinea 9.0 8.4 9.5

8 Lao People's Democratic Republic 8.3 8.7 9.7

9 Eritrea 8.2 13.3 12.3

10 Bhutan 8.1 6.5 5.8

11 Argentina 8.0 11.5 11.0

12 India 7.8 10.6 8.9

13 Ethiopia 7.5 18.1 38.1

14 Panama 7.4 5.7 5.5

15 Democratic Republic of Timor-Leste 7.3 10.5 6.5

16 Mozambique 7.2 10.8 8.0

17 Equatorial Guinea 7.1 7.3 7.3

18 Islamic Republic of Afghanistan 7.1 8.4 2.0

19 Uzbekistan 7.1 13.1 12.7

20 Kyrgyz Republic 7.0 19.1 13.0

21 Moldova 7.00 7.9 9.5

Note: Growth rates of countries as per IMF's 2011 growth projections in the September 2011 WEO

Source: International Monetary Fund, World Economic Outlook Database, September 2011

53


Source: MoFED “Public Sector External Debt” Statistical Bulletin (2004/05-2010/11), NBE Quarterly Bulletins on the

Ethiopian Economy and CSA

54


6. Abrupt and often challenging regulatory changes have been a source of pressure in the areas of

business registration, taxation, retailing, coffee exporting, real estate/land acquisition, and

banking.

Key Points:

The past year-and-a-half has witnessed a slew of abrupt, challenging, and sometimes erratic

regulatory changes applied on various segments of the private business community.

From a policymakers’ perspective, the overarching goal of these regulations is to tackle three

legitimate targets within the business community: (i) tax evaders; (ii) monopolistic and

oligopolistic businesses taking advantage of inadequate competition; and (iii) unduly

profiteering ―rent-seekers‖ deemed to be engaged in largely unproductive economic activities.

The impact of these new regulations is not always as severe as initially feared, thanks in part to

policy reversals, delays in enforcement, and flexible implementation practices to account for on-

the-ground realities.

The past year-and-a-half has witnessed a series of abrupt, challenging, and erratic regulatory

changes applied on various segments of the private sector. By our count, there are have been close to

ten significant regulatory reforms introduced covering business registration, taxation, retailing, coffee

exporters, real estate/land development. A listing of the regulatory changes as well as their presumed

objectives, intended/unintended consequences, and current status is summarized in Table 6.1.

Three over-arching motivations appear to have driven the new directives: (i) reducing tax evasion;

(ii) removing monopolistic and oligopolistic businesses practices; and (iii) minimizing unduly

profiteering ―rent-seekers‖ deemed to be engaged in largely unproductive economic activities. We

address each one of these in turn.

Tax Evasion: Driven by the need to raise Ethiopia‘s low tax-to-GDP ratio of just 12 percent of GDP,

the country‘s revenue authorities—the Ethiopian Revenue and Customs Authority—have been hard at

work expanding the tax net, removing tax loopholes, and ensuring that individuals and businesses in

all corners of the economy make their due tax contributions. The increased audit and monitoring of

business establishments has been supplemented by two measures focused on small business—

mandatory cash registers (of which 100,000 are expected by June 2012) and estimated tax

assessments on small businesses (using variables such as square meter space of the business to

estimate its income and tax obligation). A requirement that all banks first secure a tax clearance

certificate from any borrower before extending a loan has also tightened the scope for tax evasion by

business. Although the implementation of some of these initiatives has been heavy-handed in some

well-publicized cases (i.e., criminal penalties applied on failing to give receipts or use cash registers),

the thrust of all these initiatives to address tax evasion are—in principle—worthy and welcome

initiatives both from a macroeconomic perspective (to boost much needed revenues) and from an

equity point of view (to provide a level playing field between those businesses that are duly paying

taxes and those that are not).

Monopolistic and Oligopolistic business practices: Efforts to address (real or perceived)

monopolistic and oligopolistic business practices are also, in principle, welcome as competitive forces

55


within any market economy should always be at play to minimize abusive and collusive practices by

producers and/or importers. The big challenge, however, is in making the determination that prices

are ―too high‖ or that they are being ―set in collusion‖ or that a given traders‘ stock of goods is ―too

much‖. All these assessments require regulatory and competition monitoring authorities with strong

technical skills, very detailed high-frequency data, and deep knowledge of product and consumer

markets. Whether this is currently available in the Ethiopian context is questionable. As one study

concluded after an exhaustive review of 14 product markets in Ethiopia: ―accusations of hoarding are

quite widespread…but rarely rigorously substantiated‖ and ―the evidence regarding anticompetitive

behavior is more often than not ambiguous and does not allow one to reach clear-cut conclusions‖. In

some sectors that were subject to recent regulations, such as in cereals and edible oils, the

involvement of dozens traders does not at all suggest an oligopolistic market structure. Moreover,

with respect to price controls, the expectation that a simple decree could address rising price pressures

was in some respects naïve: this ignored the broader macroeconomic contributors to inflation (as

noted in Chapter 5) and gave too little credit to retailers‘ inventiveness in finding ways to evade price

controls. Not surprisingly, for several of the commodities put under price controls, supplies dried up

instead, severe shortages emerged, and inflation got worse not better—all of which indicate the limits

that even regulatory decrees can face in controlling market forces.

―Rent-seeking‖ and ―undue‖ profiteering: The range of subjects targeted by policy makers‘ efforts

to reduce ―rent-seeking‖ and ―undue‖ profiteering is wide-ranging, ranging from real estate

developers to wholesale importers. While tempering any abuses in such business activities is

welcome, greater recognition must also be given to some of the underlying regulatory and

macroeconomic conditions that create such ―rents‖ and ―undue‖ profit earnings. For example, some

of the ―undue‖ profiteering seen in land/real estate deals simply reflected the unusually limited supply

of land for housing and commercial developments that created a severe supply-demand imbalance.

Importer and wholesale behavior to accumulate stocks or hold on to certain positions reflect, in part, a

predicable economic response to volatile and rising prices, to uncertain trade and regulatory policies

(where quantitative restrictions are applied and removed, or price controls decreed) and uncertain

outlooks for inflation and exchange rates. Thus, while segments of the business community are

clearly not immune from what may be seen as ―rent-seeking‖ activities, such behavior should be seen

within the wider context of distortions and policies that often work to encourage precisely this kind of

behavior. In the end, it is thus the reform and removal of such policies as well as putting in place of

truly competitive market conditions that can address the root causes of rent-seeking behaviors and

―unduly earned‖ profit opportunities.

What overall lessons for business do these regulatory initiatives reveal? We see three broad lessons.

First, the tax-related initiatives have, on the whole, been more capable of earning public acceptance

(however grudging) and more successful in their actual implementation. This reflects, in part, the

institutional strengthening of the Revenue Authority, its massive public relations campaigns to instill a

culture of tax payment, and its increasingly professionalized and technology-backed operations (it is one

of the most IT-reliant units of government and has recruited 1,200 university graduates as part of its wide-

ranging capacity building efforts). In short, it must be recognized within the business community that the

possibility that one can operate with little chance or prospect of paying taxes is now becoming history in

the Ethiopian context, and this is fundamentally a good thing with widespread long-term benefits to the

56


overall economy. Second, several of the regulatory reforms have been reversed or their adverse impact

otherwise limited by flexible enforcement, indicating a recognition of some clearly unworkable or

insufficiently studied initiatives. This has been the case for price controls, for the initially implied

confiscation of real estate developers‘ unused land, and for the recent case in which a requirement to

export coffee only via containers (rather than bags) was reversed within a month of its introduction; the

recognition of a need for policy reversals in these cases shows policy flexibility and the need to give due

weight to on-the-ground realities.32

Finally, given the implementation challenges and adverse public

feedback faced throughout the past year on certain controversial cases, the value and importance of prior

consultation with the private sector seems to be getting some recognition. Indeed, signs of efforts to gain

wider acceptance and understanding were apparent in recent (belated) efforts to set up public discussion

forums on the new Land Lease Law, and the soon-to-be- revitalized Public-Private Consultative Forum

may also go some way in this respect. With Ethiopia‘s policy makers closely in tune with the

developmental trajectory of several of Asia‘s economic success stories (most notably Japan and South

Korea), a valuable insight taken from their experience would ideally be the close coordination between

policymakers in business and economic decision-making positions and the private sector groups most

heavily affected by those very decisions and directives.

32 In the case of the new requirement that coffee only be exported via containers, for example, little consideration appears to have

been given to the preferences of foreign buyers and the simple logistical challenge of channeling all coffee exports via containers:

within a matter of months, some 10,000 clean and suitable containers would have been needed in Addis Ababa, the site of

virtually all coffee cleaning plants, to ship out the total expected stock of 225,000 to 250,000 tons of coffee for this crop year.

57


Table 6.1: New Policy Regulations

Intended Objectives Some Consequences-- both intended and

unintended Current Status of Measures

Addressing Tax Evasion

1 Mandatory cash

registers

To ensure 100,000 new

taxpayers using cash

registers by June 2012.

High cash register cost for some micro/small

businesses; large business for about half dozen

authorized cash register companies.

Under enforcement.

2

Estimated

taxation methods

on small business

To capture even small and

medium-sized businesses

within the tax net

Widespread complaints of inflated tax assessments

due to crude (presumptive) estimation methods used Under enforcement.

3

Tax clearance

certificates for

bank borrowing

To ensure that all borrowers

have fulfilled their tax

obligation before they obtain

a bank loan.

Use of banks to cross-check tax evasion. Has created

a tight system for ensuring tax payments by any

potential bank borrower.

Under enforcement.

Addressing Monopolies & Oligopolies

1 Price controls

directive

Meant to stabilize price

increases and introduced in

January 2011 on 18 items

including edible oil, bread,

meat, soft drinks, and beer.

No significant change in inflation, retailers found

inventive ways to evade controls and severe shortages

emerged in some commodities.

Discontinued in June 2011, except for a few remaining

items still subject to controls such as sugar, palm oil, and

bread.

2

Commercial Re-

registration &

Business

Licensing Law

To update business registry

under a new 983-cateogry

classification; to limit

multiple registrations of on

business across multiple

business lines; to ensure

some basic necessary

qualifications for business

registration, including valid

business address unique to a

given business

Requirement for unique business addresses caused

difficulties and some shortages in finding rental

space, at least in city center locations, and has likely

contributed to higher rental costs.

Under enforcement. Each trader granted the possibility to

have several commercial registration (and respective

business licenses for each) to stay engaged in several

business lines.

3

Trade practice

and consumers'

protection Law

To limit price fixing,

hoarding, and collusive

behavior among

retailers/wholesalers by

imposing severe penalties on

such activity, including

penalties of Birr 2 million

and 5-10 years imprisonment

Some publicized cases of traders' stocks being

confiscated on account of "hoarding" goods-- in some

cases even for goods allegedly simply being stored or

in transit.

Under enforcement.

Addressing "rent-seeking" & "undue profits"

1

Real Estate

developers'

unused land

In July 2010, the Addis

Ababa City Land

Administration and Build

Permit Authority announced

plans to take over all real

estate developers unused

land and penalize those who

sold land without adequately

built-up premises

Reported slowdown in construction activity in

part linked to uncertainty created by this measure.

Measure largely retracted, with real estate developers getting

financial penalties, but no criminal penalties imposed and

lands largely not taken.

58


2 Urban land lease

proclamation

Directive puts all previously

free-hold lands under the

lease system upon transfer to

third parties (excluding

inheritances). Sales of free-

hold lands (through any other

modality other than

inheritance) will require

conversion of the possession

into a leasehold tenure.

Time limits established for

construction on leased lands

(of 24 to 48 months).

Home/land sales are frozen until detailed

implementing regulations are put out. Large

uncertainty created over exact application and

implication of directive. Reported slowdown in

construction activity in part due to this measure

as well.

Implementing regulations from relevant Ministry expected in

early 2012.

3

Restrictions on

coffee exporters’

stocks

Directive passed in May

2011 places limits on the

level of stock that a coffee

exporter can hold at anytime.

Holding 500 tons without

legal shipping contract

results in three-month ban

from ECX, while holding 54-

500 tons results in a two-

month ban.

Accumulation of stocks at ECX. Under enforcement--some 55 exporters were accused of

hoarding in May 2011 and banned from ECX.

4

Requirement to

Conduct Coffee

Exports only in

Containers rather

than bags

To modernize coffee sector

transport and logistics and

remove "spoiled bag"

problems.

Large groupS of buyers not able/interested to

purchase in containers due to quantities required. Retracted

5

Restrictions on

major goods

imports

Imports of four widely

consumed and imported

commodities are not allowed

to be conducted by private

businesses or traders:

cement; wheat; sugar; and

palm oil.

Government has become the sole importer of

these four commodities and removed previously

active private sector importers in commodities

such as palm oil. Despite government

intervention, all four commodities have still faced

periodic domestic shortages and sudden price

spikes in past year.

Restrictions remain in place and government conducts imports

in periodic batches.

6 Windfall Tax

Directive decreed "windfall

profit" as "a profit obtained

by any person as a result of a

change that occurs in local or

international economic or

political situations without its

own effort." Businesses in

mining, petroleum industry,

and banking are considered

potential beneficiaries of

windfall gains.

Large tax income on the order of Birr 1.5 billion

collected from 14 banks. Enforcement completed.

