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

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

2

Ethiopia Macroeconomic Handbook 2011-12

1. Massive public investments are set to deliver a wide range of public goods—roads, railways, power plants, schools, and clinics—while simultaneously propping up thousands of 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 fivefold 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.

1

Data 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.

3

Ethiopia Macroeconomic Handbook 2011-12

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.

4

Ethiopia Macroeconomic Handbook 2011-12

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 stateowned 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‖

5

Ethiopia Macroeconomic Handbook 2011-12

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.

6

Ethiopia Macroeconomic Handbook 2011-12

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.

7

Ethiopia Macroeconomic Handbook 2011-12

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 agribusiness 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)

8

Ethiopia Macroeconomic Handbook 2011-12

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 Budgetary spending Non-Budgetary spending Budgetary Expenditure by type Capital Expenditure Current Expenditure by sector Agriculture & Food Security Education Health Road Water Other Off-Budget Expenditure Industry Transport Ethio-Telecom Energy AA Condominium projects In Percent of GDP Total Public Sector Spending Budgetary spending Non-Budgetary spending Budgetary Expenditure by type Capital Expenditure Current Expenditure by sector Agriculture & Food Security Education Health Road Water Other Off-Budget Expenditure Industry Transport Ethio-Telecom Energy AA Condominium projects 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. 12% 9% 12% 9% 12% 9% 13% 9% 14% 9% 13% 9% 52,003 40,046 60,901 45,224 75,804 54,383 95,975 65,477 122,222 78,924 406,905 284,054 188,688 92,049 96,639 92,049 258,812 106,125 152,687 106,125 274,157 130,187 143,970 130,187 266,680 161,452 105,228 161,452 271,813 201,146 70,667 201,146 1,260,150 690,959 569,191 690,959

9,518 21,703 6,260 17,304 5,897 31,367 96,639 16,230 35,088 6,580 36,234 2,640 2010/11 42% 21% 22% 21%

13,123 24,562 7,027 21,752 5,701 33,960 152,687 51,955 43,223 1,900 52,966 2,640 2011/12 49% 20% 29% 20%

15,905 29,579 8,796 28,762 8,088 39,057 143,970 56,728 41,795 13,190 29,219 3,080 2012/13 45% 21% 23% 21%

20,302 36,354 11,121 36,581 11,888 45,206 105,228 42,057 30,550 29,658 3,080 2013/14 37% 22% 15% 22%

25,699 44,025 13,894 45,898 17,321 54,309 70,667 26,592 11,048 29,658 3,520 2014/15 32% 24% 8% 24%

84,547 156,223 47,098 150,297 48,895 203,899

193,561 161,704 21,670 177,735 14,960 2010-15 41% 22% 19% 22%

2% 5% 1% 4% 1% 7% 22% 4% 8% 1% 8% 1%

2% 5% 1% 4% 1% 6% 29% 10% 8% 0% 10% 1%

3% 5% 1% 5% 1% 6% 23% 9% 7% 2% 5% 0%

3% 5% 2% 5% 2% 6% 15% 6% 4% 0% 4% 0%

3% 5% 2% 5% 2% 6% 8% 3% 1% 0% 3% 0%

3% 5% 1% 5% 1% 6% 19% 6% 6% 1% 6% 0%

9

Ethiopia Macroeconomic Handbook 2011-12

Table 1.4. Capital Expenditure in Ten Largest African Economies 2011
Country
Ethiopia Tanzania Kenya Ghana Zambia Cameroon Angola Nigeria Ivory Coast South Africa

Capital Expenditure (USD mn)
4,103 2,045 2,899 1,973 1,224 1,271 8,543 6,887 686 3,383

Total Government Expenditure (USD mn)
6,849 5,686 9,175 6,681 4,432 4,693 33,330 27,307 4,718 135,321

Percent of Total Expenditure
59% 36% 32% 30% 28% 27% 26% 25% 15% 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
Roads Health Education Fertilizer complex Sugar Industry Railway EAL Energy AA Condos Total 150,297 47,098 156,223 13,205 72,781 110,796 31,142 177,735 14,960 774,238

Percent on Contractors
90% 60% 60% 30% 30% 40% 0% 30% 90%

Gross expenditure on Contractors
135,267 28,259 93,734 3,962 21,834 44,318 53,321 13,464 394,159

Estimated Contractors' Profits
13,527 2,826 9,373 396 2,183 4,432 5,332 1,346 39,416

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

10

Ethiopia Macroeconomic Handbook 2011-12

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 2010/11 2011/12 2012/13 2013/14 2014/15

854,316 919,636 1,023,892 1,146,838 1,287,817 1,287,817

65,238 70,226 78,187 87,576 98,341 98,341

789,078 849,410 945,705 1,059,263 1,189,476 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
Roads Health Education Fertilizer complex Sugar Industry Railway EAL Energy AA Condos 150,297 47,098 156,223 13,205 72,781 110,796 31,142 177,735 14,960 774,238

Percent on Foreign Suppliers
0% 20% 0% 60% 60% 60% 90% 60% 0%

Gross expenditure on Foreign Suppliers
9,420 7,923 43,669 66,478 28,028 106,641 262,158

Estimated Foreign Suppliers' Profits
1,413 1,188 6,550 13,296 5,606 21,328 49,381

Total

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

11

Ethiopia Macroeconomic Handbook 2011-12

Table 1.8: GTP Off-Budget Spending on Infrastructure & Industrial Projects-- Ranked by Value Birr Foreign or Sector/Sub-Sector Millions Business Beneficiaries Domestic
Energy Railways Sugar Industry Chemical, Pharmaceuticals & Cement Industries Ethiopian Airlines Ethio Telecom Metal Engineering Industry Mgmt & Privatization of Public Enterprises Textile & Garment Industry AA Condo Construction Fertilizer Industry Leather Products Industry Ethiopian Maritime Transit Service Micro & Small Scale Enterprises Ethiopian Airports Enterprise Agro-processing Industry Ethiopian Dry Port Service Ethiopian Shipping Lines Total Off-budget spending 177,735 110,796 73,575 34,593 31,142 21,670 20,466 19,095 15,946 14,960 13,205 6,734 6,666 6,600 6,198 3,347 3,276 3,187 569,191 Salini for Abay Dam construction; Cement companies; Hydro plant equipment producers China Railway Group $1.6 bn; OIA (India); local contractors; METEC Sugar plant equipment producers Private and state enterprises Boeing, Airbus, Bombardier, Fokker Telecom and networking equipment providers METEC State enterprises Private enterprises Domestic contractors and SMEs New state enterprise Private enterprises Domestic transit service providers Domestic SMEs Domestic contractors-- runway, civil works producers Domestic contractors and agricultural producers Domestic contractors Ship-builders (China, Korea) Mainly foreign, some domestic Mainly foreign, some domestic Mainly foreign, some domestic Mainly domestic Exclusively foreign Exclusively foreign Mainly foreign, some domestic Mainly domestic Mainly domestic Mainly domestic Mainly domestic Mainly domestic Mainly domestic Mainly domestic Mainly domestic Mainly domestic Mainly domestic Mainly foreign

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

12

Ethiopia Macroeconomic Handbook 2011-12

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 highvalue, 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

13

Ethiopia Macroeconomic Handbook 2011-12

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 stilluncultivated 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.

14

Ethiopia Macroeconomic Handbook 2011-12

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.

15

Ethiopia Macroeconomic Handbook 2011-12

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

16

Ethiopia Macroeconomic Handbook 2011-12

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 inputproviding 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;

17

Ethiopia Macroeconomic Handbook 2011-12

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 Land Cultivated (%) Fertilizer Usage (Kg/Hectare of Cultivated land) Irrigation usage (% of Cultivated land) Cereal Yields (tons/hectare) 25% 36 1.3% 1.7 SSA 44% 24 4% 1.3 3.6 530 Asia 51% 148 World 38% 96 18% 3.5 997

215 318 Agriculture Value Added per worker (USD) 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).

18

Ethiopia Macroeconomic Handbook 2011-12

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

19

Ethiopia Macroeconomic Handbook 2011-12

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 48. Transfer nearly 3.3 mln ha land to commercial farming investors in transparent and accountable manner Horticulture development 49. Land area under flowers production(ha) 1,586 50. Flowers production(mln cuts) 2,748.0 51. Land under the production of vegetables, fruits and herbs(ha) 2,472 52. Production of vegetables, fruits and herbs(tons) 58,400 Source: Growth and Transformation Plan (2010/11-2014/15)

1.81

3,000 5,859.1 33,000 979,600

20

Ethiopia Macroeconomic Handbook 2011-12

Table 2.3 Federal Land Allocations to Commercial Farm Investors in Ethiopia
No. 1 2 3 4 Name of Investor Karuturi Agro Products Plc. Shapoorji Pallonji BHO Bio Products PLC Ruchi Soya Industries CLC Spentex Industries Limited Huanan Dafengyuan Agriculture Adama White field Saudi Star Agricultural Development Sannati Agro Farm Enterprises Daniel Agricultural Development Enterprise Mela Agricultural Development PLC Access Capital Services Tracon Trading PLC Dr. Tamie Hadgu Bruhoye Lucci Agricultural Development Plc Vedanta Harvests PLC Rahwa ASKY Agricultural Development Tsegaye Demoz Agricultural Development Reta Keystone Year 2008 2010 2009 2010 Country of Origin India India India India Region of Investment Gambela Benshangul Gumuz Gambela Gambela Benshangul Gumuz & Amahara Gambella SNNPR SNNPR Alwero, Gambella Gambella SNNPR SNNPR Benshangul Gumuz Benshangul Gumuz SNNPR Benshangul Gumuz SNNPR Gambella SNNPR Benshangul Gumuz Investment Activity Development of Palm, Cereals & Pulses Growing biofuel seeds, edible oil Palm, Cereals & Pulses Growing Soya bean Hectares 100,000 50,000 27,000 25,000

