ACCESS CAPITAL Ethiopia: Macroeconomic Handbook 2011/12
Transcript of ACCESS CAPITAL Ethiopia: Macroeconomic Handbook 2011/12
ACCESS CAPITAL
Ethiopia: Macroeconomic Handbook 2011/12
The 2011/12 Macroeconomic Handbook is the third such annual report
prepared by Access Capital. As in the past, we organize our report around
ten major economic and business themes. For this year, given the launch of
a new Five-Year Growth and Transformation Plan, we take a long-term look
at Ethiopia’s overall growth prospects (Chapters 1-4); highlight the
pressures faced by private business from certain macroeconomic and
regulatory policies (Chapters 5-6); and finally present our views (in
Chapters 7-10) on reforms that we think can help ensure a favorable
economic and business outlook. We also offer an Annex with Access
Capital’s macroeconomic projections for the year ahead.
Access Capital Research
December 30, 2011
2
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
3
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 five-
fold rise in their borrowing from the banking system, which is up from Birr 8 billion about five years ago
to an estimated 42 billion in FY 2010/11. The combined economic weight of both government and state
enterprise activity has led to a situation where roughly two-thirds of all banking system credit is now
directed to the public sector (Table 1.2).1
A five-year Growth and Transformation Plan (GTP) enacted in early 2011 has set the stage for an
even bigger role for public sector spending in the coming years. For the five-year GTP period as a
whole, the sum of budgetary government spending and off-budget spending by public enterprises is
programmed to reach Birr 1.26 trillion, or an average of 41 percent of GDP per year over five years
(Table 1.3). In short, the equivalent of two-fifths of total economic activity will be linked to public sector
activity in the coming years. One of the most distinctive features of the public spending envisaged above
is the unusually high level of capital expenditure, which will see its share rising from 56 to 61 percent of
total government expenditure.2 We find that Ethiopia now has the highest capital expenditure share in
government spending among African countries, where the normal capital expenditure share in
government spending is near 25 percent (Table 1.4). This means that much more spending is being
funneled to capital projects (roads, power plants, water systems, etc.) and to capital equipment (machinery
and equipment imports), rather than to current expenditure items such as wages, salaries, and operational
and maintenance costs.
1Data for government expenditure based on MOFED budget data. Credit to government and credit to public sector figures from
the IMF Staff Report of November 2010 (www.imf.org), with FY 2010/11 representing estimates. 2 Beyond the high concentration on capital spending, two equally notable elements of the GTP public sector spending plans are
its large borrowing requirements and its substantial foreign currency demands, issues that are addressed later in Chapter 7.
4
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.
5
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 state-
owned Fertilizer Plant, the Ethiopian Railways Corporation, and the Ethiopian Sugar Corporation. 4 See Ethiopian Roads Authority‘s November 2011 publication, ―Assessment of 14 Years Performance: Road Sector
Development Program‖
6
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.
7
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.
8
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 agri-
business potential, on its rising domestic consumer markets, and on its barely exploited export potential,
areas of activity which are all addressed in the following three chapters.
Source: MoFED Annual Report on Macroeconomic Developments (2009/10), IMF Staff Review--November 2010, Federal Budget Summary
(2010/11)
9
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 188,688 258,812 274,157 266,680 271,813 1,260,150
Budgetary spending 92,049 106,125 130,187 161,452 201,146 690,959
Non-Budgetary spending 96,639 152,687 143,970 105,228 70,667 569,191
Budgetary Expenditure 92,049 106,125 130,187 161,452 201,146 690,959
by type
Capital Expenditure 52,003 60,901 75,804 95,975 122,222 406,905
Current Expenditure 40,046 45,224 54,383 65,477 78,924 284,054
by sector
Agriculture & Food
Security 9,518 13,123 15,905 20,302 25,699 84,547
Education 21,703 24,562 29,579 36,354 44,025 156,223
Health 6,260 7,027 8,796 11,121 13,894 47,098
Road 17,304 21,752 28,762 36,581 45,898 150,297
Water 5,897 5,701 8,088 11,888 17,321 48,895
Other 31,367 33,960 39,057 45,206 54,309 203,899
Off-Budget Expenditure 96,639 152,687 143,970 105,228 70,667
Industry 16,230 51,955 56,728 42,057 26,592 193,561
Transport 35,088 43,223 41,795 30,550 11,048 161,704
Ethio-Telecom 6,580 1,900 13,190 - - 21,670
Energy 36,234 52,966 29,219 29,658 29,658 177,735
AA Condominium projects 2,640 2,640 3,080 3,080 3,520 14,960
In Percent of GDP 2010/11 2011/12 2012/13 2013/14 2014/15 2010-15
Total Public Sector Spending 42% 49% 45% 37% 32% 41%
Budgetary spending 21% 20% 21% 22% 24% 22%
Non-Budgetary spending 22% 29% 23% 15% 8% 19%
Budgetary Expenditure 21% 20% 21% 22% 24% 22%
by type
Capital Expenditure 12% 12% 12% 13% 14% 13%
Current Expenditure 9% 9% 9% 9% 9% 9%
by sector
Agriculture & Food
Security 2% 2% 3% 3% 3% 3%
Education 5% 5% 5% 5% 5% 5%
Health 1% 1% 1% 2% 2% 1%
Road 4% 4% 5% 5% 5% 5%
Water 1% 1% 1% 2% 2% 1%
Other 7% 6% 6% 6% 6% 6%
Off-Budget Expenditure 22% 29% 23% 15% 8% 19%
Industry 4% 10% 9% 6% 3% 6%
Transport 8% 8% 7% 4% 1% 6%
Ethio-Telecom 1% 0% 2% 0% 0% 1%
Energy 8% 10% 5% 4% 3% 6%
AA Condominium projects 1% 1% 0% 0% 0% 0%
Memo items:
Nominal GDP
448,348
526,853
616,047
723,157
848,235
Source: Growth and Transformation Plan (2010/11--2014/15); Nominal GDP of GTP used for FY 2010/11 even though inflation has resulted in higher starting
base.