7

Housing Agency

directive on Sub-

Leasing

Directive intended to punish

those tenants of government

commercial property who

had rented the premises to

third parties. Allows third

parties the right to buy the

premises at a new price set

by the Agency.

Created severe conflicts among tenant and third-

party renters given sudden shift in a commonly

utilized and long-standing practice that had not

attracted government attention for decades.

Under enforcement.

Source: Government proclamations, regulations & directives in 2009/2010/11, various news articles

59


7. Privatize the ―BIG 5‖—good in itself but also a cure for inflation.

Key Points:

Most of the ambitious targets set under the Growth and Transformation Plan are achievable in

our view—but only as long as sufficient financing can be secured.

To secure such financing, we think there is no better solution than to privatize—even if

partially—some of Ethiopia’s largest state-owned companies, especially the ―BIG 5‖. Only

with a large-scale privatization program can Ethiopia achieve many of the GTP objectives

without having to follow the ―slower and moderated strategy‖ advocated by some.

Large-scale privatization will not just solve the GTP’s financing problem—a worthy enough

accomplishment in itself—but would also help address two chronic macroeconomic problems:

inflation and the unduly tight squeeze on credit to the private sector.

Ethiopia currently has an incredibly vast asset base of over one hundred state-owned companies

built up over a period of several decades. This asset base was largely built up in prior governments,

either through nationalization of previously private properties or as green-field projects established in the

context of a socialist-oriented economic regime. In an indication of the reach and breadth of the

government‘s involvement since then, the asset base of companies under the public sector includes a

world renown airline, a commercial bank with 300-plus branches, an insurance company, a large shipping

company, a telecom company, chemical industries, mining factories, cement factories, metal works

factories, pharmaceutical factories, coffee plantations, wineries, flour factories, shoe factories, hotels, and

(until recently) even several beer factories and a spa. Based on 2009/10 data from the relevant

supervisory body, the Ethiopian Privatization and Public Enterprises Agency (PPESA), a list of more than

80 of these large public enterprises is highlighted in Table 7.1.

Most valuable among the state-owned assets are what may be termed the ―BIG 5‖ state enterprises

which have a particularly impressive operational and financial record: Ethiopian Airlines,

Ethiopian Shipping Lines, Ethio Telecom, the Ethiopian Insurance Corporation, and the

Commercial Bank of Ethiopia. These can be seen as the ―crown jewels‖ of the government-owned

companies, consistently showing high growth and high levels of profitability in recent years. Their asset

base in some cases is as high as Birr 114 billion (≈$6 billion) and they earn annual profits of as high as

Birr 4 billion (≈$240 million), as in the case of the Commercial Bank of Ethiopia.

In the context of huge financing needs to fulfill the plans under the GTP, the full or even partial

privatization of the ―BIG 5‖ represents—in our view—an excellent means of ―cashing out‖ on their

accumulated net worth. Indeed, there is arguably no more justifiable use of this accumulated net worth

than spending it on something (i.e., the GTP) that the government itself believes is worthy of some

supreme sacrifice from all corners of society. And providing financing would not be the only thing that a

full or partial privatization of the ―BIG 5‖ would deliver: other side benefits include the prospect of

reducing inflation and easing private sector credit availability, as is detailed below.

Exactly how valuable are the ―BIG 5‖? By our calculations, these five companies alone are worth

an estimated Birr 132 billion ($7.7 billion). We arrive at this estimate as follows. We utilize the recent

60


year‘s profits for the ―BIG 5‖ and apply a simple valuation tool to compute a price for the firms based on

their annual earnings. More specifically, a conservative price-to-earnings ratio of around 10 to 15 is used,

which indicates that a firm is worth about ten to fifteen times its annual profits, or alternatively that a

buyer would expect a 7-10 percent first-year return following a purchase.33

On this basis, the price

investors would be willing to pay for the ―BIG 5‖ enterprises is, conservatively in our view, an estimated

Birr 132 billion ($7.7billion) (Table 7.2).

The additional privatization of dozens of profitable state-owned enterprises beyond the ―BIG 5‖

would bring the total value of all state enterprises within the range of Birr 165 billion ($9.6 billion).

Applying a similar methodology to what was used above, we estimate that the value of 81 PPESA-listed

enterprises, which reported sales of Birr 39 billion and profits of Birr 3.3 billion in 2010/11, is at least

Birr 33 billion (near $2 billion). The combined value of the ―BIG 5‖ plus these 81 state enterprises is thus

Birr 165 billion (or above $9.6 billion).

Given the large sums involved, there are of course alternate viewpoints that would reject the above

prescription to ―cash out‖ on Ethiopia’s accumulated state enterprise wealth. Broadly speaking, such

dissenting perspectives would tend to question: (i) the advisability of privatizing state-owned firms that

are doing so well; (ii) the appropriateness of such massive privatization for a ―developmental state‖; and

(iii) the loss of policy influence and national ―priority-setting‖ that may occur following the privatization

of some key sectors. We address each of these in turn, but none of them are fully persuasive in our view:

Why privatize the best performers? The simple answer is that Ethiopia needs cash now and it

makes perfect sense to liquidate the net worth held in long-accumulated assets for something as grand

as ensuring a transformative change in the country‘s economic history. In other words, it is precisely

because the ―BIG 5‖ are highly valuable that they deserve to be prime candidates for privatization: for

example, the ―BIG 5‖ firms alone could, according to our calculations, fully finance the Birr 80

billion Abay (―Grand Renaissance‖) Hydroelectric Dam Project. This Dam is a good example of a

mega-project that is actually affordable from a medium-term perspective but whose key challenges

from a financing perspective is that, first, it needs funds upfront and, second, that it needs funds in

foreign exchange: the value of privatization is precisely in these two vital respects.34

In addition to

the above, privatizing the best performers need not be seen as a negative given the possibility of

seeing them do even better and—over time—of generating tax and employment benefits that may

exceed the income they would have generated within the public sector. The case of BGI, a beer

33

The P-E ratio is a shorthand and readily available valuation tool for estimating the price that is willing to be paid by foreign or

domestic investors. Given their strong growth trajectory and dominant market position, we believe a P-E ratio of 15 is reasonable

for the ―BIG 3‖ firms (namely Ethiopian Airlines, Commercial Bank, and Ethio Telecom) and that a ratio of 10 is appropriate for

the other two big firms. Some guidance is available from the P-E ratios seen for comparable companies in neighboring

countries: for example, the P-E ratio of Kenya Airways is 7.2 and that of Kenya‘s largest telecom company (Safaricom) is 9.5.

Looking at stock markets in the region, P-E ratios are generally in the range of 8-15 in Kenya, Uganda, and Nigeria. The recent

privatizations of the fast-growing and profitable state beer companies, which all secured P-E ratios of more than 15, also provide

some assurance that such valuations are achievable. .

34 It is worth noting that for most large GTP projects such as the Birr 80 billion Abay Dam, the issue is not necessarily that they

are unaffordable. Seen over a 20-year time frame, as is appropriate for such mega infrastructure projects, the annual cost of the

Dam is, for example, around ETB 4 billion per annum, which is only 3 percent of this year‘s budget and just 1 percent of annual

GDP. However, as noted above, the key issue is the timing of the needed funds and their nature (large amounts of foreign rather

local currency funds).

61


company privatized more than a decade ago is exemplary: infused with foreign investment and

management, it is now among the country‘s largest taxpayers once accounting for the combined sum

of income, excise, and VAT-related taxes. With respect to Ethio Telecom, too, a privatization could

potentially generate more in future tax revenue than what is earned by retaining the company in

public hands. A comparison with Kenya‘s dominant telecom provider, Safaricom, is telling in this

regard: with less than half the Ethiopian population, Safaricom generated enough revenue last year to

contribute to $300 million (Ksh 25 billion) in taxes, while Ethio Telecom generated $163 million

(Birr 2.8 billion) in net profits, which even when fully transferred to government as dividends falls far

short of the taxes paid by its peer.35

Is large-scale privatization inconsistent with a ―developmental state‖? It is certainly the case that

many other ―developmental states‖ (on which Ethiopian policymakers often model their policies)

have had and still retain large state enterprise sectors, most notably for example in Vietnam and

China. And the fast-growth, industrialization, and poverty-reduction success of such states has

indeed taken place with these state enterprises continuing to operate within large segments of the

economy. But Ethiopia stands out from such ―developmental states‖ in two crucial respects. First,

Ethiopia does not (yet) have a very large FDI sector within the economy that is driving growth in key

areas such as manufacturing and exports. The East Asian countries have large FDI-dominated sectors

that have provided large pools of investment that propelled economy-wide growth and exports even

in the presence of large state enterprises.36

Second, Ethiopia simply does not have the savings rates of

countries like China or Vietnam, or for that matter any of the ―East Asian miracle‖ economies (such

as South Korea), where large domestic supplies of savings within the banking system offered enough

financing for both state enterprises and a thriving, credit-utilizing private sector. More specifically,

Ethiopia‘s savings rate is a low of 9 percent of GDP compared to savings rates that are nearly four

times that amount (33 percent) seen in East Asian economies; with high inflation, banking deposits as

a share of GDP have collapsed in recent years, from 31 percent to just 21 percent of GDP, eroding the

pool of funds that could finance new and expanding firms.37

In such an environment, privatization

(especially targeted at foreign investors) offers a chance to develop a dynamic FDI sector that can

drive manufacturing and exports while at the same time leaving the banking system‘s supply of

loanable funds for a domestic private sector that also needs to grow and expand.

Why privatize and lose policy influence? Given the sheer scope of state enterprise holdings there

is very little substantive and meaningful loss of policy influence that would result in selling many

state enterprises, for example those in the hotel industries, shoe factories, or food factories. There are

of course some potentially sensitive cases, such as the large state-owned bank (CBE) where the

ability for policy-directed lending could conceivably diminish with privatization.38

In such cases, and

35

One study of the impact of the delay in mobile phone penetration in Ethiopia finds that more than $1 billion in tax revenue

has been foregone in the last five years (see the Chamber of Commerce‘s PSD Hub Publication No. 15: ―The Impact of

Telecommunications Services on Doing Business in Ethiopia, December 2010‖). 36 In China, for example, FDI-owned firms drive 69 percent of manufacturing and 58 percent of the country‘s exports. 37 For a country such as Ethiopia, it is in any case undesirable to have very large jumps in saving (and, by necessity, a large drop

in or restrained growth of consumption) given the low incomes from which the economy is growing. In short, a country such as

Ethiopia should not rely too strongly on domestic savings as a source of investment funds, especially when a solution such as

privatization is readily on hand and can provide additional resources for new investments without depressing consumption. 38 Even this risk is arguably not significant given the authorities‘ ability, via bill and bond purchase requirements, to impose

directed lending directives even on private banks.

62


if public ownership must be retained, there is of course a readily available middle-ground solution:

government can retain majority stakes of 51 percent (with the associated ability to keep majority

Board seats and strategy-setting rights within the enterprises) while selling off the remaining 49

percent to private foreign/domestic investors (who would provide the proportionate cash

investments). Such a ―51 percent‖ solution would provide Birr 81 billion ($4.7 billion) in funds—

roughly what is needed for the Abay Dam—even while leaving government‘s majority stakes intact.

To summarize, the logic for pursuing an aggressive privatization program makes sense for the same

reasons that large agricultural lands and mining concessions are being offered to investors—the

private investors bring plenty of up-front cash and expertise to manage specialized activities; the

government benefits from considerable gains through future tax and export revenues; and the public has

the opportunity to benefit from what will be much increased public goods made possible by higher fiscal

resources.

Not Just Money for the GTP

The benefits of privatization extend well beyond just providing funds for the GTP, though that

itself would be a worthy and remarkable accomplishment in itself. Two other major advantages of

privatization are as important, if not more so, than getting funding for the GTP.

First and foremost, privatization will—if done rightly—offer a cure for inflation. As shown in

Chapter 5, inflation in Ethiopia has been linked heavily to a financing problem: the public sector‘s large

financing needs have been met via large credit growth in the banking system and by high levels of direct

advances from the central bank. If past patterns continue, the situation will only get worse in the coming

years as the prospective financing requirements are much larger: by the GTP‘s own projections, the

combination of budget and off-budget spending will demand around Birr 85 billion per year in new

borrowing (14 percent of annual GDP), or a total of Birr 422 billion for the five-year GTP period. Such

massive borrowing can be sought from three sources: from the central bank, from commercial banks, or

from abroad. The first (essentially ―printing money‖) is highly inflationary, the second sucks away bank

loans that would have otherwise gone to the private sector, and the third leads to an accumulation of

potentially dangerous external debt, which in Ethiopia‘s case has already tripled in just the last five years

(Table 7.3).39

In short, given the scale of the GTP financing needs and the need to moderate and even

reverse rising debt ratios, government needs funds that can be secured without any borrowing:

privatization offers precisely such a non-inflationary and non-indebting source of funds.40

In this sense, it

can be seen as the ―magic bullet‖ needed to reach many GTP targets without having to follow a ―slower

or moderated‖ strategy advocated by, for example, the IMF and World Bank.

Second, privatization will provide a welcome rebalancing of private-public ratios in many key areas

of the economy. By providing the public sector with funds from external sources, privatization can

39 External borrowing in recent years has already reached magnitudes where the annual amount is now near 70 percent of exports

and 6 percent of GDP per year, a trend that surely cannot be sustained for very long (see Annex for External Borrowing and Debt

Tables). 40 Of course, funds received from privatization still require prudent monetary and fiscal management, but this is a task that

involves much less risk of generating inflation and is, fundamentally, a second-order problem compared to the risks of domestic

borrowing induced inflation.

