The Dark Side of Ethiopia’s Liberalisation: The Fruits of Promising Reforms Are Under Threat From Waste, Graft and Conflict

 

👉 Courtesy: The Economist

For the past couple of years much of Addis Ababa, Ethiopia’s capital, was reduced to rubble by demolitions. Now luxury apartments, parks and cycle lanes are rising from the ruins. Abiy Ahmed, Ethiopia’s prime minister, believes the old city must make way for a cleaner, shinier one.

Mr Abiy is transforming not just Addis, but Ethiopia. Long one of Africa’s most state-controlled economies, the east African country of 135m people has recently begun to liberalise. A year ago it floated its currency, the birr, and entered an IMF programme worth $3.4bn (3% of GDP). A raft of reforms will radically alter its economic system. “What they are trying to do is comparable to the transition economies after the fall of the Soviet Union,” says Stefan Dercon of Oxford University, who has advised several Ethiopian governments on economic policy. Ethiopia hopes to follow the path of countries such as Poland and become an economic power. Yet it may end up looking more like Russia, its transition derailed by corruption, conflict and chaos.

Following decades of communist dictatorship, the government began to allow some space for free markets in the 1990s. But it retained tight restrictions on private enterprise, growing through debt-fuelled state investment in infrastructure. Yet since a sovereign default in 2023, following a devastating civil war, forced Ethiopia to ask the IMF for a bailout, it has opened up banking, retail and other sectors to foreign competition, and relaxed restrictions on repatriating profits. On July 1st parliament approved a law allowing foreigners to own property. The country plans to privatise some state-owned firms. In January it opened a stock exchange.

This rosy picture may not be the whole story. The IMF relies on government data for its estimates, but has repeatedly complained about “the quality and availability of economic statistics” in Ethiopia. The World Bank said this month that it could not estimate Ethiopia’s national income for the current fiscal year. It said it needed more time to take the sudden depreciation of the birr into account. Proxy measures such as electricity demand indicate the economy is growing—but probably not as fast as official figures suggest.

Fiscal belt-tightening has resulted in savage cuts to social spending. Food and cash transfers to poor households were slashed by a third last year. Reduced education spending has made it impossible to rebuild the thousands of schools that have been damaged or destroyed by conflict. At least 8m children are thought to be out of school. The country’s doctors, who have seen their salaries fall by roughly two-thirds in real terms over the past six years, launched a month-long, nationwide strike in May. At the same time Mr Abiy has continued to spend what are thought to be billions of dollars on vanity projects, such as an opulent new palace.

The prime minister’s supporters argue that although economic reform is painful, it will attract the foreign investment Ethiopia needs to thrive. Yet in April an initial public offering for Ethiotelecom, the state telecoms firm, managed to sell just 11% of the shares on offer. The IMF said on July 15th that foreign direct investment (FDI) had been “weaker than anticipated” following the reforms. It expects net FDI for the year to July to hit 3.2% of GDP, compared with a peak of more than 5% in 2017.

Investors say that the reforms have so far been skin-deep. A former executive at a multinational company in Ethiopia says state-owned firms still enjoy unfair advantages. Others lament that Ethiopia remains a licence raj. A good rule of thumb, says one investor, is that anything not explicitly permitted is forbidden.

Corruption, which used to be relatively rare, seems to be worsening. In 2023 almost two-thirds of Ethiopians felt it had increased in the past year, according to Afrobarometer, a pollster. Procedures such as applying for a passport have become impossible to complete without paying a bribe. Some complain of having to grease official palms just to pay tax.

Though Mr Abiy has conceded that corruption has become “normalised”, he maintains that it is limited to petty graft. Yet many fear the rot runs deeper. Budgets for government projects are opaque. Contracts are being handed out without competitive tender. There is talk of a new class of oligarchs making fast fortunes thanks to their connections with officials. “In the old days if you were confronted with someone asking for a brown envelope, you would go to someone higher up and they would make the problem go away,” says another investor. “Now the higher up you go, the more you have to pay.”

The most important barrier to investment in Ethiopia remains conflict. The country’s two most populous regions, Oromia and Amhara, have been roiling under insurgencies for years. Tensions with neighbouring Eritrea continue to rise, in large part because Mr Abiy has made no secret of his desire to grab its Red Sea ports. As public services across the country are ailing, he has been equipping his army with fighter jets and drones. Nothing deters investment like a looming war.