10
Ethiopia Macroeconomic Handbook 2011-12
Table 1.4. Capital Expenditure in Ten Largest African Economies 2011
Country Capital Expenditure
(USD mn)
Total Government Expenditure
(USD mn)
Percent of Total
Expenditure
Ethiopia 4,103 6,849 59%
Tanzania 2,045 5,686 36%
Kenya 2,899 9,175 32%
Ghana 1,973 6,681 30%
Zambia 1,224 4,432 28%
Cameroon 1,271 4,693 27%
Angola 8,543 33,330 26%
Nigeria 6,887 27,307 25%
Ivory Coast 686 4,718 15%
South Africa 3,383 135,321 2.5%
Source: IMF Country Staff Reviews (2011), Ethiopian Federal Budget Summary (2010/11)
Table 1.5 GTP Public Investments and Estimated Expenditure on Contractors
Total 5-yr Expenditure
on Sector
Percent on
Contractors
Gross expenditure on
Contractors
Estimated
Contractors' Profits
Roads 150,297 90% 135,267 13,527
Health 47,098 60% 28,259 2,826
Education 156,223 60% 93,734 9,373
Fertilizer complex 13,205 30% 3,962 396
Sugar Industry 72,781 30% 21,834 2,183
Railway 110,796 40% 44,318 4,432
EAL 31,142 0% - -
Energy 177,735 30% 53,321 5,332
AA Condos 14,960 90% 13,464 1,346
Total 774,238
394,159 39,416
Source: Growth and Transformation Plan (2010/11--2014/15) & Access Capital Estimates
11
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
2009/10 854,316 65,238 789,078
2010/11 919,636 70,226 849,410
2011/12 1,023,892 78,187 945,705
2012/13 1,146,838 87,576 1,059,263
2013/14 1,287,817 98,341 1,189,476
2014/15 1,287,817 98,341 1,189,476
New employees after 2010/11 368,181 28,115 340,065
Source: Ministry of Civil Service (2009/10 Human Resource Statstics) & Access Capital Estimates based on employement
rising at fifty percent of the rate of growth of nominal government spending
Table 1.7 GTP Public Investments and Estimated Expenditure on Foreign Suppliers
Total 5-yr
Expenditure on
Sector
Percent on
Foreign
Suppliers
Gross expenditure
on Foreign
Suppliers
Estimated Foreign
Suppliers' Profits
Roads 150,297 0% - -
Health 47,098 20% 9,420 1,413
Education 156,223 0% - -
Fertilizer complex 13,205 60% 7,923 1,188
Sugar Industry 72,781 60% 43,669 6,550
Railway 110,796 60% 66,478 13,296
EAL 31,142 90% 28,028 5,606
Energy 177,735 60% 106,641 21,328
AA Condos 14,960 0% - -
Total 774,238
262,158 49,381
Source: Growth and Transformation Plan (2010/11--2014/15) & Access Capital Estimates
12
Ethiopia Macroeconomic Handbook 2011-12
Table 1.8: GTP Off-Budget Spending on Infrastructure & Industrial Projects-- Ranked by Value
Sector/Sub-Sector
Birr
Millions Business Beneficiaries
Foreign or
Domestic
Energy 177,735
Salini for Abay Dam construction;
Cement companies; Hydro plant
equipment producers
Mainly foreign, some
domestic
Railways 110,796
China Railway Group $1.6 bn; OIA
(India); local contractors; METEC
Mainly foreign, some
domestic
Sugar Industry 73,575 Sugar plant equipment producers
Mainly foreign, some
domestic
Chemical, Pharmaceuticals &
Cement Industries 34,593 Private and state enterprises Mainly domestic
Ethiopian Airlines 31,142 Boeing, Airbus, Bombardier, Fokker Exclusively foreign
Ethio Telecom 21,670
Telecom and networking equipment
providers Exclusively foreign
Metal Engineering Industry 20,466 METEC
Mainly foreign, some
domestic
Mgmt & Privatization of Public
Enterprises 19,095 State enterprises Mainly domestic
Textile & Garment Industry 15,946 Private enterprises Mainly domestic
AA Condo Construction 14,960 Domestic contractors and SMEs Mainly domestic
Fertilizer Industry 13,205 New state enterprise Mainly domestic
Leather Products Industry 6,734 Private enterprises Mainly domestic
Ethiopian Maritime Transit Service 6,666 Domestic transit service providers Mainly domestic
Micro & Small Scale Enterprises 6,600 Domestic SMEs Mainly domestic
Ethiopian Airports Enterprise 6,198
Domestic contractors-- runway, civil
works producers Mainly domestic
Agro-processing Industry 3,347
Domestic contractors and agricultural
producers Mainly domestic
Ethiopian Dry Port Service 3,276 Domestic contractors Mainly domestic
Ethiopian Shipping Lines 3,187 Ship-builders (China, Korea) Mainly foreign
Total Off-budget spending 569,191
Source: Growth and Transformation Plan (2010/11--2014/15); Sectors Ranked by Total Spending level.
13
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 high-
value, export-oriented produce. All of the above are in line with the key objectives of the GTP, which has
laid out detailed agriculture sector targets as laid out in Table 2.2 below.
For two main reasons, we think an agricultural transformation involving rising acreage, rising
yields, and rising exports is a very realistic possibility within the next few years. Why? First, there is
now a deliberate push to put in place hundreds (perhaps thousands) of modern commercial farms, and
second because the still-dominant smallholder agricultural sector is set to benefit from a wide range of
output-increasing policy interventions (in the form of more irrigation, more fertilizers, better seeds and
better farming practices).
New Commercial Farms
14
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 still-
uncultivated land, estimated at 59 million additional hectares according to national statistics.10
A
large part of the still uncultivated lands are being developed via Federal Government allocations for
new commercial farms. Our compilation of the relevant data suggests that about 350,000 hectares, or
one-tenth, of the planned 3 million hectare allocation has already taken place. Of the already granted
allocations, we find that the five largest commercial land recipients are: (1) Karuturi Agro Products
Plc; (2) Shapoorji Pallonji; (3) BHO Bio Products Plc; (4) Ruchi Soya Industries; and (5) CLC
Spentex Industries Limited (see Table 2.3). The average size of the land leased is 15,000 hectares,
but excluding the top two exceptional cases, the median commercial farm size allocation is 5,000
hectares. We also find that the mix between foreign and domestic investors (based on land area) is
about 5-1, though this changes to just 2-1 if we exclude the top two cases. In terms of crop
production, plans by commercial farm investors are mainly focused on cereals and cash crops. The
focus on basic cereals such as wheat and maize makes particular sense, given the country‘s large
reliance on importing such food items in recent years: for example, cereal imports (which are
comprised mainly of wheat), have jumped from just $157 million about a decade ago to $480 million
in 2010 , or from 2 to 4 percent of total imports.
9 Lease rates for the majority of large commercial farm allocations have ranged from Birr 100-200 (or USD 6 to 12) per hectare
per year. 10 A recent Mckinsey study notes that 60 percent of the world‘s total uncultivated arable land is within Africa, while according to
Ministry of Agriculture and CSA‘s latest land utilization data Ethiopia is showing around 74 million hectares of arable land of
which only 15.1 million hectares is currently cultivated counting both small-holder and commercial farms.
15
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.