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

2010 2010 2010 2010 2008 2011 2010 2010 2011 2011 2011 2011 2010 2010 2010 2011

India China Ethiopia Indian Saudi arabia India Diaspora Ethiopia Ethiopia Ethiopia Diaspora Ethiopia Ethiopian India Ethiopian Ethiopia

Growing Cotton Growing Sugarcane Growing Cotton Growing Cotton Wheat, maize and rice farming Growing Rice and rotational pulses & cereal crops Growing Cotton and Grains Growing Cotton Development of Sesame, Cereals & Pulses Growing Cotton Growing cotton and seeds Growing Cotton and soya bean Growing Cotton Tea, biofuel and spices production Growing Cotton and Grains Growing Cotton Growing Cotton, Sesame and Soyabean Growing Cotton and Grains Horticulutural and Crops

25,000 25,000 18,516 10,000 10,000 10,000 5,000 5,000 5,000 5,000 5,000 5,000 4,003 3,012 3,000 3,000

21 22 23

2010 2010 2010

Diaspora Diaspora Diaspora

SNNPR SNNPR Benshangul Gumuz

1,000 2,137 431

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

21

Ethiopia Macroeconomic Handbook 2011-12

Table 2.4: Agricultural Exports-- GTP Production and USD earnings projections
Production ('000 Tons) Established Crops Coffee Major Food Crops Root Crops Industrial Crops Spice Crops Stimulant Crops (Chat) Flowers (Mn. Stems) Fruits & Vegetables 2009/10 341 19,392 1,806 630 182 462 2,748 966 2014/15 831 26,774 5,907 1,175 322 1,040 5,859 5,907 Established Crops Coffee Oilseeds Pulses Flowers Spices Fruits & Vegetables Natural Gum Live Animals & Meat Total
Source: Growth and Transformation Plan Policy Matrix (2010/11--2014/15)

USD Exports Earnings (Mn. USD) 2009/10 528 358 130 170 19 32 13 125 1,374 2014/15 2,037 1,120 882 535 30 948 33 1,000 6,585

Table 2.5 SUMMARY OF AREA, PRODUCTION & YIELD OF GRAIN CROPS FOR PRIVATE PEASANT HOLDINGS
Production levels (Millions of tons)
2007/0 8 2008 /09 2009/ 10 2010/11

Cultivated Area (Millions of hectares)
2007 /08 2008/ 09 2009/ 10 2010/11

Yield (Tons per hectare)
2007/08 2008/ 09 2009/ 10 2010/1 1

Total Grain Cereals Pulses Oilseeds

16.1 13.7 1.8 0.6

17.8 15.1 2.0 0.7

19.4 16.7 2.0 0.6

21.2 18.6 2.0 0.6

Total Grain Cereals Pulses Oilseeds

10.9 8.7 1.5 0.7

12.4 9.8 1.8 0.9

12.7 10.2 1.7 0.8

13.0 10.6 1.6 0.8

Total Grain Cereals Pulses Oilseed s

1.5 1.6 1.2 0.9

1.4 1.5 1.1 0.8

1.5 1.6 1.2 0.8

1.6 1.7 1.3 0.8

GROWTH RATES (%)
2007/08 Total Grain Cereals Pulses Oilseeds 2008/09 2009/ 10 8.9% 10.6% -0.2% -1.9% 2010/11

GROWTH RATES (%)
2007/ 08 Total Grain Cereals Pulses Oilseeds 3.5% 3.1% 10.1 % 4.3% 2008/0 9 13.4% 11.9% 18.2% 21.9% 2009/ 10 2.7% 4.9% -4.5% -8.1% 2010/1 1 1.9% 3.7% -8.3% 1.2% Total Grain

GROWTH RATES (%)
2007/08 2008/ 09 -2.6% -1.6% -2.9% 12.8% 2009/ 10 6.1% 5.5% 4.5% 6.8% 2010/1 1 7.5% 7.2% 9.2% -2.4%

7.8% 6.5% 12.9% 24.2%

10.5% 10.1% 14.7% 6.4%

9.6% 11.1% 0.2% -1.3%

4.1% 3.3% 2.6% 29.9%

Cereals Pulses Oilseeds

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

22

Ethiopia Macroeconomic Handbook 2011-12

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).

23

Ethiopia Macroeconomic Handbook 2011-12

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.

24

Ethiopia Macroeconomic Handbook 2011-12

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-awayfrom-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.‖

25

Ethiopia Macroeconomic Handbook 2011-12

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.

26

Ethiopia Macroeconomic Handbook 2011-12

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 2540 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 ―massmarket‖ 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).

27

Ethiopia Macroeconomic Handbook 2011-12

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)
300-399 400-599 600-799 800-999 1000-1199 1200-1399 1400-1599 1600-1799 1800-1999 2000-2199 2200-2399 2400-2599 2600-2799 2800-2999 3000+ Not mentioned Total

Male
22,785 47,501 68,579 92,949 60,581 35,781 23,062 22,759 12,099 7,957 8,405 5,697 6,365 4,294 9,706 145,570 574,089

Sex Female
17,207 28,955 44,351 45,694 30,228 12,139 8,649 6,156 3,116 2,390 1,561 1,484 1,419 1,328 1,787 73,764 280,227

Total
39,992 76,456 112,930 138,643 90,809 47,920 31,711 28,914 15,214 10,348 9,965 7,181 7,783 5,622 11,493 219,334 854,316

% 5% 9% 13% 16% 11% 6% 4% 3% 2% 1% 1% 1% 1% 1% 1% 26% 100%

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

28

Ethiopia Macroeconomic Handbook 2011-12

Table 3.2: Composition of Urban Spending by Broad Categories Proportion of MAJOR GROUPS Expenditure (%)
Food and Non Alcoholic Expenditure Alcohol and Tobacco Clothing and Footwear Housing, Water, Fuel, Energy Furnishing Household Equipment and Maintenance Goods and Services for Routine Household Maintenance Health Medical Treatment Education Other (including Transport, Communication, miscellaneous) Total Expenditure per capita Source: Household Income, Consumption and Expenditure (HICE) Survey 2004/05 34.0% 0.4% 6.2% 23.9%

6.5% 0.8% 3.1% 25.2% 100%

Table 3.3.Urban Purchasing Power Based on Aggregate Wage Income Urban Salaried group
Numbers Mean Monthly wage Monthly wage paid Annual wage paid 2,544,615 1,063 2,704,925,745 32,459,108,940

Urban Nonsalaried group
2,595,216 957 2,482,843,147 29,794,117,766

Total Wage Paid (in Birr)
… … 5,187,768,892 62,253,226,706

In USD terms
… … 302,141,461.40 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 Dividend income Rental income Remittance income Total Urban income Total Income in Percent of GDP 62,253,226,706 3,439,396,810 6,225,322,671 24,038,000,000 95,955,946,187 19%

Source: CSA 2011 Urban Employment & Unemployment Survey & Access Capital Estimates

29

Ethiopia Macroeconomic Handbook 2011-12

Table 3.5. Urban Consumption Estimates For 2011 (based on CPI Index) Estimated Annual Weight in CPI 2011 Spending Level Incrase in Spending Commodity Types (%) (In Birr) (In Birr)
Food Items Cereals( teff, wheat, maize, etc) Beef Chicken & Mutton Food away from home Edible oils Bread Vegetables Injera Peas and Lentils Spices Sugar Coffee and Tea Milk and Eggs Potatoes, Other Tubers and Stems Milling Charge Pasta & Macaroni Other Foods Fruits Home-related Rent Household furnishing Electricity charges Kerosene Building material Charcoal & Firewood Water charges Services Transport Education Communication Entertainment Medical Care Clothing and footwear Clothing Footwear Personal care products Personal care Beverages Beer Soft drinks Other items 41.0% 10.7% 3.9% 1.4% 3.2% 3.2% 2.7% 2.6% 2.6% 2.4% 1.9% 1.8% 1.6% 0.8% 0.7% 0.5% 0.5% 0.2% 0.2% 27.7% 10.8% 6.9% 2.7% 2.4% 2.1% 1.6% 1.4% 17.4% 7.7% 4.1% 2.8% 1.5% 1.3% 7.8% 5.8% 2.0% 2.1% 2.1% 2.0% 1.5% 0.5% 1.9% 39,332,342,342 10,267,286,242 3,742,281,901 1,362,574,436 3,070,590,278 3,070,590,278 2,590,810,547 2,514,045,790 2,494,854,601 2,302,942,708 1,851,949,761 1,727,207,031 1,554,486,328 767,647,569 642,904,839 498,970,920 479,779,731 220,698,676 172,720,703 26,582,675,772 10,337,334,083 6,592,173,503 2,571,619,358 2,274,155,925 1,986,288,086 1,487,317,166 1,333,787,652 16,696,334,637 7,388,607,856 3,934,193,794 2,686,766,493 1,439,339,193 1,247,427,300 7,484,563,803 5,565,444,879 1,919,118,924 2,015,074,870 2,015,074,870 1,919,118,924 1,439,339,193 479,779,731 1,823,162,978 7,866,468,468 2,053,457,248 748,456,380 272,514,887 614,118,056 614,118,056 518,162,109 502,809,158 498,970,920 460,588,542 370,389,952 345,441,406 310,897,266 153,529,514 128,580,968 99,794,184 95,955,946 44,139,735 34,544,141 5,316,535,154 2,067,466,817 1,318,434,701 514,323,872 454,831,185 397,257,617 297,463,433 266,757,530 3,339,266,927 1,477,721,571 786,838,759 537,353,299 287,867,839 249,485,460 1,496,912,761 1,113,088,976 383,823,785 403,014,974 403,014,974 383,823,785 287,867,839 95,955,946 364,632,596