63


potentially reverse years of declining and stagnant ratios of private credit to GDP (Table 7.4a). More

broadly, with government divesting its holdings in key areas of the economy, there would be a healthy

rebalancing of ratios such as private investment-to-GDP and private manufacturing-to-GDP. This would

be all the more important since (as noted in Chapter 1) some new parastatals are already emerging or

expanding well beyond their traditional tasks: the Metals and Engineering Corporation (METEC); the

Ethiopian Sugar Corporation; the Ethiopian Railways Corporation; the Ethiopian Shipping and Logistics

Enterprise (an upcoming merger of Ethiopian Shipping Lines, Ethiopian Maritime and Trade Services,

and the Dry Ports Services Enterprise); the Ethiopian Grain Trading Enterprise (which has somehow got

itself into large-scale coffee exports though once a domestic cereals trading firm); and finally a likely new

public sector commodities distributor that seems likely to arise from the merger of two public distributors,

ETFRUIT and the Merchandise Wholesale and Import Trade Enterprise (MEWIT). In summary, as

suggested in Chapter 1, it is desirable to have not one but two strong engines (both private and public)

driving Ethiopia‘s economy and privatization—by attracting foreign investment, know how, and

dynamism in key GTP-supported sectors—can play a major part in making this possible.

64


Table 7.1: Ethiopia's Large State Owned Enterprises

Name of State Enterprise Capital (Mn ETB) The "BIG 5" State Enterprises

1 Ethiopian Airlines 6,638

2 Commercial Bank of Ethiopia 6,200

3 Ethiopian Insurance Corporation 350

4 Ethio Telecom

5 Ethiopian Electric Power Corporation 23,622

Agriculture and Agricultural Services

6 Agricultural Materials and Technical Service Enterprise 184

7 Agricultural Input Supply Enterprise 38

8 Agricultural Mechanization Service Enterprise 16

9 Natural Gum Production Enterprise 8

10 Arsi Agricultural Development Enterprise 217

11 Bale Agricultural Development Enterprise 220

12 Awassa Agricultural Development Enterprise 33

13 Fruit and Vegetable Development Enterprise 3

14 Upper Awash Agro Industry 208

15 Coffee Preparation and Storage Enterprise 41

16 ETFRUIT 52

17 Coffee Plantation Development Enterprise 558

Sub-Total 1,580

Construction and Construction Services

18 Building Materials Supplier Enterprise 11

19 Awash Construction S.C 93

20 Construction Design S.C 33

21 Transport Construction Design S.C 44

22 Batu construction S.C 70

23 Tikur Abay Construction S.C 125

24 Tabor Ceramic products factory 178

25 Construction Works and Coffee Technology Expansion Enterprise 18

26 Bricks Products Factory S.C 11

27 Ethiopian Marble Product Enterprise 5

Sub-Total 588

Hotel and Tourism

29 Ethiopia Hotel 7

30 Ethiopian Tourist Trading Enterprise 38

31 Ras Hotels 7

32 Felweha Services Enterprise 5

33 Wabe Shebelle Hotels 11

34 Ghion Hotel 32

Sub-Total 100

Transport Services

35 Ethiopian Shipping Lines 758

36 Ethiopian Maritime and Transit Enterprise 24

37 Walya Cross Country Transport S.C 19

38 Weyira Transport enterprise 63

39 Anbesa City Bus 530

40 Bekelcha Transport S.C 125

41 Comet Transport S.C 270

42 Shebelle Transport S.C 124

Sub-Total 1,914

Trade

43 Merchandise Wholsale and Import Trade Enterprise 98

44 Ethiopian Petroleum Enterprise 306

Sub-Total 404

Services

47 Industry Project Service Enterprise 8

48 Public Procurement Services Enterprise 12

65


Sub-Total 20

Food Manufacturing

49 Dire Dawa Food Complex S.C 101

50 Awassa Flour Factory 22

51 Tigray Flour Factory 4

52 Kokeb Flour Factory 7

53 Nazreth Edible oil S.C 3

54 Hamaresa Edible oil S.C 75

Sub-Total 212

Iron & Steel Manufacturing

56 Akaki Spare parts and Hand Materials Factory 156

57 Nazreth Tractor Assemble 10

58 Ethiopia Plastic S.C 35

59 Kality Steel and Metal Works Factory 14

60 Ethiopia Steel Melting Enterprise 29

61 Ethiopian Cork and Can Manufacturing S.C. 41

Sub-Total 286

Paper & Printing

62 Artistic Printig Enterprise 5

63 Birhanena Selam Printing Enterprise 34

64 Commercial Printing Enterprise 7

65 Bole Printing Enterprise 10

66 Educational Material Producer and Distributor 181

67 Ethiopia Pulp and Paper Factory S.C 82

Sub-Total 318

Chemical Industry

67 Adami Tulu Anti Pest Manufacturing Enterprise 43

68 Costic Soda Factory 59

69 Awash Melkassa Aluminum Sulphate 95

Sub-Total 197

Pharmaceuticals

71 Ethiopia Pharmaceautical Factory S.C 150

Cement

72 Mugher Cement Enterprise 342

Mines

73 Ethiopian Mines Development S.C 219

74 Adolla Gold Mine Enterprise 63

75 Abijata Soda Ash S.C 34

Sub-Total 316

Beverage

76 Asela Malt Factory 55

77 Awash Wine Factory 63

78 Bedele Brewery S.C 178

79 Harar Brewery Factory S.C 157

80 Metabo Brewery Factory S.C 122

81 National Alcohol factory 13

Sub-Total 588

Textile and leather

82 Kombolcha Textile S.C 202

83 Bahir Dar Textile S.C 85

84 Anbesa Shoe S.C 16

Sub-Total 302

Source: Company Reports/Press Releases for "BIG 5" data; PPESA for State Enterprises (2009); and Access Capital

66


Table 7.2: Valuing the "BIG 5" and Other Parastatals

"BIG 5" State Enterprises

Profits--

Birr bns.

Applied P-

E ratio

Estimated

Value-- Birr

bns.

Estimated

Value-- USD

bns.

1 Ethiopian Airlines 1,380 15 20,700 1,203

2 Ethiopian Shipping Lines 531 10 5,310 309

3 Commercial Bank of Ethiopia 4,200 15 63,000 3,663

4 Ethiopian Insurance Corporation 149 10 1,490 87

5 Ethio Telecom 2,800 15 42,000 2,442

TOTAL for "BIG 5" State Enterprises 9,060

132,500 7,703

Other State Enterprises

81 PPESA-listed State Enterprises* 3,315 10 33,150 1,927

Grand Total for Major State Enterprises

"BIG 5" plus PPESA-listed Enterprises 12,375

165,650 9,631

Grand Total with Govt. Retaining Majority Stakes

Valuation at just 49% stakes sold -

81,169 4,719

*Ethiopian Shipping Lines is excluded from the 82 enterprises in the PPESA tables, as it is presented as part of the "BIG 5"

Source: Company Reports/Press Releases for "BIG 5" data; PPESA for State Enterprises (2009); and Access Capital

calculations.

Table 7.3. Public External Borrowing and Outstanding Debt (2006-2011)

FY07/08 FY08/09 FY09/10 FY10/11

Foreign Borrowing by Government (Millions

USD) 395.1 1,750.2 1,564.5 2,079.1

Government Debt Outstanding 2,767.1 4,352.2 5,633.8 7,819.5

Debt to GDP Ratio (%) 10.3% 13.5% 19.0% 25.3%

Source: MoFED “Public Sector External Debt” Statistical Bulletin (2006/07-2010/11)

67


8. Modify regulatory policies that inflate business costs and depress urban consumer incomes.

Key Points:

A combination of old and new regulations—in trade, taxation, and land policies—work to

inflate business costs and unnecessarily depress urban incomes.

Scrapping some of these regulatory policies can help boost private sector growth and

employment creation, both critical concerns for Ethiopia’s fast-expanding urban centers.

Specific reforms would ideally cover the removal of several private sector import restrictions,

selected tax cuts, and a liberalization of land and real estate policies.

Some long-standing regulatory policies in three fields—trade, taxation, and land—contribute in

varying degrees to artificially inflating business costs and depressing consumer incomes. The

impact of these policies is most acutely felt in Ethiopia‘s urban centers and by its urban inhabitants, and

thus deserves special attention given the often acute pressures faced by this sub-segment of the population

in recent years. Many of these suggested reforms are not new proposals and have often been advocated by

several others before; we highlight those we think are most urgent and justified.

First, in the area of trade policies, quantitative restrictions on certain key import items, customs tax

calculation methods, and restrictions on the choice of shippers represent extra costs to business that

also act as drains on consumer incomes.

Restrictions on private sector imports of key commodities such as cement, edible oils, wheat,

and sugar have been in place for most of the past year, driven with the belief that bulk

government imports of these commodities is the best means to regulate supplies and control

prices (Table 8.1). However, due to apparent difficulties in managing the very challenging

import and distribution tasks involved, shortages in these items still persisted and the high level

and volatility of prices has not been eliminated. For some of these commodities, large

differentials between world prices and local prices also remain: for instance, world cement prices

are just $8 or $9 per quintal or about Birr 150 per quintal but local prices have remained at double

those levels until very recently (when the prospects of a new domestic cement factory and

slowing construction activity seemed to have tempered prices). In short, the inability of imports

to enter without restrictions works to inflate local prices of these key commodities and

contributes, to some degree, as a strain on consumer incomes.

Customs tax calculation methods. Two aspects of customs tax calculations raise repeated

objections from many parts of the business community. First, the effect of ―paying taxes on

taxes,‖ or cascading, is notable: for a given value of imports and depending on the commodity, an

initial import duty tax may be followed by other taxes such as a VAT, an excise tax, and/or a

surtax, with each subsequent tax calculation being inflated by including the preceding tax in the

calculation of the base. Second, the use of Customs data on import prices rather than the actual

import invoice of an importer often works to inflate customs charges and negates volume

discounts or reduced prices that importers may have secured from their long-standing suppliers.

Although the need to avoid abuses by under-invoicing importers is obviously the logic of using

68


customs price data rather than actual import prices, introducing some controlled scheme to allow

groups of qualified importers to use actual import prices could be a workable compromise in this

area.

Ethiopian Shipping Lines monopoly on import trade. A requirement that importers utilize

only the ships of the government-owned Ethiopian Shipping Lines has been in place for many

years. This requirement can be waived in certain cases, but generally only in exceptional

circumstances. While put in place for good intentions (i.e. to help build a domestic shipping

capability rather than relying solely on foreign-owned vessels), many importers do raise

complaints about cost implications (ESL freight rates tend to be higher than those of other

shippers on most routes) and the inability to select among competing shippers. Given the many

years of protection already afforded to ESL, and the clearly sustainable position it now finds itself

in (with large profits reported for many years), a gradual elimination of this monopoly could work

to reduce shipping costs and thus minimize expenses for domestic businesses over time.

Second, with respect to taxation policies, although the broad efforts at mobilizing revenue are

broadly commendable (as noted in Chapter 6), adjustments in tax rates in selected areas is in our

view justifiable on both equity and efficiency grounds:

Taxes on salaried employees: Ethiopia‘s tax rate on salaried workers is applied at an unusually

low threshold and currently creates undue strains on large segments of the working population

that could be exempted without much loss in overall tax revenue (Table 8.2). For example, the

threshold at which one starts paying taxes starts at an unusually low monthly salary of Birr 167

($9), though the norm in other low-income African countries is to exempt workers who earn

about ten times that amount, i.e., up to $98 (Birr 1700) per month. Expressed in relation to

average per capita incomes, the wage level at which one starts paying taxes is at just 3 percent of

per capita income in Ethiopia versus around 10 percent of per capita income in other African

countries. At the other end, the highest tax rate of 35 percent is reached at a relatively low

threshold of Birr 5,000 ($292) per month, less than what is seen in other countries where the

highest tax rates applies at monthly salaries of Birr12,489 ($726) and above. Part of this

difference comes from the fact that these thresholds were set nine years ago and were not

subsequently adjusted for inflation. Indeed, with no threshold changes other than a simple

adjustment for inflation, the Birr 167 threshold for paying taxes should now be around Birr 550

and the Birr 5,000 for paying the highest 35 percent rate should actually start to apply at monthly

salaries of Birr 16,500. Clearly, inflation indexation or other ad hoc adjustments to be more in

line with international practices in this area are in order.

Surtax on imports: A ―temporary‖ surtax of 10 percent was applied on all imported goods

(except fertilizers, fuel, motor vehicles, and capital goods) in 2007. Five years later, however,

this surtax still remains in place, imposing an extra 10 percent cost to most imported items. With

a now much widened tax base than in 2007 plus big jumps in tax revenues from sources other

than trade taxes, the time seems appropriate to remove this surtax—a very easy ―stroke-of-the-

pen‖ reform that potentially could reduce import prices facing urban consumers by 10 percent.

69


National Bank’s 1.5 percent levy on all bank-routed imports: Somewhat similar to the surtax,

but at a much smaller rate, there is currently a 1.5 percent levy imposed by the central bank, the

National Bank of Ethiopia, for all Letter of Credits opened at the commercial banks. The charge

is a relic of the old system of tightly regulated trade licensing and foreign exchange control

regime and was (presumably) a service fee for the processing functions of the central bank.