16
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
17
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 input-
providing industries in areas such as the provision of: organic and chemical fertilizers; higher-yielding
seeds and plantings; irrigation systems and their associated parts such as water pumps and steel pipes;
18
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 SSA Asia World
Land Cultivated (%) 25% 44% 51% 38%
Fertilizer Usage (Kg/Hectare of Cultivated land) 36 24 148 96
Irrigation usage (% of Cultivated land) 1.3% 4%
18%
Cereal Yields (tons/hectare) 1.7 1.3 3.6 3.5
Agriculture Value Added per worker (USD) 215 318 530 997
Source: CSA Agricultural Sample Surveys, FAO Country Stat, IFPRI
12 A recent synthesis report of diagnostic studies and recommendations on Ethiopia‘s agricultural sector entitled ―Accelerating
Ethiopian Agriculture Development for Growth, Food Security, and Equity‖ and compiled by the Gates Foundation highlights in
particular the role for ―capable, well resourced private sector actors that could have impact in key (agriculture) value chains,
including ―efficient, well-regulated, and socially-responsible input suppliers and distributors‖ for supplies of seeds, fertilizers,
and agricultural equipment inputs. At present, key input markets tend to be dominated by parastatal agencies such as the
Agricultural Input Supply Enterprise and the Ethiopian Seeds Enterprise. 13 This is based on the Birr 220 billion in agriculture value-added for Ethiopia as of FY 2010/11, and McKinsey‘s estimate—
based on African country norms—of potential upstream industries equivalent to 4 percent of agriculture value-added and
downstream industries of 28 percent of agricultural value-added. Within the latter, the largest potential opportunities are
identified as being with fruits/vegetables processing (28 percent of downstream industry value-added), cereals processing (24
percent) and livestock processing related industries (14 percent).
19
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
20
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 1.81
48. Transfer nearly 3.3 mln ha land to commercial farming investors in transparent and accountable manner
Horticulture development
49. Land area under flowers production(ha) 1,586 3,000
50. Flowers production(mln cuts) 2,748.0 5,859.1
51. Land under the production of vegetables, fruits and herbs(ha) 2,472 33,000
52. Production of vegetables, fruits and herbs(tons) 58,400 979,600
Source: Growth and Transformation Plan (2010/11-2014/15)
21
Ethiopia Macroeconomic Handbook 2011-12
Table 2.3 Federal Land Allocations to Commercial Farm Investors in Ethiopia
No. Name of Investor Year Country of Origin Region of Investment Investment Activity Hectares
1
Karuturi Agro Products
Plc. 2008 India Gambela
Development of Palm, Cereals &
Pulses 100,000
2 Shapoorji Pallonji 2010 India Benshangul Gumuz Growing biofuel seeds, edible oil 50,000
3 BHO Bio Products PLC
2009 India Gambela Palm, Cereals & Pulses 27,000
4 Ruchi Soya Industries 2010 India Gambela Growing Soya bean 25,000
5
CLC Spentex Industries
Limited 2010 India
Benshangul Gumuz &
Amahara Growing Cotton 25,000
6
Huanan Dafengyuan
Agriculture 2010 China Gambella Growing Sugarcane 25,000
7 Adama
2010 Ethiopia SNNPR Growing Cotton 18,516
8 White field
2010 Indian SNNPR Growing Cotton 10,000
9
Saudi Star Agricultural
Development 2008 Saudi arabia Alwero, Gambella Wheat, maize and rice farming 10,000
10
Sannati Agro Farm
Enterprises 2011 India Gambella
Growing Rice and rotational pulses
& cereal crops 10,000
11
Daniel Agricultural
Development Enterprise 2010 Diaspora SNNPR Growing Cotton and Grains 5,000
12
Mela Agricultural
Development PLC 2010 Ethiopia SNNPR Growing Cotton 5,000
13
Access Capital Services
2011 Ethiopia Benshangul Gumuz Development of Sesame, Cereals & Pulses 5,000
14 Tracon Trading PLC
2011 Ethiopia Benshangul Gumuz Growing Cotton 5,000
15 Dr. Tamie Hadgu
2011 Diaspora SNNPR Growing cotton and seeds 5,000
16 Bruhoye
2011 Ethiopia Benshangul Gumuz Growing Cotton and soya bean 5,000
17
Lucci Agricultural
Development Plc 2010 Ethiopian SNNPR Growing Cotton 4,003
18 Vedanta Harvests PLC 2010 India Gambella Tea, biofuel and spices production 3,012
19 Rahwa
2010 Ethiopian SNNPR Growing Cotton and Grains 3,000
20
ASKY Agricultural
Development 2011 Ethiopia Benshangul Gumuz Growing Cotton 3,000
21
Tsegaye Demoz
Agricultural Development 2010 Diaspora SNNPR
Growing Cotton, Sesame and
Soyabean 1,000
22 Reta
2010 Diaspora SNNPR Growing Cotton and Grains 2,137
23 Keystone
2010 Diaspora Benshangul Gumuz Horticulutural and Crops 431
TOTAL COMMERCIAL LAND ALLOCATION 347,099
Note: This listing may not be comprehensive since some allocations are done at the regional level
Source: Ethiopian Agricultural Portal (Ministry of Agriculture), www.eap.gov.et
22
Ethiopia Macroeconomic Handbook 2011-12
Table 2.4: Agricultural Exports-- GTP Production and USD earnings projections
Production ('000 Tons)
USD Exports Earnings (Mn. USD)
Established Crops 2009/10 2014/15 Established Crops 2009/10 2014/15
Coffee 341 831 Coffee 528 2,037
Major Food Crops 19,392 26,774 Oilseeds 358 1,120
Root Crops 1,806 5,907 Pulses 130 882
Industrial Crops 630 1,175 Flowers 170 535
Spice Crops 182 322 Spices 19 30
Stimulant Crops (Chat) 462 1,040 Fruits & Vegetables 32 948
Flowers (Mn. Stems) 2,748 5,859 Natural Gum 13 33
Fruits & Vegetables 966 5,907 Live Animals & Meat 125 1,000
Total 1,374 6,585
Source: Growth and Transformation Plan Policy Matrix (2010/11--2014/15)
Table 2.5 SUMMARY OF AREA, PRODUCTION & YIELD OF GRAIN CROPS FOR
PRIVATE PEASANT HOLDINGS
Production levels (Millions of tons)
Cultivated Area (Millions of
hectares)
Yield (Tons per hectare)
2007/0
8
2008
/09
2009/
10
2010/11 2007
/08
2008/
09
2009/
10
2010/11 2007/08 2008/
09
2009/
10
2010/1
1
Total
Grain 16.1 17.8 19.4 21.2
Total
Grain 10.9 12.4 12.7 13.0
Total
Grain 1.5 1.4 1.5 1.6
Cereals 13.7 15.1 16.7 18.6 Cereals 8.7 9.8 10.2 10.6 Cereals 1.6 1.5 1.6 1.7
Pulses 1.8 2.0 2.0 2.0 Pulses 1.5 1.8 1.7 1.6 Pulses 1.2 1.1 1.2 1.3
Oilseeds 0.6 0.7 0.6 0.6 Oilseeds 0.7 0.9 0.8 0.8
Oilseed
s 0.9 0.8 0.8 0.8
GROWTH RATES (%) GROWTH RATES (%) GROWTH RATES (%)
2007/08 2008/09 2009/
10
2010/11 2007/
08
2008/0
9
2009/
10
2010/1
1
2007/08 2008/
09
2009/
10
2010/1
1
Total
Grain 7.8% 10.5% 8.9% 9.6%
Total
Grain 3.5% 13.4% 2.7% 1.9%
Total
Grain 4.1% -2.6% 6.1% 7.5%
Cereals 6.5% 10.1% 10.6% 11.1% Cereals 3.1% 11.9% 4.9% 3.7% Cereals 3.3% -1.6% 5.5% 7.2%
Pulses 12.9% 14.7% -0.2% 0.2% Pulses
10.1
% 18.2% -4.5% -8.3% Pulses 2.6% -2.9% 4.5% 9.2%
Oilseeds 24.2% 6.4% -1.9% -1.3% Oilseeds
-
4.3% 21.9% -8.1% 1.2% Oilseeds 29.9%
-
12.8% 6.8% -2.4%
Source: CSA's Agricultural Sample Survey Reports (2006/07-2010/11)
23
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).