Total Urban Consumption Basket

100%

95,955,946,187

19,191,189,237

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

30

Ethiopia Macroeconomic Handbook 2011-12

Table 3.6. Composition of Private Service Providers in Addis Ababa in 2010 Trade Fields
TRANSPORT PROVIDERS OTHER SERVICES HOTEL, RESTAURANTS , BARS & CAFÉS CONTRACTORS RENTAL ACTIVITEIS PERSONAL CARE & EFFECTS PRINTING, PHOTOGRAPHING and SECRETAREIL SERVICES EDUCATION & TRAINING CENTERS REPAIRING, INSTALLATION & MAINTENANCE PROMOTION & PRODUCTION CONSULTANCY CLINIC HEALTH SERVICES RECREATION , MUSIC & ENTERTAINMENT CLEANING &SANITATION SERVICES COMMUNICATION ENGINEERING SERVICES TOTAL SERVICE PROVIDERS Source: Addis Ababa Trade & Industry Bureau

No. of Service Providers
20,438 4,740 4,380 3,436 2,443 1,792 1,454 1,280 666 609 532 403 395 342 382 209 43,501

Combined Registred Capital (in Birr)
2,800,504,373 2,955,586,440 530,185,936 1,987,888,152 2,251,546,707 20,898,764 199,695,696 807,785,498 92,542,871 85,792,772 235,473,886 135,395,291 70,169,674 28,862,429 69,086,371 81,821,052 12,353,235,912

Table 3.7 Composition of Retail Traders in Addis Ababa (2010) Trade Fields
Durable Goods Retailers Household Appliances & Utensils Vehicles & Transport Equipment for "Personal" Use, Spare Parts & Accessories Furniture, Furnishings, & Floor Coverings Audio-Visual, Photographic, & Other Electronic Equipment (excluding ICT Products) Non-Durable Goods Retailers Food Articles of Leather, Textiles, & Footwear (Wearing Apparels & Accessories) Intermediate/Semi-Finished Products Alcoholic Beverages & Tobacco Products Others Newspapers, Books & Stationery Products of Personal Effects Healthcare Products Non-Alcoholic Beverages TOTAL RETAIL TRADERS Source: Addis Ababa Trade & Industry Bureau

No. of Retailers
4,864 1,871 1,591 764 638 24,805 9,893 7,303 3,111 1,594 1,401 756 408 224 115 29,669

Combined Capital (in Birr)
555,898,751 127,463,249 265,815,678 86,780,192 75,839,632 1,620,062,381 339,925,910 300,338,810 252,772,346 14,940,958 512,635,291 123,078,504 27,161,608 42,939,348 6,269,606 2,175,961,132

31

Ethiopia Macroeconomic Handbook 2011-12

Table 3.8 Sampling of Foreign Firms in Fast Moving Consumer Goods (FMCG) Sector in Ethiopia Ethiopian Foreign Company Origin 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. 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 SABMiller has improved technology, boosted marketing, and expanded into several new product lines such as flavored water and new bottle types. Joint venture with collaboration expected in the areas of home and personal care products, biscuits, flour, detergents and pasta Rapid expansion in operations, with products in market including Ariel, Pampers and Gillette products, Powder Milk & Sunflower. Sole distributor of Nestle's Nido Milk Powder Sole distributor of Unilever products, including children's products, detergent, sanitary items, cosmetics (i.e., Sun silk), and razors Expanding sales and aggressive promotions, especially in flat panel TV sales 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. Rapid expansion in operations with rising choice of subscription offerings targeting different price points Bottled Water Rapid expansion in operations to meet fast-growing and unmet demand, especially in regions.

2

Diageo

UK

Meta Brewery

3

SAB Miller

South Africa

Ambo Mineral Water

4

Tiger Brands

South Africa

East African Group (Ethiopia) plc*

5 6

Proctor & Gamble Nestle

US Switzerland

Petram Plc & Al-Impex Plc Mulege Plc

7

Unilever

UK/Netherlands

Alfaraj

8

Sony

Japan

Glorious PLC

9

Samsung

South Korea

Garad

12 12

Multichoice Africa Rina International

South Africa India

Multichoice Ethiopia Aqua Addis East African Bottling Share Company (EABSC)

13

Coca Cola Sabco (CCS)

South Africa

Source: Various News Articles and companies' profile notes

32

Ethiopia Macroeconomic Handbook 2011-12

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 subindustries 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

33

Ethiopia Macroeconomic Handbook 2011-12

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 2025 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 22

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

34

Ethiopia Macroeconomic Handbook 2011-12

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 highlevel 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 wellintegrated 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.

35

Ethiopia Macroeconomic Handbook 2011-12

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, agroprocessing) 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.

36

Ethiopia Macroeconomic Handbook 2011-12

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).

37

Ethiopia Macroeconomic Handbook 2011-12

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

REAL GDP VALUED ADDED 1. Mining and Quarrying (in '000 birr) Annual Growth Rate 2. Service Sector (in '000 birr) Annual Growth Rate 3. Manufacture of Textiles and Wearing apparel--Gross Value of Production (in '000 birr) Annual Growth Rate 4. Manufacture of Leather and Footwear-Gross Value of Production (in '000 birr) Annual Growth Rate GDP at Constant Basic Prices (in millions of birr) Annual Growth Rate

2005/06 393,819

2006/07 333,144 -15.4% 43,534,59 3 15.3%

2007/08 404,483 21.4% 50,506,447 16.0%

2008/09 456,160 12.8% 57,632,43 3 14.1%

2009/10 657,633 44.2% 65,208,665 13.1%

2010/11 1,037,238 57.7% 73,368,16 5 12.5%

15.7%

37,747,674

14.6%

228,940

331,423 44.8%

185,022 -44.2%

521,126 181.7%

907,567 74.2%

… …

… 64.1%

1,022,744

1,213,791 18.7%

1,447,236 19.2% 116,190 11.2%

1,332,345 -7.9% 127,857 10.0%

1,639,518 23.1% 141,368 10.6%

… … 157,463 11.4%

… 13.3%

93,474

104,499 11.8%

10.9%

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

38

Ethiopia Macroeconomic Handbook 2011-12

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 2 3 4 Primary Gold Platinum Iron Tantalum ton ton Million ton ton N/A N/A 72 280,000 61,208 12.5 32.5 2,358 Lege Dembi Southern Ethiopia Yubdo, Western Ethiopia Bikilal, Western Ethiopia Kenticha, Southern Ethiopia

II. Industrial and Construction Minerals 1 2 3 4 5 6 7 8 9 10 Kaolin Diatomite Feldspar Quartz Silica Sand Potash Phosphate Soda Ash Brine Salt Rock Salt ton Million ton ton ton Million ton Million ton Million ton Million ton Million ton Million ton 595 N/A 225 17,500 17,200 420 210 200 N/A 180 225,397 36,602 501,000 55,000 3.4 15 181 460 290 1,000 Bombawoha, Southern Ethiopa In different parts of the rift valley Kenticha, Southern Ethiopia Kenticha, Southern Ethiopia Mugher valley, Central Ethiopia Afar region, Northern Ethiopia Bikilal, Western Ethiopia Ziway in the rift valley Lake Afdera, Northern Ethiopia Afar region, Northern Ethiopia Mugher-Central Ethiopia, MesoboNorthern Ethiopia and Dire DawaEastern Ethiopia Hakim Gara, Eastern Ethiopia Daleti, Western Ethiopia Harar, Eastern Ethiopia

11 12 13 14

Limestone Limestone Marble Granite

Million ton Million M
3

12,250 12,250 27,500 28,000

136.7 60 2.8 15

Million ton Million M
3

III. Energy Minerals 1 2 3 4 5 Coal Coal Oilshale Natural Gas Geothermal Resource Million ton Million ton Million ton TCF MW 265 265 N/A 3,600 13.73 64.5 108.1 2.7 33.5 Delbi and Moye, Western Ethiopia Yayu, Western Ethiopia Yayu and Delbi, Western Ethiopia Calub, Eastern Ethiopia 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)

39

Ethiopia Macroeconomic Handbook 2011-12

No.