However, as L/C opening is now conducted by private banks, the removal of this 1.5 percent levy

on imports represents yet another avenue for removing items that tend to hold down consumer

incomes.

Removal of taxes on freight vehicles: A bolder move in the tax area and one which could have

very positive repercussions, would be a removal of the high import duties imposed on large

freight transport vehicles. As many experts in this area have remarked, it is puzzling that Ethiopia

still has not yet seen sharp declines in nation-wide transport costs despite record road expansions

and improvements; (Table 8.3). Part of the reason for the above is the very high tariffs (and thus

high vehicle costs) imposed on freight vehicles. Removing this tax would have non-trivial

revenue implications but would represent a big boost to those in the export, import, and

agriculture sectors (including potentially millions of farmers) which are—in the end—all highly

reliant on the freight sector for moving their goods to and from key markets.

Third, with respect to land and housing policies, there is tremendous scope for addressing policies

that inflate construction/home-building costs and make homes unaffordable to the majority of the

population. The fundamental principle behind the need to create favorable housing construction

conditions should first be clear, namely that housing and the associated construction industry can be a

major force not just for meeting the public‘s needs for shelter but also for generating widespread

economic activity and employment. According to the World Bank, housing in a typical developing

country context is 75-90 percent of household wealth and 15-40 percent of household monthly

expenditure. As important, given its associated construction activity, it represents 10 percent of

worldwide labor force, and thus has huge positive and multiplicative effects within the economy. For

these very reasons, a conducive private home-building industry can potentially offer much in the way of

providing an indispensable product needed by all (shelter) as well as being a driver of growth and

employment in urban centers. In this respect, besides the critical need to have in place workable land sale

and allocation policies, two potential policy reforms merit consideration:

Reducing or removing the multiple taxes that currently inflate real estate costs: For buyers

of homes in Ethiopia‘s urban areas, affordability is reduced by a 15 percent VAT that must be

paid if buying from a developer; a 15 percent capital gains tax that must be paid by a seller and

thus often implicitly included in sales prices; and a 6 percent home sale transfer fee which adds

yet another layer of taxes borne by the seller or buyer depending on the specifics of a transaction.

Selected and well-designed reductions or removals to such taxes can give a big boost to the

affordability of homes. Such a reduction would not mean that the sector is excluded from

taxation: for example, a real estate developer already pays 30 percent profit tax on the income

generated from a home/sale apartment not to mention the VAT embedded in all the inputs

purchased by the developer (for cement, iron bars, and all finishing materials). In general, even

without going to the extent of encouraging housing purchases (via mortgage tax credits used in

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some countries such as the US), there are ways to design tax policies in a way that balances the

need to collect some taxes from the real estate sector while making housing affordable for a wider

range of potential buyers.

Allowing special incentives or policies for both domestic and foreign real estate developers

to introduce truly low-cost housing schemes. The current real estate sector in Ethiopia is

largely focused on the mid- to high-end of the market, with the homes and apartments on offer

largely unaffordable to 90 percent or more of the population (especially in the absence of long-

term mortgage instruments). Accordingly, a desirable shift in focus would be on boosting the

supply of truly low-cost housing developments and on making such low-cost ventures profitable

and sustainable projects that would attract willing private investors. Preferential land allocations

for such developers—as is done for SMEs or flower growers—could help especially if strictly

limited to low cost homes (with prices below a specified threshold). Successful schemes of this

sort, driven by private developers but supported by government incentives have had exemplary

results in places such as South Africa and Brazil and deserve to be emulated.

Many of the above measures would, to some degree, cut back on government income and thus seem

to go against the overall direction of the GTP; however they do provide some measure of relief to

urban consumers, something that deserves to be a priority for the period ahead. The same level of

priority given to raising fiscal revenues needs to ideally be accorded to urban residents given the severe

income compression seen in urban areas on account of inflation, particularly in food, transportation and

rental/home ownership costs.41

All of this is important given the sheer numbers of people that now

comprise the urban population (10 million according to latest statistics) and the need to ensure healthy,

balanced urban environments that can support industry and contribute towards urban or near-urban

economic growth corridors and clusters.

Table 8.1. Recent Prices of Major Import Commodities with Quantitative Restrictions in Ethiopia

Import Commodity FOB Price (USD/ton) Local Price (USD/ton)

Wheat 300 321

Palm Oil 835 1,259

Sugar 550 845

Cement (OPC) 64 169

Source: Various International Commodity Markets Watch sites (October-2011), local markets survey

41 It should be noted also that while Ethiopia‘s revenue-to-GDP ratio of just 12 percent is seen as unusually low in comparison to

many other African countries, this partly reflects the still large size of the agricultural sector in the overall economy. Revenue

relative to non-agricultural GDP is closer to 20 percent, suggesting that effective tax rates within those parts of the economy that

are taxed are actually much higher than appears at first sight. Thus, there is a need not to overdo efforts to intensify taxation on

the urban and already taxed sectors, which may bring short-term gains in term of added collections but do so at the cost of longer-

term weakness in business creation and expansion.

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Table 8.2: Cross-country comparations in tax rates and applicable thresholds

COUNTRTRY

Minimum Income

Threshold at which

Tax Applied (USD)

Income where

Highest Income

Tax Rate Applies

(USD)

Highest

Income Tax

Rate Payable

(%)

GDP per

capita (in

USD)

Democratic Republic

of Congo (DRC) 7 213 50% 211

South Africa 1,433 5,650 40% 8,342

Namibia 415 7,782 37% 6,087

Ethiopia 9 292 35% 351

Benin 94 1,000 35% 756

Cameroon 344 861 35% 1,234

Zambia 161 825 35% 1,355

Zimbabwe 5 48 35% 735

Mozambique 129 436 32% 551

Kenya 108 415 30% 882

Uganda 50 159 30% 453

Tanzania 57 414 30% 550

Djibouti 169 3,376 30% 1,500

Malawi 55 73 30% 350

Rwanda 49 162 30% 585

Ghana 52 838 25% 1,588

Nigeria 16 84 25% 1,541

Botswana 4,082 16,327 25% 8,844

Angola 263 2,423 17% 5,061

China 79 15,751 45% 5,184

Vietnam 239 3,819 35% 1,362

India 263 822 30% 1,527

Africa Average* 98 726 32% 1,107

* Excluding South Africa, Botswana and Namibia

Source: Computed from results in World Tax Rates 2010/11--Tax Rates cc. & Country Revenue Authorities

72


Table 8.3 ROAD FREIGHT TARRIF SERIES--Djibouti to Addis Ababa (Birr/Quintal)

Year DRY BULK TARIFFS (in Birr) DRY BULK TARIFFS (in USD)

2000 36.1 4.4

2001 32.0 3.8

2002 32.0 3.7

2003 38.8 4.5

2004 40.7 4.7

2005 42.8 4.9

2006 44.0 5.1

2007 50.6 5.8

2008 58.2 6.3

2009 70.0 6.7

2010 71.8 5.6

2011 79.5 4.9

Source: AC Price Database, Regional Transport Surveys, PSD Hubs "Management of Commercial Road Transport in

Ethiopia" (2009), Transport Cost in Ethiopia: An Impediment to Exports (2004)

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9. Go for bolder and unconventional policies in agriculture, as would be more fitting for a

developmental state.

Key Points:

For a country with an avowedly ―developmental state,‖ Ethiopia’s agricultural policies are—in

many respects—surprisingly market-oriented. In our view, if there is one area that is normally

rife with market imperfections and that arguably demands the activist interventions of a

developmental state, it is precisely in a sector such as agriculture rather than in, say, areas such

as banking, telecoms, or manufacturing.

The laissez-faire approach towards agricultural policies stands in stark contrast with what is

observed in some other sectors where more activist policies such as subsidies for key inputs,

across-the-board tax relief, and price floors and ceilings are in place.

Some heterodox policies in agriculture would actually be quite welcome and could help secure the

ambitious targets in the sector—just as long as they do not create too much distortion and debt.

Ethiopia’s agricultural policies are, in many ways, governed by surprisingly laissez-faire conditions.

Farmers are essentially free to set prices on their products as they see fit and have done so for many years,

explaining the often erratic movements in prices between years and seasons. A system of minimum or

maximum farm produce prices does not apply. Prices for key farm inputs—seeds, fertilizer, farm

equipment—are not regulated to any significant degree and there are no subsidies to farmers, who are

consequently exposed to the big swings in the prices of these needed inputs. Agriculture is fully open to

foreign entrants, in contrast to many deliberately closed sectors, such as retail, wholesale, and small-scale

services, where the intention to protect small-scale domestic operations has long been the motive for

excluding outsiders.

The contrast between the relatively free-market framework faced by small-scale farmers and the

interventionist and ―supportive industrial policies‖ applied for other sectors is often quite stark.

Manufacturers and exporters, for example, enjoy all kinds of favorable treatments in the form of no taxes

imposed on their imported inputs, income tax holidays, and special land allocations. Until recently, large

fuel subsidies (on the order of 7 percent of GDP over three years) benefitted mainly urban and better-off

segments of the population. Electricity prices that are set below cost recovery levels remain in place to

the benefit of manufacturers who use large amounts of electricity. Subsidized housing schemes

(condominiums) are benefiting rising shares of the urban population. In the financial sector, a floor on

deposit interest rates is applied to encourage savings (though this has long been eroded by inflation).

Thus, in many sectors, one sees a range of interventionist policies that reduce input costs, freely provide

needed inputs such as land, reduce/remove tax obligations, and that set minimum and maximum prices.

Not all of these are necessarily desirable or appropriate, but the more significant point is that

interventionist policies are widespread in the manufacturing and services sectors to lead and direct

business and consumers towards certain economic activities and away from others.

In principle, the general case for interventionist policies in agriculture is stronger than in most

other sectors. Agriculture stands out as a sector where outputs are influenced by a much wider range of

variables than most other sectors: there are exogenous natural factors such as rains, temperature, moisture

74


levels, disease, flooding; changes in key input prices (seeds, fertilizer); and changes in key output prices

linked to world prices, transport conditions, marketing networks or urban developments. The number and

scope of potential influences is extremely high. In addition, agriculture is prone to wild price swings with

a bumper harvest often leading to price collapses, which in turn discourage production in the following

season and then subsequently lead to unusually sharp price spikes.

In Ethiopia’s agricultural sector, which is starting from much deeper handicaps than is common in

most other places (i.e., very low technology levels and yields), the case for more interventionist

policies is very strong, especially if targeted at the dominant, small-holder sector.42

What could be

done in specific terms? Five priorities, we think, deserve attention:

Fertilizer subsidies: The range of subsidies provided directly or indirectly has been quite large in

recent years, and includes beneficiaries of fuel subsidies, electricity price subsidies and low-cost

housing project (condominiums). In the case of fuel subsidies, their level reached as high as 7 percent

of GDP in 2008. Given subsidies of such size for other areas, a very legitimate question is: why not

subsidies for fertilizer to sharply lower their cost to small-scale farmers? A very compelling case

exists for subsidizing for fertilizer, a key input that can have a transformative effects on yields.43

Explicit budgetary allocations for such subsidies would be welcome and of course their technical

implementation would need strong safeguards. For illustrative purposes, a ―1 percent of the budget‖

allocation to fertilizer subsidies could provide 180,000 tons of extra fertilizer or, alternatively, cut the

cost of fertilizers by more than half (by 68 percent to be exact).44

Such allocations can replicate the

remarkable successes seen with implementation of fertilizer subsidies in countries such as Malawi,

where an effective government subsidy for seeds and fertilizers (including a voucher system to limit

abuses) helped transform the country from a position of requiring food aid for 40 percent of its

population to becoming a net maize exporter within the space of just two years. In short, a change of

orientation towards subsidizing producers instead of subsidizing consumers is worthy of

consideration.

Seed supplies and subsidies: Making available high-yielding seed varieties to small-holder farmers

in sufficient volumes and consistency has long been a major challenge given poorly developed supply

and distribution chains. Beyond just availability, however, has been the price: compared to low-

yielding seeds that farmers can readily access from prior harvests or at low cost within their farm

area, convincing a farmer to opt for higher-cost, high-yield seeds is a challenge if its value is often

uncertain and only anticipated after a long period time. The large scale supply of high-yielding and

42 Illustrative of the need for significant changes in the smallholder sector is the $300 million of food aid requirements for 2011

(see ―Humanitarian Requirements 2011‖ document of July 2011).

43 According to press reports, Ethiopia imported 571,000 tons of fertilizer in 2010/11 which was supplemented by a carryover

stock of 249,000 from the previous year. The fertilizer was distributed to farmers in 245 cooperative unions at a price of Birr

1080 for one quintal of urea and Birr 884 for one quintal of DAP. A new state-owned fertilizer plant aims to provide 550,000

tons of fertilizer by 2014/15.

44 By way of comparison, existing budget allocations are as follows: 24 percent for roads; 22 percent for education & capacity

building; 11 percent for agriculture; 9 percent for defense; 7 percent for water & sanitation; 4 percent for health; and 1.4 percent

for rural electrification.

75


soil-appropriate seeds at low cost is worthy national project to break away from past norms and to

overcome the natural disincentives to invest in high-yielding seeds. Again, sizeable and sustained

subsidies are likely to be more than offset by prospective agricultural yield and income gains, and

proper control and distribution systems can work to minimize some (inevitable) abuses.