24
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.
25
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-away-
from-home, edible oils, bread, vegetables, electricity, education, communications).
19 As would be expected, the share of urban purchasing power in total GDP is much higher (17 percent) than its share in the
population (10 out of 84 million, or 12 percent). All data on urban employees, salaried numbers, and average wage levels are
from the Central Statistical Authority‘s August 2011 ―The 2011 Urban Employment-Unemployment Survey.‖
26
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.
27
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 25-
40 percent of a household‘s income to be devoted to meeting that household‘s housing needs, whether
in the form of rents or mortgage payments for purchased homes. Despite a large construction of
government-built condominiums, this sector still shows huge potential for growth given an estimated
shortfall of more than 400,000 housing units in Addis Ababa alone.20
Taking our urban income
estimate, allocating 25 percent of household income to rental/purchase costs would imply Birr 24
billion in opportunities for builders/renters of housing units.
Mobile phone ownership and service usage: Projections to raise mobile phone coverage from its
current levels of 10 million to 40 million in 2014/15 (as per the GTP) imply huge growth in mobile
phone hardware and telecom airtime sales. An extra 30 million mobile phone units implies sales of
625,000 mobile phone units per month or 21,000 per day. With respect to airtime, an extra 30 million
users in four years time, assuming Birr 50 (≈$3) airtime usage per user per month, implies an extra
Birr 18 billion (≈$1 billion) in annual telecom service sales from new subscribers and voice services
alone.
Private health and education services: Although still dominated by government institutions,
especially for basic health and education services, privately owned and run health and educational
institutions have mushroomed in recent years and appear likely to continue their rapid growth. In
Addis Ababa alone, for example, there were (as of 2011) 20 registered private hospitals, 342 private
clinics, 487 nurseries/kindergartens, 283 private schools and 38 private colleges/universities. Rising
populations, a preference for better quality services, and a demand for specialized offerings will all
push growth in this area. In terms of key pharmaceuticals used in the health industry, medicine
imports have jumped from $35 million to $321 million over the last decade, equivalent to a market of
Birr 5.5 billion that is also ready for at least partial import substitution in the case of basic ―mass-
market‖ medicines.
Entertainment services and venues: Based on their weights in the CPI, ―food taken away from
home‖ (3.2 percent) and ―entertainment services‖ (1.5 percent), the market for eating venues
(restaurants, bars, etc.) and ―entertainment services‖ is on the order of Birr 3.1 billion and Birr 1.4
billion respectively. The size and scope of the markets in this area is certainly corroborated by other
data, such as Addis Ababa business registrations which show: 4,380 registered restaurants/bars/cafes,
1,792 personal care & effects service provides (barbers, beauty salons, spas, etc.), and 395
exclusively ―recreation, music and entertainment‖ venues (see Table 3.6).
Retail Trade: As in most developing countries, the retail distribution of many goods and services
comprises a large part of the business landscape and Ethiopia is no different in this respect. For
Addis Ababa alone, for example, business registration data show close to 30,000 registered retail
traders, with the largest categories concentrated on selling food produce (9,893), clothing (7,303),
intermediate goods, household appliances, and vehicle/transport equipment (Table 3.7).
20 A very simple and revealing indicator of the scale of housing demand can be seen from the Government condominium lottery
of April 2010. A total of 485,000 individuals (almost one-seventh of Addis residents) applied for condominium units though
only 10,700 were made available (2.2 percent of total demand).
28
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) Sex
% Male Female Total 300-399 22,785 17,207 39,992 5% 400-599 47,501 28,955 76,456 9% 600-799 68,579 44,351 112,930 13% 800-999 92,949 45,694 138,643 16% 1000-1199 60,581 30,228 90,809 11% 1200-1399 35,781 12,139 47,920 6% 1400-1599 23,062 8,649 31,711 4% 1600-1799 22,759 6,156 28,914 3% 1800-1999 12,099 3,116 15,214 2% 2000-2199 7,957 2,390 10,348 1% 2200-2399 8,405 1,561 9,965 1% 2400-2599 5,697 1,484 7,181 1% 2600-2799 6,365 1,419 7,783 1% 2800-2999 4,294 1,328 5,622 1% 3000+ 9,706 1,787 11,493 1% Not mentioned 145,570 73,764 219,334 26% Total 574,089 280,227 854,316 100%
Note: For calculating wage groupings the ' Not mentioned' category is excluded
Source: Ministry of Civil Service (2009/10 Human Resource Statistics)
29
Ethiopia Macroeconomic Handbook 2011-12
Table 3.2: Composition of Urban Spending by Broad Categories
MAJOR GROUPS Proportion of
Expenditure (%)
Food and Non Alcoholic Expenditure 34.0%
Alcohol and Tobacco 0.4%
Clothing and Footwear 6.2%
Housing, Water, Fuel, Energy 23.9%
Furnishing Household Equipment and Maintenance Goods and
Services for Routine Household Maintenance 6.5%
Health Medical Treatment 0.8%
Education 3.1%
Other (including Transport, Communication, miscellaneous) 25.2%
Total Expenditure per capita 100%
Source: Household Income, Consumption and Expenditure (HICE) Survey 2004/05
Table 3.3.Urban Purchasing Power Based on Aggregate Wage Income
Urban Salaried group
Urban Non-
salaried group
Total Wage Paid
(in Birr) In USD terms
Numbers 2,544,615
2,595,216 … …
Mean Monthly
wage 1,063
957 … …
Monthly wage
paid 2,704,925,745
2,482,843,147
