Ethiopia is building on its economic momentum with a spate of new developments, but needs higher growth rates to fulfil its ambition of achieving middle-income status.
The continent's fifth-largest economy is rapidly transitioning towards a market economy. Ethiopia clocked growth of 9.7% in 2013, and is set to grow at 7.5% this year and the next, according to the International Monetary Fund. Fitch Ratings expects real GDP growth of 9% in 2014 and 8% in 2015.
"Ethiopia's growth over the medium-term can be sustained by large, untapped resources, including large hydro-electric potential," said Fitch. "However, the private sector's weakness, reflecting the country's fairly recent transition to a market economy, and its inadequate access to domestic credit, could limit growth potential over the medium-term as public investment slows."
The prime minister said last year the government was mulling bond issuances, including a Eurobond. Fitch Ratings assigned a B rating to the country while Standard & Poor's assigned a B/B rating with stable outlook - similar to neighbouring Kenya.
ECONOMIC SHIFT
Impressive as growth rates are, they have fallen short of the government's double-digit target. The government acknowledged the slow progress in its latest Growth and Transformation Plan (GTP) annual progress report for 2012/13 that was discussed in parliament last month.
"Although the composition of the economy has changed in favour of industry and service sectors over the last three years, the process needs to be accelerated to bring about a significant shift in the structure of the economy," the report noted.
"To set the economy on a rapid process of industrialization and structural transformation, the growth of the industrial sector and particularly the manufacturing industry has to be accelerated even further."
Earlier this month, Chinese Premier Li Keqiang signed cooperation agreements with his Ethiopian counterpart Hailemariam Desalegn on trade, investment, infrastructure development, manufacturing, telecommunications, industrial park development, resources and agriculture.
"We are willing to see Ethiopia moving fast and steadily on the track of development and make greater achievements in its efforts of poverty reduction," Premier Li said at the signing ceremony.
STRONG GROWTH
Ethiopia has come a long way from years of civil war, communist rule from 1974 to 1991, a war with Eriteria and crippling famine that devastated the country.
The government launched the national Growth and Transformation Plan (GTP) in 2010 as part of a wider effort to raise the standard of living of Ethiopians and build the framework of a market economy. The multi-year plan envisions Ethiopia achieving middle-income status by 2025.
The programme has had some success on a number of levels: GDP has grown 10% annually in the first three years with strong improvements in infrastructure, human development and governance. The rapid economic growth has helped cut the unemployment rate to 17.5% from 18.9% in the previous year. Poverty rates have also fallen dramatically from 60% in 2005 to under 30% by last year.
"Based on the Human Development Index, Ethiopia has been successful in translating economic growth into higher living standards for its citizens and has outperformed many sub-Saharan African countries and a number of non-African countries," the IMF said.
Financial aid and grants to the tune of USD 8.2 billion over the past three years have helped Addis Abba invest in the economy. During that period, the country also saw USD 3.5 billion in investment, with Chinese investors leading the way.
The Ethiopian Investment Agency notes that around 2,164 foreign investors secured investment licenses over the past three years and committed capital of ETB 187.3 billion (USD 9.6 billion). The projects have created new job opportunities for 26,000 permanent and 35,000 temporary employees.
INVESTMENT PLATEAU
Ethiopia's ratings are constrained by a weak level of development, notes Fitch Ratings. "The country ranks among the weakest Fitch-rated sovereigns on U.N. human development indicators, with a GDP per capita of USD500 in 2013."
Growth has been led by state-owned enterprises, focused on infrastructure, but investment has reached a plateau.
Analysts said some of the large public investment projects by state-owned enterprises could pose risks to Ethiopia's public debt sustainability. They said it would be prudent for the authorities to formulate a medium-term debt management strategy and start monitoring overall debt of the public sector
"Ethiopia has so far pursued a state-led development strategy, it may be approaching the limits of this strategy in engendering broad-based growth," said the IMF. "A number of key sectors, especially manufacturing, are lagging behind and the scope seems wide for private sector involvement, while retaining control in some strategic sectors."
The IMF said opening up the telecommunication sector, sugar industry and transport sector in particular could attract new investment, improve efficiency and increase public revenues.
State-owned Ethiopia Electricity Power Company is undertaking several large projects that rely on external assistance and loans, while the USD 4.7 billion Renaissance Dam project, estimated by the government to cost 10% of 2012/13 GDP, is intended to be financed entirely domestically.
The Ethiopian Railway Corporation recently signed contracts with Chinese and Turkish companies for projects with a total cost of USD 3 billion, or 6% of 2012/13 GDP. The country's telecommunications company signed two agreements with Chinese providers for a total of USD 1 billion in equipment. 
Electricity exports to Kenya are expected to commence in 2014/15 and once the Renaissance Dam has been completed, exports are expected to increase further.
Despite the great effort by the public sector to improve Ethiopia's economic growth, the next chapter of growth must be led by the private sector.
Much depends on reforming the agriculture sector which employs 50% of the working population, with key exports such as coffee, oilseeds, flower and pulses.
Ethiopia can also look to attract foreign investment in leather manufacturing and textile production to generate employment. Labour-intensive manufacturing hold considerable potential for further export diversification, the IMF said.
The feature was produced by alifarabia.com exclusively for zawya.com.
© Zawya 2014