Farming equipment subsidies: The virtual absence of modern farming tools and technologies is one

major factor behind low farm yields and, again, subsidy programs to facilitate the purchase of

agricultural equipment can go a long way. This need not involve high-tech tractors or harvesters but

even simpler tools such as mechanical water pumps to facilitate irrigation and small-farm vehicles to

reduce large post-harvest losses linked to the poor transport conditions of moving produce to markets.

Trade policies could also be modified. Farm equipment imports (e.g., tractors) are currently subject

to duty, for example, unless the buyer has an investment license. This, however, has the perverse

effect of benefiting large farmers (who take out such investment licenses) at the expense of small-

holder farms who would not readily go about getting such a license. However, tractor imports will of

course be used in agriculture and there is little need to require an investment license to import it duty

free—better to let everyone who makes such a purchase benefit, as is the case in most other

neighboring countries for example.

An Agricultural Bank: Credit is a key input still in short supply for Ethiopia‘s small-holder farmers.

While the proliferation of MFIs in rural areas has addressed rural credit needs to some extent in recent

years, the establishment of a professionally run agricultural bank targeted at small and medium-size

farmers can make a major difference. The key value-added of such an institution (relative to existing

commercial banks, for example) would be its ability to specialize solely in agriculture-related

financial products which should allow it to offer tailored funding for small scale farmers and

potentially for others in the agricultural value chain. A policy lending bank, the Development Bank

of Ethiopia, is of course already in place but its focus of attention is mainly on industry (60 percent of

its planned Birr 28 billion in new lending under its five-year plan is for manufacturing) and whatever

remaining funds are dedicated for agriculture go largely to large commercial farms rather than

smallholders.

Stronger price stabilizing tools for key agricultural goods, via stronger food reserve

management systems or price bands: Given the high (57 percent) contribution of food in the

overall price index, it should not be forgotten that agricultural policies that control food inflation

effectively help control overall inflation. However, in recent years, food prices have been

characterized by large price swings, both for key grains such as teff, wheat and corn as well as for

other food items such as onions, spices, fruits and vegetables. Although detailed technical and expert

evaluations would be necessary, instituting mechanisms for stabilizing at least the staple cereal crops

(teff, wheat, and corn) appear to us as very worthy of consideration in the Ethiopian context. This

could be accomplished via a strong food reserve management system that could, for instance, buy

stocks when prices are collapsing and sell stocks when prices are spiking—this is best perhaps

supplemented by a price band for key highly consumed food items. The mixed and sometimes dismal

record of such food reserve management agencies is, of course, not lost on us but this need not imply

76


dismissing such an initiative but rather that it be done with the right safeguards, limits, financing caps,

and the like to ensure its success without too much debt or distortions.45

In short, to tackle the single greatest contributor to low incomes in Ethiopia, which is the low level

of productivity of small-scale Ethiopian farms, bold, unconventional, and even some possibly risky

agricultural policies are worthy of consideration. The GTP is certainly ambitious in many respects, but

some of its targets in the agricultural sector—such as waiting till 2014/15 to eliminate Ethiopia‘s need for

food aid—deserve to be seen as being too timid rather too ambitious. Bolder agricultural policies,

including a stronger dose of interventionist ones, could help ensure this one GTP target is achieved much

sooner than envisaged.

45 It is notable that price floors or bands are widely used in agricultural markets as varied as the US, the Euro area, and many

Asian and Latin American countries.

77


10. Put in place a smarter set of reforms for the domestic banking sector, the lifeblood and

―circulatory system‖ for any fast-growing and modernizing economy.

Key Points:

Large portions of Ethiopia’s private sector are currently starved of credit thanks to the high

share of bank loans that has been going to the public sector in recent years.

Reversing this state of affairs—by allowing greater credit expansion at private banks—should

be a top priority going forward. Contrary to some widely held misconceptions, this will not

necessarily mean a jump in inflation nor result in a state of affairs where credit would only flow

to importers, domestic traders, and other unduly maligned sectors.

Three sets of financial reforms—the relaxation of foreign exchange controls, allowing a greater

scope for foreign borrowing by private banks, and the establishment of an Ethiopian Bond

Exchange (EBX) with an associated secondary market— would bring in substantial private

capital for driving investment, exports, and growth, all in line with GTP objectives.

Credit to the private sector has been steadily shrinking—relative to the size of the overall

economy— in recent years. In 2010/11, according to our estimate, credit to the private sector reached

Birr 46 billion, or 9 percent of Ethiopia‘s Birr 511 billion GDP. This ratio has declined from the peak of

12 percent of GDP seen in 2005/06. At the same time, the ratio of credit to the private sector in relation

to credit to state enterprises has dropped sharply in recent years—credit to the private sector had for long

been more than double that given to public enterprises but the outstanding loans of the two sectors are

now nearly the same (Table 10.1). The on-the-ground effects of this crowding out of private credit has

become increasingly visible and biting in recent months. As of December 2011, credit conditions in

private banks have become unusually tight, with most private banks having stopped taking in new loan

applications and unable to process or make disbursements on already lodged credit requests. Reversing

the decline in credit to the private sector should be a top priority in the period ahead to relieve the severe

credit strains felt by the private sector, and giving private banks more room to lend is one important way

to do so: private banks extend 90 percent of their loans to private sector versus just 56 percent for public

banks.46

The lack of policy initiatives to reverse falling private credit ratios may be driven by views that

such credit is mainly directed towards ―unproductive sectors.‖ Moreover, there is also often a

widespread view that private banks, who provide virtually all of their loans to private sector borrowers,

are in any case unduly profitable. For example, a windfall tax in September 2010 imposed a 75 percent

tax on banks, while a May 2011 central bank directive mandated banks to devote 27 percent of their

lending for priority national projects via purchases of NBE Bills. We look into whether the relevant data

really supports such views.

Excessive Profitability? Based on our review of the recently released annual reports of Ethiopia‘s

private banks, their return on equity in 2010/11 averaged 30 percent (Table 10.2). This, as it turns

out, is less than the 38 percent year-on-year inflation rate registered at the end of the year, though a

46 NBE Bulletin FY 2010/11 First Quarter, page 44.

78


more appropriate basis for calculating the real return on equity may be on the basis of the year-

average inflation (18 percent at June 2011), which yields a real return on equity of around 12 percent.

Given Ethiopia‘s high inflation, not just last year but also the 20 percent average inflation rate of the

previous five years, the average return on equity within the banking sector is more or less in line with

that in other African countries when considered in real terms. In any case, as we have noted in the

past, one distinctive feature to note about banking is that it is—by its very nature—more profitable

than other businesses simply because it relies on leverage; in other words, a bank deploys a given sum

of its own funds (its start-up capital) but is then able to multiply this initial start-up investment by ten-

fold or more by collecting public deposits and by subsequently generating income from that much

larger sum of collected deposits. Thus, the high profitability of banks in Ethiopia or anywhere else is

simply a reflection of this ―multiplicative effect‖ of leverage, which tends to offer shareholders of

banks much higher returns on their investments compared to other non-bank businesses. There is

probably no more telling indication of this than looking at the results of the state-owned CBE, whose

return on equity was near 50 percent—even higher than the private banks‘ average.47

In short, high

ROEs are not unique to Ethiopia‘s private banks and—in any case—should be seen in the proper

perspective, i.e., in real as opposed to nominal terms.

Lending to ―unproductive‖ sectors? The lending of private banks is typically seen as being

dominated by large flows to finance the ―unproductive‖ import and domestic trade and services

sectors. In fact, two-thirds of loans are directed to sectors such as manufacturing, exports,

agriculture, construction, and tourism. Private banks‘ loan books do show about one-third of loans

going to the two much-maligned import and domestic trade and services sectors.48

But even this one-

third ratio should not be seen as unusually inflated. Some level of imports and domestic trade and

services are simply indispensable in any economy. In Ethiopia‘s case, with a total annual import bill

of near Birr 120 billion in 2010/11, net new import-related loans during the same period amounted to

just Birr 3.5 billion—thus only around 3 percent of the annual import value. The vast majority of

imports are thus not financed by private bank loans at all.

To help the expansion in credit to the private sector, a modification of this past year’s NBE Bills

directive would be welcome. Without violating the objective of shifting some loanable funds from

private banks to priority national projects, the manner in which the directive is implemented and the

introduction of compensatory measures can make an important difference. More specifically, we think

the directive could: (i) usefully exempt loans to priority sectors, namely manufacturing and exports; (ii)

apply the 27 percent calculation on the stock of loans at the end of a given period rather than on new

lending flows; (iii) broaden the range of eligible instruments (such as including DBE bonds, Abay Dam

Bonds, and other similar higher-yielding public sector instruments); (v) allow banks to temporarily

liquidate their stock of NBE Bills when warranted for short-term liquidity needs; and (iv) adjust the

interest rate to the same average levels that state banks receive when they lend to priority sectors so there

is a level playing field between the two sets of banks.49

Beyond the above modifications, and once

47 CBE earned gross profits of Birr 4.2 billion in 2010/11 and had a Birr 6.2 billion paid-up capital. Its pre-tax ROE would thus

be 68 percent and its after-tax ROE 48 percent. 48 See NBE Bulletin of First Quarter 2010/11, page 43. 49 As it is, private banks lending to priority sectors (via NBE bills) is fixed at 3 percent, while the lending of the two state banks

to priority sectors is generally well above that. DBE, for example, offers long-term loans at interest rates of about 8 percent and

the CBE‘s most favored interest rate is offered to exporters at rates of 7 percent.

79


inflation is on a firmly downward trend, the reduction of the 15 percent unremunerated reserve

requirement (which has locked some Birr 7.5 billion in private banks‘ deposits at the central bank) would

also be welcome, as it would help expand the room for providing funds to a credit-starved private sector.

Beyond addressing monetary policy factors that are holding back private sector credit, financial

sector policies could also ideally be modified to address structural issues that would make available

more capital within the financial system. Three sets of such reforms, each with potentially large

positive impacts, deserve consideration as we see it:

Relaxing controls in the foreign exchange market: As we have noted in the past, one of the

important factors holding back non-traditional financing sources to Ethiopia (such as from private

equity groups or venture capital funds) has been the perception that there is a very closed and

controlled foreign exchange regime. In reality, profit and dividend repatriation is readily allowed and

this is in part what has boosted foreign investment in recent years. Still, owing to factors such as the

periodic shortages that emerge in foreign exchange markets and the limits on certain current account

as well as capital account outflows, the overall impression held by some foreign investors is of a

foreign exchange regime that is too controlled, especially in comparison to neighboring countries like

Kenya, Uganda, or Rwanda with relatively open capital account regimes as well as stock and bond

markets that are open to foreign investors. Even with the existing foreign exchange framework

broadly unchanged, there are potential policy reforms that can address this perception gap; for

example, allowing banks greater flexibility to adjust their rates in response to changing market

conditions, streamlining export and import letter of credit procedures, and removing caps on certain

current account outflows. A second part of the foreign exchange market worthy of reform relates to

the continued segmentation of foreign exchange inflows linked to exports to China. The dominant

state bank continues to enjoy a monopoly privilege to exclusively handle foreign exchange inflows

derived from exports to China (now Ethiopia‘s biggest export destination). This represents a major

obstacle to the emergence of a unified foreign exchange market and deserves to be eliminated.

Allowing foreign borrowing by private banks: Although banks in Ethiopia have relied almost

exclusively on public deposits to fund their lending operations, the norm in many other financial

systems is to supplement this with ―wholesale funds‖ in the form of bond issues or externally secured

loans that are subsequently on-lent to bank customers. With the appropriate regulatory and risk-

related safeguards in place, allowing private banks more latitude to borrow from abroad would

expand their pool of loanable funds and, most important, allow them to extend the maturity of their

on-lent loans to the extent that they secure long term external financing. Such funding arrangements

would be available to private banks from a host of potentially interested providers, including

multilateral development banks, regional development banks, development finance institutions, and

Africa-focused funds; taking advantage of the interest of such investors in working with Ethiopia‘s

private banks is to something that should ideally be encouraged rather than discouraged.50

50 It is notable that the state-owned already borrows from foreign banks, as seen in its recent MOU to borrow $300 million from

China EXIM Bank and also a $100 loan million agreement with the Turkish EXIM Bank. A similar opportunity to private banks

could help strengthen their operations while providing much-needed long-term capital to their clients who stand to benefit from

the associated on-lending.

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Establishment of an Ethiopian Bond Exchange (EBX) with an associated secondary market:

Bond issuance is becoming common in Ethiopia, with outstanding issues having reached 29.1 billion

as of September 2010, mainly reflecting EEPCO, ETC, and DBE bonds as well as Birr 6.6 billion in

bonds issued by regional governments (Table 10.3).51

However, the outstanding bond issuance figure

is even higher now following the ―Grand Renaissance Dam‖ Bond and a DBE Savings Bond. A

formally established Bond Exchange could usefully standardize bond issuance practices and

requirements and be a central depository for registering, disclosing, and trading bond issues by public

or private entities. In essence, this would be the equivalent of an organized stock exchange but where

only the issuance and trading of bonds (as opposed to stocks) is conducted. In line with plans already

place in this area, establishing a secondary market as part of this bond exchange would also be of

much value, as this considerably expands the pool of interested bond buyers once such investors are

confident that quickly and conveniently liquidating their bonds is possible following their initial

purchase. Finally, it is worth noting that a formal Bond exchange can be a useful alternative and/or

supplement to prospective share companies which seek to raise funds directly from the public and

have, so far, been the primary avenue of raising funds for new business ventures outside the banking

system. By our count, there were as of December 2011 some 22 medium- to large-size companies

seeking to raise a combined Birr 6 billion in start-up capital. A bond exchange would offer them

another avenue for raising funds with a more open and transparent set of disclosure and accountability

requirements.