5,187,768,892 302,141,461.40
Annual wage paid 32,459,108,940
29,794,117,766
62,253,226,706 3,625,697,537
Source: CSA 2011 Urban Employment & Unemployment Survey & Access Capital Estimates
Table 3.4 Total Urban Income Estimate in 2011
(in Birr)
Birr per year
Wage Income 62,253,226,706
Dividend income 3,439,396,810
Rental income 6,225,322,671
Remittance income 24,038,000,000
Total Urban income 95,955,946,187
Total Income in Percent of GDP 19%
Source: CSA 2011 Urban Employment & Unemployment Survey & Access Capital Estimates
30
Ethiopia Macroeconomic Handbook 2011-12
Table 3.5. Urban Consumption Estimates For 2011 (based on CPI Index)
Commodity Types
Weight in CPI
(%)
2011 Spending Level
(In Birr)
Estimated Annual
Incrase in Spending
(In Birr)
Food Items 41.0% 39,332,342,342 7,866,468,468
Cereals( teff, wheat, maize, etc) 10.7% 10,267,286,242 2,053,457,248
Beef 3.9% 3,742,281,901 748,456,380
Chicken & Mutton 1.4% 1,362,574,436 272,514,887
Food away from home 3.2% 3,070,590,278 614,118,056
Edible oils 3.2% 3,070,590,278 614,118,056
Bread 2.7% 2,590,810,547 518,162,109
Vegetables 2.6% 2,514,045,790 502,809,158
Injera 2.6% 2,494,854,601 498,970,920
Peas and Lentils 2.4% 2,302,942,708 460,588,542
Spices 1.9% 1,851,949,761 370,389,952
Sugar 1.8% 1,727,207,031 345,441,406
Coffee and Tea 1.6% 1,554,486,328 310,897,266
Milk and Eggs 0.8% 767,647,569 153,529,514
Potatoes, Other Tubers and Stems 0.7% 642,904,839 128,580,968
Milling Charge 0.5% 498,970,920 99,794,184
Pasta & Macaroni 0.5% 479,779,731 95,955,946
Other Foods 0.2% 220,698,676 44,139,735
Fruits 0.2% 172,720,703 34,544,141
Home-related 27.7% 26,582,675,772 5,316,535,154
Rent 10.8% 10,337,334,083 2,067,466,817
Household furnishing 6.9% 6,592,173,503 1,318,434,701
Electricity charges 2.7% 2,571,619,358 514,323,872
Kerosene 2.4% 2,274,155,925 454,831,185
Building material 2.1% 1,986,288,086 397,257,617
Charcoal & Firewood 1.6% 1,487,317,166 297,463,433
Water charges 1.4% 1,333,787,652 266,757,530
Services 17.4% 16,696,334,637 3,339,266,927
Transport 7.7% 7,388,607,856 1,477,721,571
Education 4.1% 3,934,193,794 786,838,759
Communication 2.8% 2,686,766,493 537,353,299
Entertainment 1.5% 1,439,339,193 287,867,839
Medical Care 1.3% 1,247,427,300 249,485,460
Clothing and footwear 7.8% 7,484,563,803 1,496,912,761
Clothing 5.8% 5,565,444,879 1,113,088,976
Footwear 2.0% 1,919,118,924 383,823,785
Personal care products 2.1% 2,015,074,870 403,014,974
Personal care 2.1% 2,015,074,870 403,014,974
Beverages 2.0% 1,919,118,924 383,823,785
Beer 1.5% 1,439,339,193 287,867,839
Soft drinks 0.5% 479,779,731 95,955,946
Other items 1.9% 1,823,162,978 364,632,596
Total Urban Consumption
Basket
100% 95,955,946,187 19,191,189,237
Source: CSA CPI COMPOSITION & WEIGHTS--Addis Ababa & Access Capital estimates
31
Ethiopia Macroeconomic Handbook 2011-12
Table 3.6. Composition of Private Service Providers in Addis Ababa in 2010
Trade Fields No. of Service
Providers
Combined Registred Capital
(in Birr)
TRANSPORT PROVIDERS 20,438 2,800,504,373
OTHER SERVICES 4,740 2,955,586,440
HOTEL, RESTAURANTS , BARS & CAFÉS 4,380 530,185,936
CONTRACTORS 3,436 1,987,888,152
RENTAL ACTIVITEIS 2,443 2,251,546,707
PERSONAL CARE & EFFECTS 1,792 20,898,764
PRINTING, PHOTOGRAPHING and SECRETAREIL SERVICES 1,454 199,695,696
EDUCATION & TRAINING CENTERS 1,280 807,785,498
REPAIRING, INSTALLATION & MAINTENANCE 666 92,542,871
PROMOTION & PRODUCTION 609 85,792,772
CONSULTANCY 532 235,473,886
CLINIC HEALTH SERVICES 403 135,395,291
RECREATION , MUSIC & ENTERTAINMENT 395 70,169,674
CLEANING &SANITATION SERVICES 342 28,862,429
COMMUNICATION 382 69,086,371
ENGINEERING SERVICES 209 81,821,052
TOTAL SERVICE PROVIDERS 43,501 12,353,235,912
Source: Addis Ababa Trade & Industry Bureau
Table 3.7 Composition of Retail Traders in Addis Ababa (2010)
Trade Fields No. of Retailers
Combined
Capital
(in Birr)
Durable Goods Retailers 4,864 555,898,751
Household Appliances & Utensils 1,871 127,463,249
Vehicles & Transport Equipment for "Personal" Use, Spare Parts & Accessories 1,591 265,815,678
Furniture, Furnishings, & Floor Coverings 764 86,780,192
Audio-Visual, Photographic, & Other Electronic Equipment (excluding ICT Products) 638 75,839,632
Non-Durable Goods Retailers 24,805 1,620,062,381
Food 9,893 339,925,910
Articles of Leather, Textiles, & Footwear (Wearing Apparels & Accessories) 7,303 300,338,810
Intermediate/Semi-Finished Products 3,111 252,772,346
Alcoholic Beverages & Tobacco Products 1,594 14,940,958
Others 1,401 512,635,291
Newspapers, Books & Stationery 756 123,078,504
Products of Personal Effects 408 27,161,608
Healthcare Products 224 42,939,348
Non-Alcoholic Beverages 115 6,269,606
TOTAL RETAIL TRADERS 29,669 2,175,961,132
Source: Addis Ababa Trade & Industry Bureau
32
Ethiopia Macroeconomic Handbook 2011-12
Table 3.8 Sampling of Foreign Firms in Fast Moving Consumer Goods (FMCG) Sector in Ethiopia
Foreign Company Origin
Ethiopian
Subsidiary/Affiliate/Partner Notes
1 Heinken Netherlands Bedele and Harar Brewery
Heineken purchased Bedele
Brewery at $80 million and Harar
Brewery at $75 million in 2011.
2 Diageo UK Meta Brewery
Diageo purchased Meta Brewery
at a cost of $220 million in late
2011. Diageo plans to invest 10
million dollars on expansion of
the brewery and may introduce
new line of products to the
Ethiopian beer market
3 SAB Miller South Africa Ambo Mineral Water
SABMiller has improved
technology, boosted marketing,
and expanded into several new
product lines such as flavored
water and new bottle types.
4 Tiger Brands South Africa East African Group (Ethiopia) plc*
Joint venture with collaboration
expected in the areas of home and
personal care products, biscuits,
flour, detergents and pasta
5 Proctor & Gamble US Petram Plc & Al-Impex Plc
Rapid expansion in operations,
with products in market including
Ariel, Pampers and Gillette
products, Powder Milk &
Sunflower.