Table 4.3 Mineral Industry Operators in Ethiopia-- by Commodity Capacity Origin Country Firm (Metric Tons)
Ethiopia Ethiopia Ethiopia Ethiopia Ethiopia 10,000 900,000 120,000 900,000 300,000 240,000 150,000 150,000 90,000 20,000e 8000 8,000 8,000 1,500,000 6,000 Ziway

Location

CAUSTIC SODA 1 National Mining Corporation (Govt-owned) CEMENT 1 Mugher Cement Enterprise (Govt- owned) 2 Addis Ababa Cement Factory 3 Messebo Building Materials Production S.C.(Govt- owned) 4 National Cement S.C. 5 Jema Cement plc 6 Abyssinia Cement plc 7 CGC Overseas Construction Ltd. (CGCOC) 8 Derba Midroc Cement plc COAL Ethio-Pak Coal Mining plc DOLOMITE Ethiopian Mineral Development S.C.(Govt- owned) GLASS Ethiopia Hansom International Glass plc Addis Ababa Bottle and Glass S.C. GOLD Midroc Gold Mine plc (subsidiary of Midroc Ethiopia plc) LIME Senkele Lime Factory MARBLE

China Saudi Arabia Joint Venture Ethiopia China Ethiopia Saudi Arabia Ethiopia

Mugher Addis Ababa Mekelle Dire Dawa North Shoa Zone Chancho Koka Dejen Dilby Soloka Addis Ababa Addis Ababa Lega Dembi Ambo

Ethiopian Marble Industries National Mining Corp. (subsidiary of Midroc Ethiopia plc) OIL 1 2 3 1 South West Development Africa Oil Tullow Oil Nyota Minerals

Ethiopia Saudi Arabia Ethiopia Canada Ireland Australian Canada Canada China Saudi Arabia

N/A 10000 m3 N/A N/A N/A 10e Kg 105 128,000,000 180,000 20,000

harar and various sites in western Ethiopia Dalleti and harar Ogaden Ogaden South Omo Yubdo Dallol Danakil Depression Lemi Lake Abiyata

PLATINUM POTASH 1 Allana Potash 2 Ethiopian Potash Corporation SILICA SAND CGC Overseas Construction Ltd. (CGCOC) SODA ASH National Mining Corporation plc STEEL Abysinia Integrated Steel Plc Sheba Steel Mills Plc Ethiopia Steel Smelting Enterprise (Government owned) Zuquala Steel Rolling Mill Enterprise (Government owned) Wallia Steel Factroy

Ethiopia Ethiopia Ethiopia Ethiopia Ethiopia

150,000 20,000 7,000 36,000 36,000 14,000

Debre Ziet N/A N/A Akaki

Akaki Metal products Ethiopia Source: USGS 2009 Minerals Yearbook. Some commodity items may not show an exhaustive listing. e Estimated

40

Ethiopia Macroeconomic Handbook 2011-12

No.

Sub-sector

Table 4.4. Manufacturing Sector in Ethiopia (2009/10) Total ValuePrivate No. Employment added Sector of Notable Operating Firms ('000) (ETB Share firms Million)
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, Muger, Messebo, Abyssinia, National Cement, Jema Cement Ethio-Plastic Share Company, MatadorAddis Tyre Share Company, Excel Plastics PLC, Unique Plastic Industry, Mohan Kothari Group MaruMetal Industry (MMI); Mesfin Industrial Engineering, Alemgenet Trade and Industry PLC AYKA Addis, Almeda Textile PLC, Kombolcha Textile PLC, Ediget Yarn S.C, MAA Garment, Ambassador Garment, Garment Express Adami Tulu Anti Pest, Chora Gas & chemical Enterprise, Al-Kyd Resin S.C Artistic Printing Press, Berhanena Selam Printing Press, Bole Printing Press, Commercial Printing Press Salvatore Fiore, 3F, GM Furnitures, Yonatan B.T., Sunmate Furniture Yesu PLC, Zuquala Steel Rolling Mill Enterprise, Abyssinia Integrated Steel Ethiopia Tannery S.C, Hafde Tannery PLC, Anbessa Shoe S.C.,Ramsey Shoes Factory National Tobacco Yangfan Motors, Holland Car, Mesfin Industrial Enginnering, Belay Ab enterprises and BT Trading, Metal and Engineering Corporation Ethiopian Pharmaceutical Manufacturing (EPHARM), Addis Pharmaceutical Factory, East African Pharmaceuticals (EAP) , Sino Ethiop Associate (Africa); Asmi Pharmaceuticals Akaki Spare Parts and Hand Tools S.C.; Mohan Kothari Group

1

Food processing

2

Cement and Nonmetalic minerals Rubber & Plastics

1,471 1,217

11% 79%

482 139

20.2 13.9

3

4

Fabricated Metal products

1,180

76%

154

10.1

1,138 5 Textiles & Garments 1,068 756 7 8 9 10 11 12 Paper & Printing Wood and Furniture Products Iron & Steel Leather & Footwear Manufacuring Tobacco Vehicles & Trailers 227 13 Pharmaceuticals 577 414 405 368 341

54%

91

30.8

6

Chemical Products

89% 65%

85 123

11.2 10.0

73% 75% 94% 0% 76%

335 39 114 1 11

12 4.0 10.8 0.99 1.7

68%

11

14

Machinery & Equipments

84

100%

15

0.87

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

41

Ethiopia Macroeconomic Handbook 2011-12

Table 4.5: A Typology of Ethiopia's Manufacturers by Ownership and Market Orientation
Mainly PRIVATE firms Mainly PUBLIC firms

1. Export-market oriented

Textiles/Clothing Leather products

Sugar

2. Local-market oriented

Food processing Cement Glass Chemicals Rubber & Plastics Paper & Printing Pharmaceuticals

Steel Cement Sugar Fertilizers

Table 4.6 Hydro Power Projects in the Pipeline
No.
1 2 3 4 5 6 GIBE III GENALE 3rd HELELE WERABESA CHEMOGA YEDA GENALE 6
th

Project

Status
42% completed Under Construction Under W.B finance Under Construction MOU Signed Under ADB Finance Under Construction

Capacity (MW)
1,870 258 422 278 256 366

Energy (GWH)
6,400 1,200 2,233 1,250 1,000 1,788

Project Completion (Year)
2013 2014 2015 2015 2015 2015

GEBA I & II GRAND RENAISSANCE DAM ("ABAY DAM")

7

5,250

15,000

2014-15

Total

8,700

28,871

Source: EEPCO's "Highlights on Power Sector Development Program (2010-2015 G.C.)"

42

Ethiopia Macroeconomic Handbook 2011-12

Table 4.7: The Outlook for Emerging Exports vs. Traditional/Agricultural Exports
2010/11
Total Gold Exports-- USD mns. Gold export volume total Midroc Gold Other gold mines Artisinal mines Gold price Total Coffee Exports-- USD mns Coffee export volume total Coffee price Total Emerging Exports---USD mns. Mineral exports Gold Other minerals Manufacturing exports Textiles Leather products Exportable services Ethiopian Airlines Ethiopian Shipping Lines EEPCO Traditional Agricultural Exports--USD mns. Coffee Oilseeds Chat Flowers Live Animals Meat Spices Pulses 485 11.0 4.0 0.0 7.0 44.1 841 196.1 4.3 1,985 519 485 34 166 62 104 1,300 1,100 200 1,993 841 324 238 175 148 63 33 139

2011/12
737 13.4 4.5 0.5 8.4 55.0 902 225.5 4.0 2,722 837 737 100 273 118 156 1,612 1,342 250 20 2,501 902 421 310 228 192 120 43 222

2012/13
846 16.9 5.0 1.0 10.9 50.0 986 259.4 3.8 3,623 1,146 846 300 457 223 234 2,020 1,637 313 70 3,247 986 547 403 296 250 227 56 356

2013/14
1,085 21.7 6.0 1.5 14.2 50.0 1,074 298.3 3.6 4,748 1,485 1,085 400 775 425 351 2,488 1,997 391 100 4,345 1,074 711 524 385 325 432 73 569 253

2014/15
1,323 26.5 6.0 2.0 18.5 50.0 1,235 343.0 3.6 6,281 1,823 1,323 500 1,333 807 526 3,125 2,437 488 200 6,095 1,235 925 681 500 422 821 94 910 506

Fruits and Vegetables 32 63 126 Source: Ethiopian Trade data for 2010/11, Access Capital projections for 2011/12 to 2014/15.

43

Ethiopia Macroeconomic Handbook 2011-12

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.

44

Ethiopia Macroeconomic Handbook 2011-12

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 subgroup 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.

45

Ethiopia Macroeconomic Handbook 2011-12

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. 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.

o

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.

46

Ethiopia Macroeconomic Handbook 2011-12

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. 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
30

47

Ethiopia Macroeconomic Handbook 2011-12

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.

48

Ethiopia Macroeconomic Handbook 2011-12

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
1 2 3 4 5 6 7 8 9 10 Ethiopia Sudan Guinea Democratic Republic of Congo Sierra Leone Uganda Angola Burundi Eritrea Swaziland Top 10 average

Inflation--2011
38.1 22.0 18.4 16.4 16.0 15.7 15.0 14.0 12.3 12.3 18.0

Country
Belarus Ethiopia Republic of Yemen Venezuela Sudan Suriname Vietnam Guinea Democratic Republic of Congo Sierra Leone Top 10 average

Inflation--2011
65.3 38.1 25.5 24.5 22.0 19.9 19.0 18.4 16.4 16.0 26.5

Source: IMF Data Mapper of September 2011 WEO at www. imf.org

49

Ethiopia Macroeconomic Handbook 2011-12

Table 5.2. Decomposition of Inflation for November 2011
FOOD INFLATION ACROSS REGIONS Month -onmonth COUNTRY ADDIS ABABA AFAR AMHARA B.GUMUZ DIREDAW A -1.1 -2.8 0.2 -1.5 4.3 Year onyear 50.3 27.0 36.1 49.6 99.1 Food total Cereals Pulses Bread & other Meat Milk, eggs, cheese Oils and Fats Vegeta bles & Fruits Spices Potatoe s, tubers, stems Coffee, tea Other food Milling charges Food away from home FOOD INFLATION BY COMPONENTS Month -onMonth -1.1 -0.3 -1.8 3.8 2.4 YearonYear 50.3 64.8 75.7 31.9 40.9 Non-food total Beverages Cigarettes & Tobacco Clothing & Footwear Rent, construction materials, utilities Furniture, Household equipments NON-FOOD INFLATION BY COMPONENTS Month -onMonth 0.9 1.8 -0.6 1.5 0.1 YearonYear 24.0 35.2 14.7 33.5 18.8