All of the above elements of financial sector reform would make a major contribution towards

expanding the type and nature of borrowers across the small, medium, and large categories of

business groups. Such an explosion in borrower numbers is precisely what Ethiopia needs: one

astounding statistic about the Ethiopian banking system is the very low number of borrowers, which

stands at just 95,000 in all of the country‘s commercial banks, even after including all borrowers at the

large state-owned commercial bank. For a population of 84 million, this low base of credit users points to

the still immense potential for growth in Ethiopia‘s financial sector and also indicates the large scope for

additional enterprises and entrepreneurism that can emerge once improvements are seen in the ability of

both the public and private banking sectors to offer more financial intermediation in the years ahead.

51 Data from NBE Bulletin of First Quarter 2010/11, page 51.

81


MoFED Annual Report on Macroeconomic Developments (2009/10), IMF Staff Review--November 2010

Table 10.2: Private Banks' Performance in 2010/11

Deposits

(Mn Birr)

Loans

(Mn Birr)

Period Average

Equity (Mn Birr)

Profit After Tax

(Mn Birr)

Earnings

Per

Share

Return

on

Equity

Return

on

Assets

Abay 263 … … -4 -2.4% … -0.8%

Abyssinia 6,075 3,316 505 178 56.7% 35.3% 2.6%

Awash 7,744 3,986 901 361 56.0% 40.0% 3.6%

Berhan 694 332 124 21 17.5% 17.1% 3.4%

Bunna 491 366 194 19 10.2% 10.1% 3.1%

Dashen 11,841 6,221 1,042 451 75.3% 43.3% 3.3%

LIB 1,297 676 264 44 17.6% 16.6% 2.8%

NIB 5,157 2,767 863 246 38.0% 28.5% 3.8%

OIB 1,526 662 236 44 20.5% 18.8% 2.9%

United 6,066 3,277 616 232 52.8% 37.7% 3.4%

Wegagen 5,734 2,910 990 323 44.8% 32.7% 4.7%

Zemen 1,163 645 159 85 58.1% 53.4% 6.3%

Private

Bank

Average … … … … 40.7% 30.3% 3.6%

Source: Private Bank's Annual Reports (2010/11)

Annual Reports of FY 2010/11 for CBO and Addis International not yet available at the time of publication.

82


Table 10.3. Corporate Bond by Holders in 2010/11

First Quarter (In Millions of Birr)

Issuer of the Bond

2010/11

Quarter I

Outstanding

1.Puplic Enterprises 22,495

EEPCO 18,200

ETC -

DBE 4,295

2. Regional Governments 6,672

Oromia 1,588

Amhara 1,152

Tigray 660

SNNPRS 866

Dire Dawa 184

Harari 129

Addia Ababa 2,093

3.Grand Total(1+2) 29,167

Source: NBE QIV 2009/10 Bulletin

83


ANNEX: Macroeconomic Review of 2010/11 and Outlook for 2011/12

Economic Growth .

Ethiopia ended the 2010/11 fiscal year with economic growth of 11.4 percent according to

government statistics.52

The strong growth record stands out for taking place at a time when growth is

faltering in most other regions of the world, at only 1.5 percent in the US, 2.1 percent in Europe, 4 percent

in Africa, and 6.2 percent in Asia. Indeed the growth figure is among the highest in the world and

marks—based on government data—the eighth consecutive year of double-digit growth. Looking at the

sector-by-sector sources of growth, last year‘s outturns show Industry registering the highest growth of 15

percent, followed by Services at 12.5 percent and Agriculture at 9.0 percent.53

Slower growth rates in

agriculture continue to result in its falling share of total GDP, which is now at 41.1 percent, compared to

46.6 percent for Services and 13.4 percent for Industry (Annex Table 1). With the fast growth of recent

years, Ethiopia‘s GDP has now reached Birr 511 billion or about $32 billion based on the FY 2010/11

year-average exchange rate of Birr 16.1 per USD. This aggregate GDP figure places Ethiopia as the sixth

biggest economy in Africa in GDP at market prices.54

That strong growth has taken place in Ethiopia is not in doubt, but its precise level is becoming

increasingly subject to question in some circles. Two international organizations have, for instance,

recently deviated from government figures in their assessment of growth outturns:

o FAO data on agricultural production: Crop production estimates reported by the FAO differ

from those of national statistical authorities. In particular, the FY 2010/11 cereal production

estimate of FAO is 17.4 million tons while a higher cereal production estimate of 19.1 million

tons is reported by the Central Statistical Agency.55

It is the case that cereal production estimates

of FAO and national authorities are not always identical, but this past year‘s gap of about 9

percent has been getting larger than the near 2 percent difference seen in recent years (Annex

Table 2).

o IMF assessment of overall economic growth: After years of accepting the authorities‘ national

income statistics (including all historical growth data since the start of the period of high growth

in FY 2001/02), the IMF has for the first time reported, in a publicly released Joint Staff

Assessment Note co-authored with the World Bank, that its ―staffs have not been able to confirm

[the] very high growth rates reported in the official statistics that appear to significantly overstate

actual growth. Staff estimates suggest robust growth in the 7-8 percent range.‖56

In addition, the

JSAN (p10) notes: ―official GDP growth rates imply productivity increases that appear

implausible, casting doubt on some aspects of national accounts compilation.‖

52 See FY 2010/11 GDP Estimate Figures of Ministry of Finance and Economic Development at www.mofed.gov.et 53 Demand-side GDP figures are not yet released, but we assume the strongest contributors will have been—in line with recent

years—Public Consumption followed by Investment (gross fixed capital formation). 54 In PPP terms, the IMF ranks Ethiopia as the fourth biggest economy in 2011 with a GDP of $95 billion, following those of

South Africa ($555 billion), Nigeria ($415 billion), Angola ($116 billion). 55

See http://www.fao.org/giews/countrybrief/country.jsp?code=ETH for the FAO‘s Crop Estimates report. CSA‘s 2010/11 crop

estimate data is provided in its October 2011 publication ―Agriculture in Figures: Key Findings of the 2008/09 – 2010/11

Agricultural Sample Surveys‖ 56 See http://www.imf.org/external/pubs/cat/longres.aspx?sk=25282.0

http://www.mofed.gov.et/

http://www.fao.org/giews/countrybrief/country.jsp?code=ETH

84


Does all of the above imply that Ethiopia’s recent growth is a mirage? We think not, but actual

growth could realistically be anywhere between 8-11 percent. The national income accounts

compilation no doubt have weaknesses that affect the precise recording of growth: even with the a strong

human resource base (and the best of intentions), annual crop surveys are highly challenging exercises

that involve making numerous statistical extrapolations from what are supposed to be well-chosen and

representative sample surveys of thousands of plots of farmland. Going into even more technical detail,

national accounts base years have not been changed for more than a decade; the coverage of new and

emerging sectors is incomplete; and service sector deflators are notoriously weak and difficult to ascertain

without regular updates. Still, even with these known data gaps and as we have noted in the past (see

Macro Handbook of 2009), although the precise level of growth may be difficult to ascertain with much

certainty in a setting such as Ethiopia, there are many growth proxies (based on more easily measured

activities) that corroborate the presence of strong growth (Annex Table 3). Whether such growth is

precisely 11.4 percent as reported in government statistics or closer to the 7-8 percent range noted by IMF

economists is less important than noting the fact that growth under either scenario is still very rapid and

among the highest in Africa and in the world. We find the near constancy of the growth rates extremely

unusual,57

for example, but given the range of data we‘ve compiled on correlates of growth last year (see

below) do not have reason to doubt that growth of at least the high single digits has been a reality in

Ethiopia during FY 2010/11. For example, we find high double-digit growth in several better measured

indicators of activity: 23 percent for electricity usage; 14 percent for export volumes; 16 percent growth

in the volume of petroleum imports; 19 percent for EAL passenger growth; 20 percent for Ethiopian

airlines cargo growth, and 4 percent for tourist visitor arrivals.

Looking ahead, we expect that growth will continue its strong pace in FY 2011/12. Supporting the

relatively strong growth outlook for the current fiscal year are the following factors:

In the agricultural sector, rains in the primary kiremt season (June-September) have been

normal to above-normal in most food-producing regions (see the National Meteorological

Agency‘s June 2011 seasonal report on the 2011 Belg and Kiremt seasons). Ethiopia of course

still faces a large number of food-insecure individuals, more than 4.6 million according to recent

government statements, but this reflects populations in chronically food-deficit regions and does

not contradict the expectation of strong overall agricultural growth figures, which reflect output

in food-producing and food-surplus regions of the country.

In the non-agricultural sectors, services growth should also continue strongly given expanding

government budgets (see Annex Table 4) and continued demand-driven growth in private

services such wholesale/retail trade and transport/communications (which together make up one-

third of the total services sector). Within industry, normal supplies of electric power should help

the manufacturing sector, which was in the previous two years hit by lengthy cuts in this critical

service. In fact, with two large dams having come on stream within the last year, Ethiopia‘s

power supply prospects look very secure for 2011/12, though this could be short-lived without

still further capacity expansions. Given very high inflation and the consequent compression of

57 Growth outturns have been at exactly around 11 percent for at least six years now, in contrast to the large deviations in growth

rates seen in prior years and elsewhere in the world. Indeed, we find that the standard deviation of growth in Ethiopia was among

the lowest in the world in the past 8 years, a surprising outturn for a country so reliant on agriculture and the associated

weather/price shocks common to this sector.

85


real incomes in urban centers, domestic demand for some manufactured goods may weaken this

fiscal year and much tighter bank credit conditions that have begun to emerge in the second

quarter of the fiscal year (beginning October 2011) will likely also temper growth in the private

manufacturing and especially construction sectors. Offsetting this drag, however, should be

several factors whose net impact should allow for strong overall industrial growth: manufactured

goods destined to external markets are growing fast (despite the global slowdown and judging by

recent export data); GTP-related public enterprise construction and industrial projects will

continue to propel large activity expansions; significant FDI-related new capacity is coming on

stream in areas such as textiles and leather; and mining output continues to rise rapidly driven by

new entrants and high international prices (mining sector growth was the 58 percent last fiscal

year and the first quarter export figures suggest a continued strong output growth for this year as

well). More broadly, the four fundamental and long-term drivers of growth we highlighted in

Chapters 1-4 (―P-A-C-E‖) will increasingly be in force in the year ahead: Public Infrastructure

Investments; the Agricultural Transformation; a Consumer Goods revolution; and Emerging

Export Industries.

Considering all of the above, we see growth in the high single digits as the most likely outturn for

the Ethiopian economy in FY 2011/12. Having earlier highlighted the imprecision of growth

accounting in Ethiopia and given the now disputed nature of growth figures even for historical data, it is

perhaps not so meaningful to offer a point forecast for the year ahead. Still, if pressed for a projection, we

would put our growth forecast at 9 percent for FY 2011/12. This is somewhat below the forecasts of the

government but stands well above the 5.5 percent growth forecast of the IMF, which we think

overestimates the impact of recent regulatory changes and at the same underestimates the significance of

large-scale, on-going public sector investments.

Inflation .

Given the starting point of Ethiopia’s inflation—38.1 percent at the beginning of the 2011/12 fiscal

year—it would be natural to expect that the outlook for inflation can and will only get better. This

will indeed be the case even though there has not yet (as of December 2011) been any significant decline.

Part of the explanation is the lag involved for the October/November harvests to reach food markets, and

accordingly we see the improvement in year-on-year inflation only occurring after the start of 2012. We

believe inflation peaked with the 40.6 percent reading of August 2011, given the gradual trend decline

seen since then and the negative month-on-month inflation rate recorded last month (November 2011) for

the first time since early 2011. The inflation reading for December 2011 and for the early months of 2012

will likely show slightly negative or near zero month-on-month inflation rates in line with the seasonal,

post-harvest norms. Supporting these expectations is the fact that, on the external side, weakness in the

global economy is likely to keep commodity prices at restrained levels: for 2012, global oil prices are

projected to be lower by 3.5 percent, metals prices lower by 3.5 percent, and food prices lower by 4.4

percent according to the IMF‘s latest Africa Regional Economic Outlook. This should imply little or no

external price pressures on Ethiopia‘s domestic fuel and food prices.

Considering all of the above, and most notably the end of direct NBE advances to government this

fiscal year, Access Capital forecasts year-on-year inflation will show a significant drop to 33 percent

by end-December 2011, but then fall even more sharply to 20 percent by March 2012 and to a single

digit level of 9 percent by (at the latest) June 2012 (Annex Table 5). The sharp declines in early 2012

are almost certain to be realized from a statistical viewpoint given the favorable base effects, i.e., the price

index was at an unusually high level in early 2011 (in the months following the large devaluation) so

comparisons to year-ago figures will tend to show sharply improving inflation rates for early 2012. Our

86


anticipated disinflation path is much faster than that forecast by the IMF, which has projected the inflation

rate to drop by a slower degree, to 15 percent by June 2012.58

Monetary and banking conditions .