6 Nestle Switzerland Mulege Plc
Sole distributor of Nestle's Nido
Milk Powder
7 Unilever UK/Netherlands Alfaraj
Sole distributor of Unilever
products, including children's
products, detergent, sanitary
items, cosmetics (i.e., Sun silk),
and razors
8 Sony Japan Glorious PLC
Expanding sales and aggressive
promotions, especially in flat
panel TV sales
9 Samsung South Korea Garad
Samsung is planning set up an
assembly plant for refrigerators
and home appliances and to open
a state-of-the-art engineering
institution that aims to educate
more than 10,000 electronic
engineers in few years time.
12 Multichoice Africa South Africa Multichoice Ethiopia
Rapid expansion in operations
with rising choice of subscription
offerings targeting different price
points
12 Rina International India Aqua Addis Bottled Water
13 Coca Cola Sabco (CCS) South Africa
East African Bottling Share Company
(EABSC)
Rapid expansion in operations to
meet fast-growing and unmet
demand, especially in regions.
Source: Various News Articles and companies' profile notes
33
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 sub-
industries is promising, aided by policy reforms, favorable demand prospects, and on-going capacity
expansions
Mining
Mining has long been an industry with huge untapped potential but little actual delivery in the past
several decades—this is now changing for good, however. The past few decades have seen false
promises from the mining sector many times, including for example from anticipated oil discoveries in
the Ogaden/Somali region in the 1970s and from extensive natural gas explorations in the 1980s. None of
these materialized, however, in large part due to an inhospitable policy environment that discouraged the
large foreign investments typically required for successful mining projects.
With improving policy conditions and given the country’s substantive resources, Ethiopia is
beginning to appear on the radar screen of international mining investors. Driving this interest is the
size and scope of commercially exploitable mineral deposits. According to data from the Ministry of
Mines, Ethiopia‘s notable mining resources include an estimated: 61,000 tons of gold; 72 million tons of
iron; around 200 million tones of potash/phosphate; 3 million tones of marble; 430,000 barrels of proven
oil reserves; and much more (Table 4.2). Some very crude calculations of the gross market value of these
mineral resources is in the tens of billions of US dollars were all these prospects realized as estimated and
actually explored. The prospect of reaching $1.36 billion in annual mining exports by 2014/15 is thus
very much within the realm of the possible if investors capable of exploring these largely untapped
mineral resources are able to commence operations in the coming years.
Signs of the mining sector’s promising potential are already being witnessed in the gold sub-sector.
Gold has been the single biggest area of active mining, with export values rising nearly 100-fold from just
$5 million in 2001 to $485 million last year. Volumes exported reached 11 tons last year, reflecting the
roughly 4 tons output from the dominant producer, Midroc Gold‘s Legadembi Gold Mine, as well as
34
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 20-
25 tons per annum within a few years time, equivalent to near $1 billion in export earnings assuming
prices do not fall much from their current levels in the years ahead.
Beyond gold, other notable minerals with significant exploration and export prospects include oil,
potash, platinum and tantalum. Of these, tantalum is the only one already mined in significant
amounts by the Ethiopian Mineral Development Share Company, with 66 tons of exports last year
earning $28 million. As for the other potentially large prospects, data compiled by the USGS Minerals
Yearbook and other sources show: oil exploration is taking place by South West Development and Africa
Oil Corporation of Canada; potash is being explored by Alana Potash and the Ethiopian Potash
Corporation; and platinum exploration is taking place by Australian company Nyota Minerals, a firm also
engaged in gold exploration (See Table 4.3).
Manufacturing
The manufacturing sector in Ethiopia is still in its infancy and its recent growth record has been
good but far from spectacular. Growth rates in the sector have been around 10 percent per year in
recent years, and given similar real growth rates in the rest of the economy, the share of manufacturing
has remained essentially unchanged at just 5 percent of GDP over the past decade (the manufacturing
sector is one part of the ―Industry‖ sector that also includes mining, electricity/water, and construction in
Ethiopia‘s GDP statistics). In terms of numbers, an estimated 2,172 medium- and large-manufacturing
firms operate in Ethiopia, up from around 700 in 2001 and the five largest sub-sectors are (in order of
their GDP contribution) food processing, cement, rubber and plastics, metals, textiles and garment22
(Table 4.4).
Despite a still small manufacturing base, an important sub-set of the sector focused on exports is
beginning to grow sharply from a small base. At an economy-wide level, this growth and expansion is
most evident from steadily rising manufactured exports, especially of leather products and textiles and
garments. Exports of these two commodity groups reached a combined $165 million in 2010/11, a
doubling from just five years ago and not far short of the highly successful and much-publicized
performance of the flower sector ($175 million in exports). Moreover, there is a strong momentum going
21 USGS Minerals Yearbook, quoting from Midroc Gold Mine PLC 2009 22 See CSA‘s 2009/10 Large and Medium Manufacturing Survey.
35
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 high-
level official meetings to track their progress and help address their issues, financial support from
the Development Bank (with long-term financing at favorable interest rates), and streamlined
customs arrangements in certain cases (for example, the ability to process export clearance at
their sites for some of the largest firms). Going forward, industrial zones will provide ―factory
shells‖ that contain a ready-made package of factory floor space, warehouse facility, and utilities
such as electricity, water, and telecom networks.23
Additional impetus is also likely from
planned economic growth corridors that—if implemented as envisaged—could provide a well-
integrated and inter-connected network of input suppliers and logistics services beyond just the
establishment of industrial parks.
Continued favorable treatment in key markets such as the US and EU, via the AGOA and
EBA initiatives, respectively continues to guarantee large and open-ended markets for Ethiopian
products that can meet the requisite quality standards. In both cases, Ethiopia‘s exports are
currently only a tiny fraction of its allowed quota or potential market share, indicating a huge
23 In this connection, a large Chinese Industrial Park about 40 kilometers from Addis Abeba, already showing sizeable progress
in the completion of the civil construction works, is set to become one of the first such industrial parks to provide ready-made
factory facilities.
36
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, agro-
processing) while 4 are mainly domestic focused (cement, metals & engineering, chemicals and pharmaceuticals). 25 Sugar is a partial exception as part of the plan is—after meeting domestic demand—to enable annual exports of some $662
million by 2014/15. Work in this area is being spear-headed by the state-owned Ethiopia Sugar Corporation, which aims to
develop sugarcane on hundreds of thousands of hectares and establish 10 new sugar producing factories.
37
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).