Weight* 57.0% 22.5% 4.3% 1.9% 2.8%

Weight* 43.0% 2.0% 0.5% 8.3% 20.6%

-0.1

39.8

2.0%

1.3

24.9

3.7%

2.0

24.6

GAMBELA

-3.3

63.1

2.4%

-6.2

41.6

Medical care & Health Transport & Communications Recreation, Entertainment, Education

1.1%

1.0

10.5

HARAR OROMIA

2.7 -0.7

28.8 51.3

2.5% 2.0%

-2.5 -14.7

-5.4 71.6

2.5% 1.1%

-2.3 1.0

25.7 16.6

SNNP SOMALIA TIGRAY

-2.3 5.0 -3.0

61.5 28.2 36.1

4.2% 4.3% 1.2% 1.2%

4.3 -1.3 0.5 1.8

53.5 67.5 9.8 7.8

Personal care and effects Misc goods

0.8% 2.3%

2.8 6.2

35.1 17.4

5.8%

1.1

31.6

*Weight in the overall Consumer Price Index
Source: CSA Consumer Price Index Monthly Survey--November 2011

50

Ethiopia Macroeconomic Handbook 2011-12

Table 5.3: Inflation Analytics by Type of Commodity/Service
CPI Weights
A

Inflation 46.7 64.8 75.7 31.9 40.9 24.9 53.5 35.2 44.5 67.5 -5.4 71.6 24.4 41.6 9.8 14.7 33.5 18.8 24.6 35.1 17.4 18.4 7.8 31.6 10.5 25.7 16.6

Domestically produced and domestically consumed 1 Cereals
2 3 4 5 6 7

22.5% 4.3% 1.9% 2.8% 2.0% 4.2% 2.0% 39.7% 4.3% 2.5% 2.0%

Pulses Bread & other Meat Milk, eggs, cheese Potatoes, tubers, stems Beverages Sub-Total

B

Domestically produced but also heavily exported 1 Coffee, tea
2 3

Vegetables & Fruits Spices Sub-Total

8.8% 2.4% 1.2% 0.5% 8.3% 20.6% 3.7% 0.8% 2.3% 39.9% 1.2% 5.8% 1.1% 2.5% 1.1% 11.6% 100.0%

C

Import-heavy commodities 1 Oils and Fats
2 3 4 5 6 7 8

Other food Cigarettes & Tobacco Clothing & Footwear Rent, construction materials, utilities Furniture, Household equipments Personal care and effects Misc goods Sub-Total

D

Services 1 Milling charges
2 3 4 5

Food away from home Medical care & Health Transport & Communications Recreation & Entertainment Sub-Total

All CPI components

Source: Access Capital analysis based on Central Statistical Authority Nov 2011 inflation data

51

Ethiopia Macroeconomic Handbook 2011-12

Table 5.4. Inflation and Broad Money Growth Rates for Top 20 Fastest Growing Countries in 2011
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Qatar Ghana Mongolia Turkmenistan Iraq China Papua New Guinea Lao People's Democratic Republic Eritrea Bhutan Argentina India Ethiopia Panama Democratic Republic of Timor-Leste Mozambique Equatorial Guinea Islamic Republic of Afghanistan Uzbekistan Kyrgyz Republic Moldova

Country

GDP Growth at Constant Prices
18.7 13.5 11.5 9.9 9.6 9.5 9.0 8.3 8.2 8.1 8.0 7.8 7.5 7.4 7.3 7.2 7.1 7.1 7.1 7.0 7.00

Inflation Rate Year Average
2.3 8.7 10.2 6.1 5.0 5.5 8.4 8.7 13.3 6.5 11.5 10.6 18.1 5.7 10.5 10.8 7.3 8.4 13.1 19.1 7.9

End of Period
2.3 9.0 15.1 7.5 5.0 5.1 9.5 9.7 12.3 5.8 11.0 8.9 38.1 5.5 6.5 8.0 7.3 2.0 12.7 13.0 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

52

Ethiopia Macroeconomic Handbook 2011-12

Source: MoFED “Public Sector External Debt” Statistical Bulletin (2004/05-2010/11), NBE Quarterly Bulletins on the Ethiopian Economy and CSA

53

Ethiopia Macroeconomic Handbook 2011-12

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 onthe-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

54

Ethiopia Macroeconomic Handbook 2011-12

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 wideranging 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

55

Ethiopia Macroeconomic Handbook 2011-12

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.

56

Ethiopia Macroeconomic Handbook 2011-12

Table 6.1: New Policy Regulations Intended Objectives Addressing Tax Evasion
To ensure 100,000 new 1 Mandatory cash registers Estimated 2 taxation methods on small business Tax clearance 3 certificates for bank borrowing taxpayers using cash registers by June 2012. To capture even small and medium-sized businesses within the tax net To ensure that all borrowers have fulfilled their tax obligation before they obtain a bank loan. High cash register cost for some micro/small businesses; large business for about half dozen authorized cash register companies. Widespread complaints of inflated tax assessments due to crude (presumptive) estimation methods used Under enforcement.

Some Consequences-- both intended and
Current Status of Measures

unintended

Under enforcement.

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
Meant to stabilize price increases and introduced in 1 Price controls directive January 2011 on 18 items including edible oil, bread, meat, soft drinks, and beer. To update business registry under a new 983-cateogry classification; to limit multiple registrations of on Commercial Re2 registration & Business Licensing Law business across multiple business lines; to ensure some basic necessary qualifications for business registration, including valid business address unique to a given business To limit price fixing, hoarding, and collusive behavior among Trade practice 3 and consumers' protection Law 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. 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. 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.

Addressing "rent-seeking" & "undue profits"
In July 2010, the Addis Ababa City Land Administration and Build Real Estate 1 developers' unused land 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.

57

Ethiopia Macroeconomic Handbook 2011-12

Directive puts all previously free-hold lands under the lease system upon transfer to third parties (excluding inheritances). Sales of freehold lands (through any other 2 Urban land lease proclamation 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). Directive passed in May 2011 places limits on the level of stock that a coffee exporter can hold at anytime. Restrictions on 3 coffee exporters’ stocks Holding 500 tons without legal shipping contract results in three-month ban from ECX, while holding 54500 tons results in a twomonth ban. Requirement to Conduct Coffee 4 Exports only in Containers rather than bags Imports of four widely consumed and imported Restrictions on 5 major goods imports commodities are not allowed to be conducted by private businesses or traders: cement; wheat; sugar; and palm oil. 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 6 Windfall Tax political situations without its own effort." Businesses in mining, petroleum industry, and banking are considered potential beneficiaries of windfall gains. Directive intended to punish those tenants of government commercial property who Housing Agency 7 directive on SubLeasing 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 thirdparty renters given sudden shift in a commonly utilized and long-standing practice that had not attracted government attention for decades. Under enforcement. Large tax income on the order of Birr 1.5 billion collected from 14 banks. 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. 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 Accumulation of stocks at ECX. Under enforcement--some 55 exporters were accused of hoarding in May 2011 and banned from ECX. 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.

Enforcement completed.

Source: Government proclamations, regulations & directives in 2009/2010/11, various news articles

58

Ethiopia Macroeconomic Handbook 2011-12

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

59

Ethiopia Macroeconomic Handbook 2011-12

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).

60

Ethiopia Macroeconomic Handbook 2011-12

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.

61

Ethiopia Macroeconomic Handbook 2011-12

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.

62

Ethiopia Macroeconomic Handbook 2011-12

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.

63

Ethiopia Macroeconomic Handbook 2011-12

Table 7.1: Ethiopia's Large State Owned Enterprises Name of State Enterprise Capital (Mn ETB)
The "BIG 5" State Enterprises 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Ethiopian Airlines Commercial Bank of Ethiopia Ethiopian Insurance Corporation Ethio Telecom Ethiopian Electric Power Corporation Agriculture and Agricultural Services Agricultural Materials and Technical Service Enterprise Agricultural Input Supply Enterprise Agricultural Mechanization Service Enterprise Natural Gum Production Enterprise Arsi Agricultural Development Enterprise Bale Agricultural Development Enterprise Awassa Agricultural Development Enterprise Fruit and Vegetable Development Enterprise Upper Awash Agro Industry Coffee Preparation and Storage Enterprise ETFRUIT Coffee Plantation Development Enterprise Sub-Total Construction and Construction Services Building Materials Supplier Enterprise Awash Construction S.C Construction Design S.C Transport Construction Design S.C Batu construction S.C Tikur Abay Construction S.C Tabor Ceramic products factory Construction Works and Coffee Technology Expansion Enterprise Bricks Products Factory S.C Ethiopian Marble Product Enterprise Sub-Total Hotel and Tourism Ethiopia Hotel Ethiopian Tourist Trading Enterprise Ras Hotels Felweha Services Enterprise Wabe Shebelle Hotels Ghion Hotel Sub-Total Transport Services Ethiopian Shipping Lines Ethiopian Maritime and Transit Enterprise Walya Cross Country Transport S.C Weyira Transport enterprise Anbesa City Bus Bekelcha Transport S.C Comet Transport S.C Shebelle Transport S.C Sub-Total Trade Merchandise Wholsale and Import Trade Enterprise Ethiopian Petroleum Enterprise Sub-Total Services Industry Project Service Enterprise Public Procurement Services Enterprise 6,638 6,200 350 23,622 184 38 16 8 217 220 33 3 208 41 52 558 1,580 11 93 33 44 70 125 178 18 11 5 588 7 38 7 5 11 32 100 758 24 19 63 530 125 270 124 1,914 98 306 404 8 12