Monetary and banking conditions will be difficult this year, particularly for private banks and their

borrowers. The introduction of NBE Bill purchase requirements, which require private banks to devote

27 percent of their loans to government bills, is severely restricting the capacity of banks to meet the ever-

growing credit demands of their customers. Moreover, aggregate money supply growth will be restrained

by two notable developments this year: (i) policy makers‘ recent commitment to ensure zero direct

government borrowing from the central bank will eliminate this source of money growth; and (ii) the

smaller balance of payments surplus forecast for the year (see below) will imply reduced money supply

growth arising from increases in banks‘ foreign assets. Thus, one should expect a double impact to be felt

by private sector borrowers, as overall broad money growth will slow down from last year‘s high rate of

36 percent (most likely to the 24 percent average annual growth seen in the previous five years) and as the

share of credit directed to the private sector is squeezed given the new NBE Bill directive that became

operational in May 2011. In an environment where there is little upward movement in lending rates at

banks, and unless the implementation of the NBE Bill directive is modified in the coming months, this

implies continued excess demand for credit at private banks and the associated symptoms (prolonged

delays and queues) to be faced by private sector borrowers. Given the still limited size of those who

access bank loans in the Ethiopian banking system (as highlighted in Chapter 10), and the added fact that

many projects are able to rely on self-financing, this credit squeeze will not necessarily weigh down

significantly on short-term growth and export prospects, but it will mean that performance in these areas

will be much lower and much more restrained than it could otherwise have been under more conducive

financial conditions.59

Balance of Payments and the Exchange Rate .

Aided by the large devaluation of September 2010, the balance of payments for the fiscal year

ending in June 2011 registered a sizeable surplus. Among the main contributors within the current

account: (i) exports grew by a strong 38 percent from USD 2.0 to 2.8 billion, with coffee and gold doing

particularly well because of higher volumes and much higher prices; (ii) import growth was close to zero

in nominal terms, equivalent to a sharp contraction in real terms (Annex Table 6); and (iii) private

transfers rose to $2.8 billion (of which remittances contributed sharply, rising to a record level of $1.4

billion). Aided by all these factors, but thanks mainly to the sharp import compression following the

devaluation, Ethiopia‘s current account actually registered a surplus in the first quarter of the fiscal year

for the first time in recent history.60

Besides the favorable current account developments, two items in the capital account—large

external borrowing and FDI inflows—were also critical for the overall balance of payments

surplus. New borrowing of $2.1 billion was undertaken last year, which has raised Ethiopia‘s foreign

debt stock to $7.8 billion this year from just $2.1 billion five years ago. As a share of GDP, external

58 The IMF‘s 2011/12 inflation projection is provided in their October 2011 Regional Economic Outlook (page 73). 59 Given unusually tight private sector credit as of end-2011, there is a reasonable chance that a policy reversal may be

implemented to ease such monetary conditions. This might include modification to the NBE Bills directive (as noted in Chapter

10) or a reduction in reserve requirements once inflation drops in the coming months. 60 See NBE Bulletin of First Quarter 2010/11, page 51.

87


borrowing has now reached 24 percent of GDP, double the African average and double the levels of

2005/06, the year following Ethiopia‘s large debt reduction under the IMF-World Bank led HIPC Debt

Relief Initiative. Moreover, we observe two notable milestones passed just recently: (i) foreign

commercial banks became the single largest provider of external loans last year, surpassing even the

World Bank, the country‘s traditionally largest lender, and (ii) Asian and Middle Eastern lenders

(primarily comprised of China, India, Kuwait and Saudi Arabia) are also now giving more loans to

Ethiopia than is the World Bank (Annex Table 7). The combination of these large new inflows of loans

as well as foreign direct investment has meant that, despite the country‘s large and ever-present trade

deficit (imports are roughly three times bigger than exports), Ethiopia still saw more foreign exchange

coming into the country than was going out of the country. For this reason, reserves rose to near $3

billion by June 2011, from $2 billion a year earlier, and the import coverage ratio improved to around 2.1

months of imports.

Looking ahead, the positive balance of payments outturn registered in FY 2010/11 should continue

this fiscal year, but we expect that the overall surplus will be much smaller, as imports will pick up

and the exceptionally high growth rates of certain foreign exchange inflows such as exports and

remittances should moderate on account of more adverse global conditions. With respect to exports,

although the first five months of this fiscal year are off to a good start with growth of 25 percent (Annex

Table 8), the very high prices seen for coffee and gold last year are unlikely to be repeated again this year

so overall export growth is unlikely to exceed 30 percent. At the same time, import growth is now

picking up as the effect of the 2010 devaluation dissipates and as new mega projects are coming on

stream. Offsetting these developments, we can again expect large financial inflows in the form of donor

grants as well as continued GTP-related external loans, and a continued good outturn on FDI inflows.

Thus, though much smaller than last year, we expect another balance of payments surplus (of near $270

million) this year (Annex Table 9). Reserves would thus rise again, to $3.2 billion according to our

projections, while import cover would stay largely unchanged—given the higher import denominator—at

just around 2 months of imports.

Finally, with respect to the exchange rate, Access Capital forecasts only a slight and gradual Birr

depreciation for the coming year. This assessment reflects the country‘s still-high inflation (which the

authorities will be quite careful and determined not to exacerbate), the very limited gap between bank and

parallel market rates (only around 3 percent), as well as the relatively benign balance of payments

conditions expected to prevail this fiscal year (as outlined above). Given these macroeconomic

conditions, and contrary to some expectations of an imminent devaluation in parts of the business

community, we are quite confident that there will be no step devaluation up to end-2012 other than the

now fairly consistent exchange rate crawl of about six cents per month (Annex Table 10). Given the

exchange rate of Birr 17.52 at end-November and the steady monthly depreciations anticipated in the

period ahead, Access Capital forecasts an exchange rate of 17.57 Birr/USD by end-December 2011, 17.81

Birr/USD by end-June 2012 and 18.05 Birr/USD by end-2012 (Annex Table 11).61

61

These represent the rates at which banks sell dollars to customers (such as importers seeking foreign exchange). As per central

bank guidelines, rates at which banks buy dollars from clients bringing in foreign exchange (e.g. from exporters) are exactly 2

percent lower.

88


ANNEX Table 1: Economic Sectors Percentage Distribution in GDP and Growth Rates, 2010/11

Sector Real Growth Percentage Share

Agriculture 9.0 41.1

Industry 15.0 13.4

Services 12.5 46.6

GDP Total 11.4

Source: Ministry of Finance and Economic Development--2003 EFY GDP Estimates

ANNEX Table 2: Production of Cereals (Mn. Tons)

2008/09 2009/10 2010/11

CSA 15.6 17.3 19.1

FAO 15.2 16.8 17.5

Difference 2.6% 3.0% 9.3%

Source: CSA and FAO Crop Prospects and Food Situation (March--October 2011)

ANNEX Table 3: Alternative Measures of Economic

Activity in 2010/11

Indicator Growth rate

Real Growth Variables

Electricity usage (sales) growth 22.5%

Volume of Exports growth 14.1%

Ports traffic growth -12.0%

Ethiopian Airlines Passenger growth 19.0%

Ethiopian Airlines Cargo growth 20.3%

Petroleum Products volume growth 16.6%

Tourist Arrivals growth 3.5%

Vehicle Registration growth 47.9%

Crop Production-- CSA data 9.3%

Nominal Growth Variables

Tax Receipts nominal growth 42.2%

Export value growth 38.3%

Import value growth 37.1%

Broad Money growth 36.0%

Deposit growth at private banks 29.1%

Loan growth at private banks 21.6%

Source: EEPCO, MoTI, IMF, EAL, EPE, Dry Ports Enterprises, Ethiopian Transport Authority, NBE, EIA, MoFED, CSA,

Banks' Annual reports, Press reports.

89


ANNEX Table 4: Government Budget for FY 2010/11 and FY

2011/12 (in Birr billions)

Budget

(FY 2010/11)

Budget

(FY 2011/12)

Total Revenue and Grants 64.0 100.6

Revenues 48.7 79.2

Tax Revenue 40.9 70.0

Tax on Incomes, Profits, and Capital Gains 10.9 18.6

VAT on domestic goods and services 8.1 18.5

Excise tax and stamp duties 1.5 2.9

Taxes on imported goods 20.4 32.9

Non-Tax Revenue 7.7 9.2

Fees, charges, and public revenues 1.5 2.3

Government investment income (from SOEs) 5.5 4.1

Other non-tax revenue 0.8 2.7

Grants 15.4 21.4

Total Expenditure 77.2 117.8

by nature of expenditure

Recurrent Expenditure 17.1 23.3

Capital Expenditure 36.0 48.1

Subsidies to Regions 24.2 31.4

Support for Reaching MDG Goals … 15.0

by sector of expenditure

Administrative and General Service 7.2 10.6

Economic services 23.2 33.6

Social services 15.9 19.3

Miscellaneous 30.9 54.3

Overall deficit -13.2 -17.2

To be covered by external borrowing 4.7 6.6

To be covered by domestic borrowing 8.5 10.6

Source: MoFED's Federal Budget Summary (2010/11 & 2011/12)

90


ANNEX Table 5: Consumer Price Index-General

Month

Price

Index

Month-on-

Month

Inflation

Year-on-

Year

Inflation

Year-Average

Inflation

Jan-10 178.2 0.8 7.6 6.6

Feb-10 178.9 0.4 7.1 5.0

Mar-10 179.6 0.4 7.4 3.9

Apr-10 180.7 0.6 6.8 2.9

May-10 181.3 0.3 7.4 2.4

Jun-10 183.7 1.3 7.3 2.8

Jul-10 183.2 -0.3 5.7 3.6

Aug-10 184.3 0.6 5.3 4.4

Sep-10 189.9 3.0 7.5 5.4 September 2010 Devaluation

Oct-10 194.0 2.2 10.7 6.6

Nov-10 194.1 0.1 10.2 7.5

Dec-10 202.4 4.3 14.5 8.2

Jan-11 209.7 3.6 17.7 9.0

Feb-11 208.4 -0.6 16.5 9.8

Mar-11 224.6 7.8 25.1 11.3

Apr-11 233.9 4.1 29.4 13.2

May-11 244.1 4.4 34.6 15.5

Jun-11 253.6 3.9 38.1 18.1

Jul-11 254.9 0.5 39.1 20.9

Aug-11 259.2 1.7 40.6 23.9 Peak Year-on-Year Inflation

Sep-11 266.0 2.6 40.1 26.6

Oct-11 271.1 1.9 39.7 28.1

Nov-11 270.2 -0.3 39.2 29.8

Dec-11 268.8 -0.5 32.8 32.9

Jan-12 267.5 -0.5 27.6 33.6

Feb-12 267.5 0.0 28.4 34.5

Mar-12 268.8 0.5 19.7 33.8

Apr-12 270.7 0.7 15.7 32.4

May-12 273.4 1.0 12.0 30.2

Jun-12 277.5 1.5 9.4 27.5 Return to single-digit inflation

Jul-12 278.9 0.5 9.4 24.9

Aug-12 283.1 1.5 9.2 22.3

Sep-12 285.9 1.0 7.5 19.6

Oct-12 288.8 1.0 6.5 17.7

Nov-12 287.9 -0.3 6.6 15.6

Dec-12 286.5 -0.5 6.6 12.6

Source: CSA for historical data and Access Capital projections in bold.

91


ANNEX TABLE 6: Value of Imports by End Use--FY 2010/11 Vs 2009/10 (in '000 USD)