38
Ethiopia Macroeconomic Handbook 2011-12
Table 4.1. Recent Growth in Ethiopia's Emerging Export-Oriented Industries
REAL GDP VALUED ADDED 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
5-year
Average
Growth
1. Mining and Quarrying (in '000 birr) 393,819 333,144 404,483 456,160 657,633 1,037,238
Annual Growth Rate
-15.4% 21.4% 12.8% 44.2% 57.7% 15.7%
2. Service Sector (in '000 birr) 37,747,674
43,534,59
3 50,506,447
57,632,43
3 65,208,665
73,368,16
5
Annual Growth Rate
15.3% 16.0% 14.1% 13.1% 12.5% 14.6%
3. Manufacture of Textiles and Wearing
apparel--Gross Value of Production (in
'000 birr) 228,940 331,423 185,022 521,126 907,567 … …
Annual Growth Rate
44.8% -44.2% 181.7% 74.2% … 64.1%
4. Manufacture of Leather and
Footwear-- Gross Value of
Production (in '000 birr) 1,022,744 1,213,791 1,447,236 1,332,345 1,639,518 … …
Annual Growth Rate
18.7% 19.2% -7.9% 23.1% … 13.3%
GDP at Constant Basic Prices (in
millions of birr) 93,474 104,499 116,190 127,857 141,368 157,463
Annual Growth Rate
11.8% 11.2% 10.0% 10.6% 11.4% 10.9%
Source: MoFED's GDP Estimates for 2010/11, CSA's Large and Medium Scale Manufacturing Survey 2009/10
39
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 Primary Gold ton N/A 61,208 Lege Dembi Southern Ethiopia
2 Platinum ton N/A 12.5 Yubdo, Western Ethiopia
3 Iron Million ton 72 32.5 Bikilal, Western Ethiopia
4 Tantalum ton 280,000 2,358 Kenticha, Southern Ethiopia
II. Industrial and Construction Minerals
1 Kaolin ton 595 225,397 Bombawoha, Southern Ethiopa
2 Diatomite Million ton N/A 36,602 In different parts of the rift valley
3 Feldspar ton 225 501,000 Kenticha, Southern Ethiopia
4 Quartz ton 17,500 55,000 Kenticha, Southern Ethiopia
5 Silica Sand Million ton 17,200 3.4 Mugher valley, Central Ethiopia
6 Potash Million ton 420 15 Afar region, Northern Ethiopia
7 Phosphate Million ton 210 181 Bikilal, Western Ethiopia
8 Soda Ash Million ton 200 460 Ziway in the rift valley
9 Brine Salt Million ton N/A 290 Lake Afdera, Northern Ethiopia
10 Rock Salt Million ton 180 1,000 Afar region, Northern Ethiopia
11 Limestone Million ton 12,250 136.7
Mugher-Central Ethiopia, Mesobo-
Northern Ethiopia and Dire Dawa-
Eastern Ethiopia
12 Limestone Million M3 12,250 60 Hakim Gara, Eastern Ethiopia
13 Marble Million ton 27,500 2.8 Daleti, Western Ethiopia
14 Granite Million M3 28,000 15 Harar, Eastern Ethiopia
III. Energy Minerals
1 Coal Million ton 265 13.73 Delbi and Moye, Western Ethiopia
2 Coal Million ton 265 64.5 Yayu, Western Ethiopia
3 Oilshale Million ton N/A 108.1 Yayu and Delbi, Western Ethiopia
4 Natural Gas TCF 3,600 2.7 Calub, Eastern Ethiopia
5 Geothermal Resource MW
33.5
Aluto-Lamgamo and Tendaho in the rift
valley
IV. Gemstone
1 Opal
Million kg 1.07 2.8 North Shoa, Central Ethiopia
Source: Ministry of Mines, Investment Guide to Ethiopia (EIA, 2009)
40
Ethiopia Macroeconomic Handbook 2011-12
Table 4.3 Mineral Industry Operators in Ethiopia-- by Commodity
No. Firm Origin Country Capacity
(Metric Tons) Location
CAUSTIC SODA
1 National Mining Corporation (Govt-owned) Ethiopia 10,000 Ziway
CEMENT
1 Mugher Cement Enterprise (Govt- owned) Ethiopia 900,000 Mugher
2 Addis Ababa Cement Factory Ethiopia 120,000 Addis Ababa
3 Messebo Building Materials Production S.C.(Govt- owned) Ethiopia 900,000 Mekelle
4 National Cement S.C. Ethiopia 300,000 Dire Dawa
5 Jema Cement plc 240,000 North Shoa Zone
6 Abyssinia Cement plc 150,000 Chancho
7 CGC Overseas Construction Ltd. (CGCOC) China 150,000 Koka
8 Derba Midroc Cement plc Saudi Arabia 90,000 Dejen
COAL
Ethio-Pak Coal Mining plc Joint Venture 20,000e Dilby
DOLOMITE
Ethiopian Mineral Development S.C.(Govt- owned) Ethiopia 8000 Soloka
GLASS
Ethiopia Hansom International Glass plc China 8,000 Addis Ababa
Addis Ababa Bottle and Glass S.C. Ethiopia 8,000 Addis Ababa
GOLD
Midroc Gold Mine plc (subsidiary of Midroc Ethiopia plc) Saudi Arabia 1,500,000 Lega Dembi
LIME
Senkele Lime Factory Ethiopia 6,000 Ambo
MARBLE
Ethiopian Marble Industries Ethiopia N/A harar and various sites in western Ethiopia
National Mining Corp. (subsidiary of Midroc Ethiopia plc) Saudi Arabia 10000 m3 Dalleti and harar
OIL
1 South West Development Ethiopia N/A Ogaden
2 Africa Oil Canada N/A Ogaden
3 Tullow Oil Ireland N/A South Omo
PLATINUM
1 Nyota Minerals Australian 10e Kg Yubdo
POTASH
1 Allana Potash Canada 105 Dallol
2 Ethiopian Potash Corporation Canada 128,000,000 Danakil Depression
SILICA SAND
CGC Overseas Construction Ltd. (CGCOC) China 180,000 Lemi
SODA ASH
National Mining Corporation plc Saudi Arabia 20,000 Lake Abiyata
STEEL
Abysinia Integrated Steel Plc Ethiopia 150,000 Debre Ziet
Sheba Steel Mills Plc Ethiopia 20,000
Ethiopia Steel Smelting Enterprise (Government owned) Ethiopia 7,000 N/A
Zuquala Steel Rolling Mill Enterprise (Government owned) Ethiopia 36,000
Wallia Steel Factroy Ethiopia 36,000 N/A
Akaki Metal products Ethiopia 14,000 Akaki
Source: USGS 2009 Minerals Yearbook. Some commodity items may not show an exhaustive listing. eEstimated
41
Ethiopia Macroeconomic Handbook 2011-12
Table 4.4. Manufacturing Sector in Ethiopia (2009/10)
No. Sub-sector
Total
Value-
added
(ETB
Million)
Private
Sector
Share
No.