18 19 20 21 22 23 24 25 26 27

29 30 31 32 33 34

35 36 37 38 39 40 41 42

43 44

47 48

64

Ethiopia Macroeconomic Handbook 2011-12

Sub-Total Food Manufacturing 49 50 51 52 53 54 Dire Dawa Food Complex S.C Awassa Flour Factory Tigray Flour Factory Kokeb Flour Factory Nazreth Edible oil S.C Hamaresa Edible oil S.C Sub-Total Iron & Steel Manufacturing 56 57 58 59 60 61 Akaki Spare parts and Hand Materials Factory Nazreth Tractor Assemble Ethiopia Plastic S.C Kality Steel and Metal Works Factory Ethiopia Steel Melting Enterprise Ethiopian Cork and Can Manufacturing S.C. Sub-Total Paper & Printing 62 63 64 65 66 67 Artistic Printig Enterprise Birhanena Selam Printing Enterprise Commercial Printing Enterprise Bole Printing Enterprise Educational Material Producer and Distributor Ethiopia Pulp and Paper Factory S.C Sub-Total Chemical Industry 67 68 69 Adami Tulu Anti Pest Manufacturing Enterprise Costic Soda Factory Awash Melkassa Aluminum Sulphate Sub-Total Pharmaceuticals 71 72 73 74 75 Ethiopia Pharmaceautical Factory S.C Cement Mugher Cement Enterprise Mines Ethiopian Mines Development S.C Adolla Gold Mine Enterprise Abijata Soda Ash S.C Sub-Total Beverage 76 77 78 79 80 81 Asela Malt Factory Awash Wine Factory Bedele Brewery S.C Harar Brewery Factory S.C Metabo Brewery Factory S.C National Alcohol factory Sub-Total Textile and leather 82 83 84 Kombolcha Textile S.C Bahir Dar Textile S.C Anbesa Shoe S.C

20 101 22 4 7 3 75 212 156 10 35 14 29 41 286 5 34 7 10 181 82 318 43 59 95 197 150 342 219 63 34 316 55 63 178 157 122 13 588

202 85 16 Sub-Total 302 Source: Company Reports/Press Releases for "BIG 5" data; PPESA for State Enterprises (2009); and Access Capital

65

Ethiopia Macroeconomic Handbook 2011-12

Table 7.2: Valuing the "BIG 5" and Other Parastatals
Estimated Value-- Birr bns. 20,700 5,310 63,000 1,490 42,000 132,500 10 33,150 165,650 Estimated Value-- USD bns. 1,203 309 3,663 87 2,442 7,703 1,927 9,631

1 2 3 4 5

"BIG 5" State Enterprises Ethiopian Airlines Ethiopian Shipping Lines Commercial Bank of Ethiopia Ethiopian Insurance Corporation Ethio Telecom TOTAL for "BIG 5" State Enterprises Other State Enterprises 81 PPESA-listed State Enterprises* Grand Total for Major State Enterprises "BIG 5" plus PPESA-listed Enterprises

Profits-Birr bns. 1,380 531 4,200 149 2,800 9,060 3,315 12,375

Applied PE ratio 15 10 15 10 15

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
Foreign Borrowing by Government (Millions USD) Government Debt Outstanding Debt to GDP Ratio (%) 395.1 2,767.1 10.3%

FY08/09
1,750.2 4,352.2 13.5%

FY09/10
1,564.5 5,633.8 19.0%

FY10/11
2,079.1 7,819.5 25.3%

Source: MoFED “Public Sector External Debt” Statistical Bulletin (2006/07-2010/11)

66

Ethiopia Macroeconomic Handbook 2011-12

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

67

Ethiopia Macroeconomic Handbook 2011-12

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-thepen‖ reform that potentially could reduce import prices facing urban consumers by 10 percent.

68

Ethiopia Macroeconomic Handbook 2011-12

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

69

Ethiopia Macroeconomic Handbook 2011-12

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 longterm 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 Wheat Palm Oil Sugar Cement (OPC) FOB Price (USD/ton) 300 835 550 64 Local Price (USD/ton) 321 1,259 845 169

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 longerterm weakness in business creation and expansion.

70

Ethiopia Macroeconomic Handbook 2011-12

Table 8.2: Cross-country comparations in tax rates and applicable thresholds Minimum Income Threshold at which Tax Applied (USD) COUNTRTRY Democratic Republic of Congo (DRC) South Africa Namibia Ethiopia Benin Cameroon Zambia Zimbabwe Mozambique Kenya Uganda Tanzania Djibouti Malawi Rwanda Ghana Nigeria Botswana Angola China Vietnam India Africa Average* 7 1,433 415 9 94 344 161 5 129 108 50 57 169 55 49 52 16 4,082 263 79 239 263 98 213 5,650 7,782 292 1,000 861 825 48 436 415 159 414 3,376 73 162 838 84 16,327 2,423 15,751 3,819 822 726 50% 40% 37% 35% 35% 35% 35% 35% 32% 30% 30% 30% 30% 30% 30% 25% 25% 25% 17% 45% 35% 30% 32% 211 8,342 6,087 351 756 1,234 1,355 735 551 882 453 550 1,500 350 585 1,588 1,541 8,844 5,061 5,184 1,362 1,527 1,107 Income where Highest Income Tax Rate Applies (USD) Highest Income Tax Rate Payable (%) GDP per capita (in USD)

* Excluding South Africa, Botswana and Namibia Source: Computed from results in World Tax Rates 2010/11--Tax Rates cc. & Country Revenue Authorities

71

Ethiopia Macroeconomic Handbook 2011-12

Table 8.3 ROAD FREIGHT TARRIF SERIES--Djibouti to Addis Ababa (Birr/Quintal)
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 DRY BULK TARIFFS (in Birr) 36.1 32.0 32.0 38.8 40.7 42.8 44.0 50.6 58.2 70.0 71.8 79.5 DRY BULK TARIFFS (in USD) 4.4 3.8 3.7 4.5 4.7 4.9 5.1 5.8 6.3 6.7 5.6 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)

72

Ethiopia Macroeconomic Handbook 2011-12

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

73

Ethiopia Macroeconomic Handbook 2011-12

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 lowyielding 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.

74

Ethiopia Macroeconomic Handbook 2011-12

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 smallholder 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

75

Ethiopia Macroeconomic Handbook 2011-12

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.

76

Ethiopia Macroeconomic Handbook 2011-12

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.

77

Ethiopia Macroeconomic Handbook 2011-12

more appropriate basis for calculating the real return on equity may be on the basis of the yearaverage 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 tenfold 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 onethird 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.

78

Ethiopia Macroeconomic Handbook 2011-12

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 riskrelated 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.

79

Ethiopia Macroeconomic Handbook 2011-12

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.

80

Ethiopia Macroeconomic Handbook 2011-12

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) Abay Abyssinia Awash Berhan Bunna Dashen LIB NIB OIB United Wegagen Zemen Private Bank Average 263 6,075 7,744 694 491 11,841 1,297 5,157 1,526 6,066 5,734 1,163 Loans (Mn Birr) … 3,316 3,986 332 366 6,221 676 2,767 662 3,277 2,910 645 Period Average Equity (Mn Birr) … 505 901 124 194 1,042 264 863 236 616 990 159 Profit After Tax (Mn Birr) -4 178 361 21 19 451 44 246 44 232 323 85 Earnings Per Share -2.4% 56.7% 56.0% 17.5% 10.2% 75.3% 17.6% 38.0% 20.5% 52.8% 44.8% 58.1% Return on Equity … 35.3% 40.0% 17.1% 10.1% 43.3% 16.6% 28.5% 18.8% 37.7% 32.7% 53.4% Return on Assets -0.8% 2.6% 3.6% 3.4% 3.1% 3.3% 2.8% 3.8% 2.9% 3.4% 4.7% 6.3%

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.

81

Ethiopia Macroeconomic Handbook 2011-12

Table 10.3. Corporate Bond by Holders in 2010/11 First Quarter (In Millions of Birr)
2010/11 Issuer of the Bond Quarter I Outstanding 1.Puplic Enterprises EEPCO ETC DBE 2. Regional Governments Oromia Amhara Tigray SNNPRS Dire Dawa Harari Addia Ababa 3.Grand Total(1+2)
Source: NBE QIV 2009/10 Bulletin

22,495 18,200 4,295 6,672 1,588 1,152 660 866 184 129 2,093 29,167

82

Ethiopia Macroeconomic Handbook 2011-12

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). 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.‖

o

52 53

See FY 2010/11 GDP Estimate Figures of Ministry of Finance and Economic Development at www.mofed.gov.et 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

83

Ethiopia Macroeconomic Handbook 2011-12

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 onethird 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.

84

Ethiopia Macroeconomic Handbook 2011-12

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

85

Ethiopia Macroeconomic Handbook 2011-12

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 evergrowing 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 59

The IMF‘s 2011/12 inflation projection is provided in their October 2011 Regional Economic Outlook (page 73). 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.

86

Ethiopia Macroeconomic Handbook 2011-12

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.