2009/10 2010/11

Growth

Rates

CONSUMER GOODS 2,367,730 2,095,610 -11.5%

Durables 560,512 572,994 2.2%

Furniture, Furnishings, & Floor Coverings 38,709 46,916 21.2%

Household Appliances & Utensils 118,746 143,018 20.4%

Vehicles & Transport Equipment for "Personal" Use, Their

Spare Parts & Accessories 254,321 251,061 -1.3%

Audio-Visual, Photographic, & Other Electronic Equipment

(excluding ICT Products) 108,906 76,534 -29.7%

Other durables 39,830 55,464 39.3%

Non-Durables 1,807,217 1,522,616 -15.7%

Food & Non-Alcoholic Beverages 995,642 725,376 -27.1%

Food 994,753 724,565 -27.2%

Non-Alcoholic Beverages 889 810 -8.8%

Alcoholic Beverages & Tobacco Products 14,346 14,448 0.7%

Articles of Leather, Textiles, & Footwear (Wearing Apparels

& Accessories) 237,681 199,621 -16.0%

Healthcare Products 311,752 321,842 3.2%

Newspapers, Books & Stationery 124,658 121,671 -2.4%

Products of Personal Effects 90,781 100,813 11.1%

Other non-durables 32,356 38,845 20.1%

INTERMEDIATE/SEMI-FINISHED PRODUCTS 1,656,046 1,536,848 -7.2%

ENERGY 1,310,588 1,808,142 38.0%

CAPITAL GOODS 2,596,051 2,634,130 1.5%

Machinery 1,097,812 1,095,387 -0.2%

ICT Products 537,373 543,830 1.2%

Transport Equipment, Spare Parts & Accessories 520,816 696,288 33.7%

Railway or Tramway Locomotives, Parts & Accessories 217 64 -70.6%

Vehicles, Spare Parts & Accessories (used in the production

of goods & services) 517,641 667,752 29.0%

Aircrafts, Parts & Accessories 1,022 25,972 2442.2%

Ships, Boats, & Floating Structures, Parts & Accessories 265 103 -61.0%

Containers (designed & equipped for carriage by one or

more modes of transport) 1,671 2,397 43.4%

Other capital goods 440,050 298,625 -32.1%

RAW MATERIALS 189,088 194,735 3.0%

ARMS AND AMMUNITION; PARTS & ACCESSORIES 5,158 1,500 -70.9%

TOTAL IMPORTS 8,124,661 8,270,964 1.8%

Source: Customs Authority and Ethiopian Petroleum Enterprise

92


ANNEX Table 7: External Borrowing and External Debt

2006/07 2007/08 2008/09 2009/10 2010/11

Total External Debt-- USD millions 2,314.6 2,767.1 4,352.2 5,633.3 7,819.5

Multilateral lenders to Ethiopia 1,193.06 1,540.49 2,032.31 2,737.28 3,589.20

World Bank 615.8 807.4 1,126.2 1,577.0 2,091.8

African Development Bank 46.1 33.1 19.8 12.8 8.2

IMF 0 0 51.8 217.6 297.7

Others 531.2 700.0 834.5 929.8 1,191.5

Bilateral lenders to Ethiopa 806.9 951.5 1,204.3 1,415.0 1,863.6

Paris Club 367.6 456.5 466.0 429.1 479.1

Non-Paris Club (China, India, Saudi, etc.) 439.3 495.0 738.3 985.9 1,384.5

Private lenders to Ethiopa 314.6 275.0 1,115.6 1,481.0 2,366.5

Commercial Banks 283.8 244.4 217.7 259.2 926.5

Suppliers 30.8 30.7 897.9 1,221.8 1,440.0

New external borrowing--USD millions 357.8 395.1 1,750.2 1,564.5 2,079.1

Multilateral 277 281 593 857 673

o/w World Bank 158 144 358 526 394

Bilateral 80 114 290 258 404

Private 0 0 867 449 1,002

External debt to GDP-- Ethiopia 11.9 10.3 13.5 19.0 25.3

External debt to GDP-- SSA average 24.5 21.8 24.4 20.7 19.9

Source: MOFED, Public Sector External Debt Statistics, Statistical Bulletin No. 7 (www.mofed.gov.et) and IMF

93


ANNEX Table 8: Export Performance-- First Five Months of FY 2011/12

No

Export

Value: FY

2010/11

(USD

millions)

Export

Value: July-

Nov 2010

(USD

millions)

Export

Value: July-

Nov 2011

(USD

millions)

Value

Growth

Rate

Of

which:

Volume

growth

Of

which:

Price

growth

1 Coffee 841.7

280.2 288.2 2.9%

-38.0% 65.8%

2 Gold 485.3

133.8 209.5 56.6%

-8.3% 70.8%

3 Chat 238.4

107.1 110.5 3.2%

0.8% 2.4%

4 Oil Seeds 323.9

79.2 106.1 33.9%

22.1% 9.6%

5 Live Animals* 147.9

67.2 103.5 54.0%

8.1% 42.5%

6 Flower** 175.3

62.9 74.5 18.5%

10.6% 7.1%

7

Leather and Leather

Products 103.9

33.1 62.3 88.3%

58.3% 18.9%

8 Pulses 138.8

49.8 52.1 4.5%

-11.2% 17.6%

9 Textile and Garment 61.9

16.4 38.6 135.5%

55.3% 51.7%

10 Meat and Meat Products 63.3

23.2 36.1 55.8%

28.2% 21.6%

11 Fruit & Vegetables 31.7

12.5 17.2 38.2%

49.7% -7.7%

12 Spices 33.2

8.4 12.4 47.9%

45.1% 1.9%

13 Others 51.1

20.7 7.5 -63.7%

-70.7% 23.8%

14 Natural Gum 12.8

5.6 4.8 -14.5%

-21.4% 8.8%

15 Tantalum 28.1

4.7 4.0 -16.3%

-3.8% -13.0%

16 Flour 5.3

2.7 3.3 20.2%

-2.2% 23.0%

17

Mineral Products (excl gold

& tantl.) 6.0

1.1 3.1 168.4%

-97.3% 9748%

18 Beverages 2.2

0.7 1.9 181.5%

101% 39.6%

19

Hair Oil (Paprika

Oleoresin) 3.0

0.9 1.7 77.4%

67.5% 5.9%

20 Honey 1.7

0.7 1.4 109.8%

100% 4.6%

21 Processed Fruit Products 0.8

0.0 1.2

2466.5

%

330% 0.0%

22 Processed Spices 1.5

0.4 1.1 169.3%

145% 9.6%

23 Bees Wax 2.0

0.6 0.6 -7.2%

-14.4% 8.4%

24 Eucalyptus Tree (logs) 3.8

0.2 0.5 125.3%

221% -29.9%

25 Tea 1.3

0.4 0.4 1.7%

-17.5% 23.4%

26 Animal Vaccine 1.6

0.8 0.4 -47.9%

-56.9% 20.7%

27 Oil seed products (Tahina) 4.4

2.7 0.3 -88.7%

-85.5% -21.8%

28 Cotton 0.0

0.0 0.2 350.8%

407% -11.2%

29 Capsule 0.3

0.1 0.1 48.6%

34.5% 10.5%

TOTAL 2,771

916 1,143 24.8%

… …

Source: Ministry of Trade

../../Documents%20and%20Settings/mohammednur.behru.HQWK001-/Local%20Settings/Temporary%20Internet%20Files/Content.MSO/FBF8625.xls#RANGE!_ftn1

94


ANNEX Table 9: Ethiopia's Balance of Payments, 2009/10 - 2011/12

2009/10 2010/11 2011/12

Actual Estimate Proj.

Current Account (1,222) (930) (1,523)

Exports 2,003 2,770 3,532

Imports (8,269) (8,434) (9,910)

Net Services 513 641 737

Net Factor Income (92) (115) (132)

Private Grants 2,708 2,808 2,800

Public Grants 1,915 1,400 1,450

Capital Account 2,001 1,900 1,800

Official borrowing, net 1,327 1,200 1,200

Foreign Investment 956 1,000 1,100

Other private flows 227 200 -

Other flows (E & Os) (509) (500) (500)

Overall balance 779 970 277

o/w NBE net foreign assets 418 … …

o/w Banks' net foreign assets 361 … …

Gross reserves at FY-end 2,018 2,988 3,264

USD GDP in millions 29,689 30,943 38,443

Current Account to GDP -4.1% -3.0% -4.0%

FDI plus loans to GDP 7.7% 7.1% 6.0%

Export growth rate 38.4 38.3 27.5

Import growth rate 7.0 2.0 17.5

Source: NBE and IMF Staff Report of November 2010 for FY 2009/10;

Access Capital estimates for FY 2010/11 and projections for FY 2011/12

95


Source: National Bank of Ethiopia

ANNEX Table 11: Exchange Rate Recent Trends and

Outlook

Month Birr per USD-- Buying

rate Birr per USD-- Selling rate

Sep-11 17.08 17.42

Oct-11 17.13 17.47

Nov-11 17.17 17.52

Dec-11 17.23 17.57

Jan-12 17.28 17.63

Feb-12 17.34 17.68

Mar-12 17.39 17.74

Apr-12 17.45 17.79

May-12 17.50 17.85

Jun-12 17.56 17.90

Jul-12 17.61 17.96

Aug-12 17.67 18.01

Sep-12 17.72 18.07

Oct-12 17.78 18.12

Nov-12 17.83 18.18

Dec-12 17.89 18.23

Source: NBE for historical data and Access Capital projections in bol

96


ANNEX TABLE 12: Ethiopia--Ten Years of Key Macroeconomic Indicators: FY 2001/02 to 2011/12

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Estimate Proj.

Real GDP growth

1.6 -2.1 11.7 12.6 11.5 11.8 11.2 10.1 10.5 11.4 9.1 By Sector

Agriculture growth

-1.9 -10.5 16.9 13.5 10.9 9.4 7.5 6.4 7.6 9.0 9.0

Industry growth

8.3 6.5 11.6 9.4 10.2 9.5 10.0 9.8 10.8 15.0 10.0 Services growth

3.3 6.0 6.3 12.8 13.3 15.3 16.0 14.1 13.1 12.5 9.0

GDP at current market prices (Birr billons)

66.6 73.4 86.7 106.5 131.6 172.0 248.3 335.9 383.3 511.2 664.5

GDP at current market prices (USD billons)

7.8 8.6 10.0 12.3 15.2 19.6 26.9 32.2 29.7 30.9 38.5 GDP per capita (USD)

118 126 143 171 205 257 344 402 361 355 442

GDP per capita (Birr)

1,004 1,077 1,236 1,478 1,778 2,260 3,176 4,188 4,656 5,869 7,638

Gross domestic investment (% GDP)

23.6 22.8 21.2 26.3 24.3 24.8 21.0 20.4 22.0 24.2 26.0

Public investment (% GDP)

14.1 14.0 12.1 15.4 16.7 18.1 15.1 14.5 15.1 16.6 19.0

Private investment (% GDP)

9.5 8.8 9.1 10.9 7.6 6.7 5.8 5.9 6.9 7.6 7.0

Consumer prices (end of period)

-1.0 23.5 1.7 13.0 11.6 15.8 55.2 2.7 7.3 38.1 9.4

Consumer prices (year-average)

-7.2 15.1 8.6 6.8 12.3 17.1 25.4 36.4 2.8 18.1 27.5

Broad money growth

8.1 10.9 14.7 19.6 17.4 19.7 22.9 19.9 24.3 36.0 24.0

Credit to the public sector (Govt & SOEs) growth

… … … … 16.6 21.1 35.7 5.8 11.8 41.0 27.3 Credit to the private sector growth

… … … … 28.3 27.3 22.0 12.6 39.9 25.0 20.0

Deposit rates (minimum, in percent)

3.0 3.0 3.0 3.0 3.0 4.0 4.0 4.0 4.0 5.0 5.0

Exchange rate (Birr per USD, year average.)

8.54 8.58 8.63 8.65 8.68 8.79 9.24 10.42 12.91 16.5 17.3

Exports, f.o.b.

452 483 600 818 1,001 1,189 1,466 1,447 2,003 2,770 3,532 Coffee

163 165 223 335 354 424 525 376 528 842 902

Noncoffee

289 318 377 483 647 765 941 1,071 1,475 1,928 2,630

Imports, c.i.f.

1,696 1,856 2,587 3,633 4,593 5,128 6,811 7,727 8,269 8,434 9,910 Fuel

268 288 311 669 861 895 1,621 1,257 1,127 1,808 2,124

Current account, after grants (% GDP)

-4.5 -2.1 -5.0 -8.2 -9.1 -4.4 -5.5 -5.0 -4.1 -3.0 -3.8

Foreign direct investment (% GDP)

1.9 1.4 1.5 1.2 2.4 2.5 3.0 2.7 3.2 3.2 2.9 External borrowing (% GDP)

6.2 4.2 2.0 2.2 1.3 1.2 2.6 4.8 4.5 3.9 3.1

External debt (% GDP)

97.4 85.4 73.3 48.1 39.6 11.9 10.3 12.9 14.0 25.3 24.0 Gross official international reserves

664 931 1,352 1,581 1,158 1,326 906 1,523 2,018 2,988 3,264

(in months of imports of goods & services)

3.3 3.7 3.7 3.4 2.2 1.9 1.2 1.9 2.2 2.1 2.0

Revenue

15.6 15.2 16.1 14.6 14.8 12.7 12.0 12.0 13.4 13.5 11.9

Tax revenue

11.9 11.2 12.6 11.6 10.8 10.1 9.6 8.6 10.7 10.8 10.5 Nontax revenue

3.7 4.0 3.5 3.0 4.1 2.6 2.6 3.3 2.6 2.7 1.4

Grants

3.2 3.2 3.2 3.2 3.2 3.2 3.2 4.3 3.2 4.5 3.2

Expenditure and net lending

26.5 27.9 23.7 23.3 22.3 20.7 18.9 17.2 18.1 20.1 17.7 Current expenditure

15.9 18.4 13.8 12.4 11.6 10.0 9.2 8.1 8.3 8.5 7.0

Capital expenditure

9.2 8.6 9.5 10.7 10.7 10.7 9.7 9.1 9.8 11.6 10.7

Overall fiscal balance, including grants

-7.2 -6.5 -3.0 -4.4 -3.9 -3.6 -2.9 -0.9 -1.6 -2.1 -2.6 External financing of the deficit

7.4 5.3 2.8 2.2 1.1 1.1 1.0 0.9 1.0 0.5 1.0

Domestic financing of the deficit

0.6 2.3 2.5 3.3 2.1 3.6 3.0 -0.1 0.6 1.6 1.6

Float/statistical discrepancy

-0.7 -1.0 -2.3 -1.2 0.6 -1.1 -1.0 -0.2 0.0 0.0 0.0 Gross stock of domestic debt

0.0 . 35.8 30.0 29.5 26.2 20.8 15.2 13.3 12.0 12.0

Population, mid-year estimate (in millions)

66.3 68.2 70.1 72.1 74.1 76.1 78.2 80.2 82.3 85.0 87.0

Sources: MOFED (for GDP data); IMF REO Oct 2011 and Nov 2010 Staff Report (for monetary, fiscal, investment, BOP data); CSA (for

inflation data); National Bank of Ethiopia. Access Capital estimates for most 2010/11 data points and for all 2011/12 projections.