87

Ethiopia Macroeconomic Handbook 2011-12

ANNEX Table 1: Economic Sectors Percentage Distribution in GDP and Growth Rates, 2010/11 Sector
Agriculture Industry Services GDP Total

Real Growth
9.0 15.0 12.5 11.4

Percentage Share
41.1 13.4 46.6

Source: Ministry of Finance and Economic Development--2003 EFY GDP Estimates

ANNEX Table 2: Production of Cereals (Mn. Tons)
2008/09 CSA FAO Difference 15.6 15.2 2.6% 2009/10 17.3 16.8 3.0% 2010/11 19.1 17.5 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 Real Growth Variables
Electricity usage (sales) growth Volume of Exports growth Ports traffic growth Ethiopian Airlines Passenger growth Ethiopian Airlines Cargo growth Petroleum Products volume growth Tourist Arrivals growth Vehicle Registration growth Crop Production-- CSA data 22.5% 14.1% -12.0% 19.0% 20.3% 16.6% 3.5% 47.9% 9.3%

Growth rate

Nominal Growth Variables
Tax Receipts nominal growth Export value growth Import value growth Broad Money growth Deposit growth at private banks Loan growth at private banks 42.2% 38.3% 37.1% 36.0% 29.1% 21.6%

Source: EEPCO, MoTI, IMF, EAL, EPE, Dry Ports Enterprises, Ethiopian Transport Authority, NBE, EIA, MoFED, CSA, Banks' Annual reports, Press reports.

88

Ethiopia Macroeconomic Handbook 2011-12

ANNEX Table 4: Government Budget for FY 2010/11 and FY 2011/12 (in Birr billions)
Budget (FY 2010/11) Total Revenue and Grants Revenues Tax Revenue Tax on Incomes, Profits, and Capital Gains VAT on domestic goods and services Excise tax and stamp duties Taxes on imported goods Non-Tax Revenue Fees, charges, and public revenues Government investment income (from SOEs) Other non-tax revenue Grants Total Expenditure by nature of expenditure Recurrent Expenditure Capital Expenditure Subsidies to Regions Support for Reaching MDG Goals by sector of expenditure Administrative and General Service Economic services Social services Miscellaneous Overall deficit To be covered by external borrowing To be covered by domestic borrowing
Source: MoFED's Federal Budget Summary (2010/11 & 2011/12)

Budget (FY 2011/12) 100.6 79.2 70.0 18.6 18.5 2.9 32.9 9.2 2.3 4.1 2.7 21.4 117.8 23.3 48.1 31.4 15.0 10.6 33.6 19.3 54.3 -17.2 6.6 10.6

64.0 48.7 40.9 10.9 8.1 1.5 20.4 7.7 1.5 5.5 0.8 15.4 77.2 17.1 36.0 24.2 … 7.2 23.2 15.9 30.9 -13.2 4.7 8.5

89

Ethiopia Macroeconomic Handbook 2011-12

ANNEX Table 5: Consumer Price Index-General
Month Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Price Index 178.2 178.9 179.6 180.7 181.3 183.7 183.2 184.3 189.9 194.0 194.1 202.4 209.7 208.4 224.6 233.9 244.1 253.6 254.9 259.2 266.0 271.1 270.2 268.8 267.5 267.5 268.8 270.7 273.4 277.5 278.9 283.1 285.9 288.8 287.9 286.5 Month-onMonth Inflation 0.8 0.4 0.4 0.6 0.3 1.3 -0.3 0.6 3.0 2.2 0.1 4.3 3.6 -0.6 7.8 4.1 4.4 3.9 0.5 1.7 2.6 1.9 -0.3 -0.5 -0.5 0.0 0.5 0.7 1.0 1.5 0.5 1.5 1.0 1.0 -0.3 -0.5 Year-onYear Inflation 7.6 7.1 7.4 6.8 7.4 7.3 5.7 5.3 7.5 10.7 10.2 14.5 17.7 16.5 25.1 29.4 34.6 38.1 39.1 40.6 40.1 39.7 39.2 32.8 27.6 28.4 19.7 15.7 12.0 9.4 9.4 9.2 7.5 6.5 6.6 6.6 Year-Average Inflation 6.6 5.0 3.9 2.9 2.4 2.8 3.6 4.4 5.4 6.6 7.5 8.2 9.0 9.8 11.3 13.2 15.5 18.1 20.9 23.9 26.6 28.1 29.8 32.9 33.6 34.5 33.8 32.4 30.2 27.5 24.9 22.3 19.6 17.7 15.6 12.6 Return to single-digit inflation Peak Year-on-Year Inflation September 2010 Devaluation

Source: CSA for historical data and Access Capital projections in bold.

90

Ethiopia Macroeconomic Handbook 2011-12

ANNEX TABLE 6: Value of Imports by End Use--FY 2010/11 Vs 2009/10 (in '000 USD)
2009/10 CONSUMER GOODS Durables Furniture, Furnishings, & Floor Coverings Household Appliances & Utensils Vehicles & Transport Equipment for "Personal" Use, Their Spare Parts & Accessories Audio-Visual, Photographic, & Other Electronic Equipment (excluding ICT Products) Other durables Non-Durables Food & Non-Alcoholic Beverages Food Non-Alcoholic Beverages Alcoholic Beverages & Tobacco Products Articles of Leather, Textiles, & Footwear (Wearing Apparels & Accessories) Healthcare Products Newspapers, Books & Stationery Products of Personal Effects Other non-durables INTERMEDIATE/SEMI-FINISHED PRODUCTS ENERGY CAPITAL GOODS Machinery ICT Products Transport Equipment, Spare Parts & Accessories Railway or Tramway Locomotives, Parts & Accessories Vehicles, Spare Parts & Accessories (used in the production of goods & services) Aircrafts, Parts & Accessories Ships, Boats, & Floating Structures, Parts & Accessories Containers (designed & equipped for carriage by one or more modes of transport) Other capital goods RAW MATERIALS ARMS AND AMMUNITION; PARTS & ACCESSORIES TOTAL IMPORTS Source: Customs Authority and Ethiopian Petroleum Enterprise 2,367,730 560,512 38,709 118,746 254,321 108,906 39,830 1,807,217 995,642 994,753 889 14,346 237,681 311,752 124,658 90,781 32,356 1,656,046 1,310,588 2,596,051 1,097,812 537,373 520,816 217 517,641 1,022 265 1,671 440,050 189,088 5,158 8,124,661 2010/11 2,095,610 572,994 46,916 143,018 251,061 76,534 55,464 1,522,616 725,376 724,565 810 14,448 199,621 321,842 121,671 100,813 38,845 1,536,848 1,808,142 2,634,130 1,095,387 543,830 696,288 64 667,752 25,972 103 2,397 298,625 194,735 1,500 8,270,964 Growth Rates -11.5% 2.2% 21.2% 20.4% -1.3% -29.7% 39.3% -15.7% -27.1% -27.2% -8.8% 0.7% -16.0% 3.2% -2.4% 11.1% 20.1% -7.2% 38.0% 1.5% -0.2% 1.2% 33.7% -70.6% 29.0% 2442.2% -61.0% 43.4% -32.1% 3.0% -70.9% 1.8%

91

Ethiopia Macroeconomic Handbook 2011-12

ANNEX Table 7: External Borrowing and External Debt
2006/07 Total External Debt-- USD millions Multilateral lenders to Ethiopia World Bank African Development Bank IMF Others Bilateral lenders to Ethiopa Paris Club Non-Paris Club (China, India, Saudi, etc.) Private lenders to Ethiopa Commercial Banks Suppliers New external borrowing--USD millions Multilateral o/w World Bank Bilateral Private
External debt to GDP-- Ethiopia External debt to GDP-- SSA average

2007/08 2,767.1 1,540.49 807.4 33.1 0 700.0 951.5 456.5 495.0 275.0 244.4 30.7 395.1 281 144 114 0
10.3 21.8

2008/09 4,352.2 2,032.31 1,126.2 19.8 51.8 834.5 1,204.3 466.0 738.3 1,115.6 217.7 897.9 1,750.2 593 358 290 867
13.5 24.4

2009/10 5,633.3 2,737.28 1,577.0 12.8 217.6 929.8 1,415.0 429.1 985.9 1,481.0 259.2 1,221.8 1,564.5 857 526 258 449
19.0 20.7

2010/11 7,819.5 3,589.20 2,091.8 8.2 297.7 1,191.5 1,863.6 479.1 1,384.5 2,366.5 926.5 1,440.0 2,079.1 673 394 404 1,002
25.3 19.9

2,314.6 1,193.06 615.8 46.1 0 531.2 806.9 367.6 439.3 314.6 283.8 30.8 357.8 277 158 80 0
11.9 24.5

Source: MOFED, Public Sector External Debt Statistics, Statistical Bulletin No. 7 (www.mofed.gov.et) and IMF

92

Ethiopia Macroeconomic Handbook 2011-12

ANNEX Table 8: Export Performance-- First Five Months of FY 2011/12
Export Value: FY 2010/11 (USD millions) Coffee Gold Chat Oil Seeds Live Animals* Flower** Leather and Leather Products Pulses Textile and Garment Meat and Meat Products Fruit & Vegetables Spices Others Natural Gum Tantalum Flour Mineral Products (excl gold & tantl.) Beverages Hair Oil (Paprika Oleoresin) Honey Processed Fruit Products Processed Spices Bees Wax Eucalyptus Tree (logs) Tea Animal Vaccine Oil seed products (Tahina) Cotton Capsule TOTAL
Source: Ministry of Trade

No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Export Value: JulyNov 2010 (USD millions) 280.2 133.8 107.1 79.2 67.2 62.9 33.1 49.8 16.4 23.2 12.5 8.4 20.7 5.6 4.7 2.7 1.1 0.7 0.9 0.7 0.0 0.4 0.6 0.2 0.4 0.8 2.7 0.0 0.1 916

Export Value: JulyNov 2011 (USD millions) 288.2 209.5 110.5 106.1 103.5 74.5 62.3 52.1 38.6 36.1 17.2 12.4 7.5 4.8 4.0 3.3 3.1 1.9 1.7 1.4 1.2 1.1 0.6 0.5 0.4 0.4 0.3 0.2 0.1 1,143

Value Growth Rate 2.9% 56.6% 3.2% 33.9% 54.0% 18.5% 88.3% 4.5% 135.5% 55.8% 38.2% 47.9% -63.7% -14.5% -16.3% 20.2% 168.4% 181.5% 77.4% 109.8% 2466.5 % 169.3% -7.2% 125.3% 1.7% -47.9% -88.7% 350.8% 48.6% 24.8%

Of which: Volume growth -38.0% -8.3% 0.8% 22.1% 8.1% 10.6% 58.3% -11.2% 55.3% 28.2% 49.7% 45.1% -70.7% -21.4% -3.8% -2.2% -97.3% 101% 67.5% 100% 330% 145% -14.4% 221% -17.5% -56.9% -85.5% 407% 34.5% …

Of which: Price growth 65.8% 70.8% 2.4% 9.6% 42.5% 7.1% 18.9% 17.6% 51.7% 21.6% -7.7% 1.9% 23.8% 8.8% -13.0% 23.0% 9748% 39.6% 5.9% 4.6% 0.0% 9.6% 8.4% -29.9% 23.4% 20.7% -21.8% -11.2% 10.5% …

841.7 485.3 238.4 323.9 147.9 175.3 103.9 138.8 61.9 63.3 31.7 33.2 51.1 12.8 28.1 5.3 6.0 2.2 3.0 1.7 0.8 1.5 2.0 3.8 1.3 1.6 4.4 0.0 0.3 2,771

93

Ethiopia Macroeconomic Handbook 2011-12

ANNEX Table 9: Ethiopia's Balance of Payments, 2009/10 - 2011/12
2009/10 Actual Current Account Exports Imports Net Services Net Factor Income Private Grants Public Grants Capital Account Official borrowing, net Foreign Investment Other private flows Other flows (E & Os) Overall balance o/w NBE net foreign assets o/w Banks' net foreign assets Gross reserves at FY-end USD GDP in millions Current Account to GDP FDI plus loans to GDP Export growth rate Import growth rate (1,222) 2,003 (8,269) 513 (92) 2,708 1,915 2,001 1,327 956 227 (509) 779 418 361 2,018 29,689 -4.1% 7.7% 38.4 7.0 2010/11 Estimate (930) 2,770 (8,434) 641 (115) 2,808 1,400 1,900 1,200 1,000 200 (500) 970 … … 2,988 30,943 -3.0% 7.1% 38.3 2.0 2011/12 Proj. (1,523) 3,532 (9,910) 737 (132) 2,800 1,450 1,800 1,200 1,100 (500) 277 … … 3,264 38,443 -4.0% 6.0% 27.5 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

94

Ethiopia Macroeconomic Handbook 2011-12

Source: National Bank of Ethiopia

ANNEX Table 11: Exchange Rate Recent Trends and Outlook
Month
Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12

Birr per USD-- Buying rate
17.08 17.13 17.17 17.23 17.28 17.34 17.39 17.45 17.50 17.56 17.61 17.67 17.72 17.78 17.83 17.89

Birr per USD-- Selling rate
17.42 17.47 17.52 17.57 17.63 17.68 17.74 17.79 17.85 17.90 17.96 18.01 18.07 18.12 18.18 18.23

Source: NBE for historical data and Access Capital projections in bol

95

Ethiopia Macroeconomic Handbook 2011-12

ANNEX TABLE 12: Ethiopia--Ten Years of Key Macroeconomic Indicators: FY 2001/02 to 2011/12
2001/02 Real GDP growth By Sector Agriculture growth Industry growth Services growth GDP at current market prices (Birr billons) GDP at current market prices (USD billons) GDP per capita (USD) GDP per capita (Birr) Gross domestic investment (% GDP) Public investment (% GDP) Private investment (% GDP) Consumer prices (end of period) Consumer prices (year-average) Broad money growth Credit to the public sector (Govt & SOEs) growth Credit to the private sector growth Deposit rates (minimum, in percent) Exchange rate (Birr per USD, year average.) Exports, f.o.b. Coffee Noncoffee Imports, c.i.f. Fuel Current account, after grants (% GDP) Foreign direct investment (% GDP) External borrowing (% GDP) External debt (% GDP) Gross official international reserves (in months of imports of goods & services) Revenue Tax revenue Nontax revenue Grants Expenditure and net lending Current expenditure Capital expenditure Overall fiscal balance, including grants External financing of the deficit Domestic financing of the deficit Float/statistical discrepancy Gross stock of domestic debt Population, mid-year estimate (in millions) 1.6 -1.9 8.3 3.3 66.6 7.8 118 1,004 23.6 14.1 9.5 -1.0 -7.2 8.1 … … 3.0 8.54 452 163 289 1,696 268 -4.5 1.9 6.2 97.4 664 3.3 15.6 11.9 3.7 3.2 26.5 15.9 9.2 -7.2 7.4 0.6 -0.7 0.0 66.3 2002/03 -2.1 -10.5 6.5 6.0 73.4 8.6 126 1,077 22.8 14.0 8.8 23.5 15.1 10.9 … … 3.0 8.58 483 165 318 1,856 288 -2.1 1.4 4.2 85.4 931 3.7 15.2 11.2 4.0 3.2 27.9 18.4 8.6 -6.5 5.3 2.3 -1.0 . 68.2 2003/04 11.7 16.9 11.6 6.3 86.7 10.0 143 1,236 21.2 12.1 9.1 1.7 8.6 14.7 … … 3.0 8.63 600 223 377 2,587 311 -5.0 1.5 2.0 73.3 1,352 3.7 16.1 12.6 3.5 3.2 23.7 13.8 9.5 -3.0 2.8 2.5 -2.3 35.8 70.1 2004/05 12.6 13.5 9.4 12.8 106.5 12.3 171 1,478 26.3 15.4 10.9 13.0 6.8 19.6 … … 3.0 8.65 818 335 483 3,633 669 -8.2 1.2 2.2 48.1 1,581 3.4 14.6 11.6 3.0 3.2 23.3 12.4 10.7 -4.4 2.2 3.3 -1.2 30.0 72.1 2005/06 11.5 10.9 10.2 13.3 131.6 15.2 205 1,778 24.3 16.7 7.6 11.6 12.3 17.4 16.6 28.3 3.0 8.68 1,001 354 647 4,593 861 -9.1 2.4 1.3 39.6 1,158 2.2 14.8 10.8 4.1 3.2 22.3 11.6 10.7 -3.9 1.1 2.1 0.6 29.5 74.1 2006/07 11.8 9.4 9.5 15.3 172.0 19.6 257 2,260 24.8 18.1 6.7 15.8 17.1 19.7 21.1 27.3 4.0 8.79 1,189 424 765 5,128 895 -4.4 2.5 1.2 11.9 1,326 1.9 12.7 10.1 2.6 3.2 20.7 10.0 10.7 -3.6 1.1 3.6 -1.1 26.2 76.1 2007/08 11.2 7.5 10.0 16.0 248.3 26.9 344 3,176 21.0 15.1 5.8 55.2 25.4 22.9 35.7 22.0 4.0 9.24 1,466 525 941 6,811 1,621 -5.5 3.0 2.6 10.3 906 1.2 12.0 9.6 2.6 3.2 18.9 9.2 9.7 -2.9 1.0 3.0 -1.0 20.8 78.2 2008/09 10.1 6.4 9.8 14.1 335.9 32.2 402 4,188 20.4 14.5 5.9 2.7 36.4 19.9 5.8 12.6 4.0 10.42 1,447 376 1,071 7,727 1,257 -5.0 2.7 4.8 12.9 1,523 1.9 12.0 8.6 3.3 4.3 17.2 8.1 9.1 -0.9 0.9 -0.1 -0.2 15.2 80.2 2009/10 10.5 7.6 10.8 13.1 383.3 29.7 361 4,656 22.0 15.1 6.9 7.3 2.8 24.3 11.8 39.9 4.0 12.91 2,003 528 1,475 8,269 1,127 -4.1 3.2 4.5 14.0 2,018 2.2 13.4 10.7 2.6 3.2 18.1 8.3 9.8 -1.6 1.0 0.6 0.0 13.3 82.3 2010/11 Estimate 11.4 9.0 15.0 12.5 511.2 30.9 355 5,869 24.2 16.6 7.6 38.1 18.1 36.0 41.0 25.0 5.0 16.5 2,770 842 1,928 8,434 1,808 -3.0 3.2 3.9 25.3 2,988 2.1 13.5 10.8 2.7 4.5 20.1 8.5 11.6 -2.1 0.5 1.6 0.0 12.0 85.0 2011/12 Proj. 9.1 9.0 10.0 9.0 664.5 38.5 442 7,638 26.0 19.0 7.0 9.4 27.5 24.0 27.3 20.0 5.0 17.3 3,532 902 2,630 9,910 2,124 -3.8 2.9 3.1 24.0 3,264 2.0 11.9 10.5 1.4 3.2 17.7 7.0 10.7 -2.6 1.0 1.6 0.0 12.0 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.

96