of
firms
Employment
('000) Notable Operating Firms
1 Food processing
5,845 43% 572 60.1 BGI Ethiopia, NAS Foods, Dire Dawa Food Complex, Sebeta Agro Industry, Luna,
Modjo and Organic Export Slaughter houses, Addis Modjo Edible Oil Complex, Meta Abo,
Bedele, Dashen, Harar, Ambo Mineral Water,
Babile Mineral Water, Moha Soft Drinks, East African Bottling (EAB), Upper Awash
Agro Industry,
2 Cement and Non-metalic minerals
1,471 11% 482 20.2 Muger, Messebo, Abyssinia, National
Cement, Jema Cement
3 Rubber & Plastics
1,217 79% 139 13.9 Ethio-Plastic Share Company, Matador-
Addis Tyre Share Company, Excel Plastics
PLC, Unique Plastic Industry, Mohan Kothari
Group
4 Fabricated Metal
products
1,180 76% 154 10.1 MaruMetal Industry (MMI); Mesfin Industrial Engineering, Alemgenet Trade and
Industry PLC
5 Textiles & Garments
1,138 54% 91 30.8 AYKA Addis, Almeda Textile PLC,
Kombolcha Textile PLC, Ediget Yarn S.C, MAA Garment, Ambassador Garment,
Garment Express
6 Chemical Products 1,068 89% 85 11.2 Adami Tulu Anti Pest, Chora Gas &
chemical Enterprise, Al-Kyd Resin S.C
7 Paper & Printing
756 65% 123 10.0 Artistic Printing Press, Berhanena Selam
Printing Press, Bole Printing Press, Commercial Printing Press
8 Wood and Furniture
Products
577 73% 335 12 Salvatore Fiore, 3F, GM Furnitures, Yonatan B.T., Sunmate Furniture
9 Iron & Steel 414 75% 39 4.0 Yesu PLC, Zuquala Steel Rolling Mill
Enterprise, Abyssinia Integrated Steel
10 Leather & Footwear
Manufacuring
405 94% 114 10.8 Ethiopia Tannery S.C, Hafde Tannery PLC,
Anbessa Shoe S.C.,Ramsey Shoes Factory
11 Tobacco 368 0% 1 0.99 National Tobacco
12 Vehicles & Trailers
341 76% 11 1.7 Yangfan Motors, Holland Car, Mesfin
Industrial Enginnering, Belay Ab enterprises and BT Trading, Metal and Engineering
Corporation
13 Pharmaceuticals
227 68% 11 Ethiopian Pharmaceutical Manufacturing
(EPHARM), Addis Pharmaceutical Factory,
East African Pharmaceuticals (EAP) , Sino Ethiop Associate (Africa); Asmi
Pharmaceuticals
14 Machinery & Equipments
84 100% 15 0.87 Akaki Spare Parts and Hand Tools S.C.;
Mohan Kothari Group
Total 15,090 64% 2,172 186
Source: An Enterprise Map of Ethiopia (2010), The Private Sector in Ethiopia: The Current Landscape and Key Issues (2011), CSA
Large and Medium Scale Manufacturing Industries Survey (2009/100
42
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 Textiles/Clothing Sugar
oriented Leather products
Food processing Steel
Cement Cement
2. Local-market Glass Sugar
oriented Chemicals Fertilizers
Rubber & Plastics
Paper & Printing
Pharmaceuticals
Table 4.6 Hydro Power Projects in the Pipeline
No. Project Status Capacity (MW) Energy (GWH)
Project
Completion
(Year)
1 GIBE III 42% completed 1,870 6,400 2013
2 GENALE 3rd Under Construction 258 1,200 2014
3 HELELE WERABESA Under W.B finance 422 2,233 2015
4 CHEMOGA YEDA Under Construction 278 1,250 2015
5 GENALE 6th MOU Signed 256 1,000 2015
6 GEBA I & II Under ADB Finance 366 1,788 2015
7
GRAND RENAISSANCE
DAM ("ABAY DAM")
Under Construction
5,250 15,000 2014-15
Total
8,700 28,871
Source: EEPCO's "Highlights on Power Sector Development Program (2010-2015 G.C.)"
43
Ethiopia Macroeconomic Handbook 2011-12
Table 4.7: The Outlook for Emerging Exports vs. Traditional/Agricultural Exports
2010/11 2011/12 2012/13 2013/14 2014/15
Total Gold Exports-- USD mns. 485 737 846 1,085 1,323
Gold export volume total 11.0 13.4 16.9 21.7 26.5
Midroc Gold 4.0 4.5 5.0 6.0 6.0
Other gold mines 0.0 0.5 1.0 1.5 2.0
Artisinal mines 7.0 8.4 10.9 14.2 18.5
Gold price 44.1 55.0 50.0 50.0 50.0
Total Coffee Exports-- USD mns 841 902 986 1,074 1,235
Coffee export volume total 196.1 225.5 259.4 298.3 343.0
Coffee price 4.3 4.0 3.8 3.6 3.6
Total Emerging Exports---USD mns. 1,985 2,722 3,623 4,748 6,281
Mineral exports 519 837 1,146 1,485 1,823
Gold 485 737 846 1,085 1,323
Other minerals 34 100 300 400 500
Manufacturing exports 166 273 457 775 1,333
Textiles 62 118 223 425 807
Leather products 104 156 234 351 526
Exportable services 1,300 1,612 2,020 2,488 3,125
Ethiopian Airlines 1,100 1,342 1,637 1,997 2,437
Ethiopian Shipping Lines 200 250 313 391 488
EEPCO - 20 70 100 200
Traditional Agricultural Exports--USD mns. 1,993 2,501 3,247 4,345 6,095
Coffee 841 902 986 1,074 1,235
Oilseeds 324 421 547 711 925
Chat 238 310 403 524 681
Flowers 175 228 296 385 500
Live Animals 148 192 250 325 422
Meat 63 120 227 432 821
Spices 33 43 56 73 94
Pulses 139 222 356 569 910
Fruits and Vegetables 32 63 126 253 506
Source: Ethiopian Trade data for 2010/11, Access Capital projections for 2011/12 to 2014/15.
44
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.
45
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 sub-
group is at the highest rates (47 percent) and reflects very large price increases seen for cereals
(wheat, corn, teff), pulses, and potatoes/tubers. There are virtually no exports of these goods so
price developments should, in principle, mainly reflect domestic supply and demand conditions
and not external influences.
Domestically-produced but heavily exported commodities: Even for goods that are
domestically produced, the impact of international price increases can filter through to domestic
inflation if that domestically produced good is exported in large quantities. In such contexts, high
prices in external markets become more attractive options for local producers/exporters and this
would tend to push up domestic prices too if producers are to keep supplying the local market.
And indeed, based on July-September export data, unit prices for coffee were up 67 percent from
a year ago, those for spices were up 14 percent and those for fruits and vegetables were down by
about 14 percent. However, given the small weights of these three commodities in the CPI index
(4.3% for coffee/tea, 2.5% for fruits/vegetables, and 2% for spices, or a combined 8.8%), the net
impact of such external price effects would not be expected to be significant for the overall
domestic price index.
Commodities with large import components: Commodities that can reasonably be judged to
have large import components, such as edible oils, ―other foods‖ (mainly sugar), personal care
items, and clothing and footwear show relatively lower inflation than the overall price index, or
only about 24 percent compared to 39 percent.
Services: Finally, CPI components that are largely in the nature of services, including food
milling charges, medical care, transportation, and recreation/entertainment service, show the
27 Non-food inflation had long been well above food inflation for many years, but this situation reversed in March 2011 and has
remained so ever since.
46
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.
o Are wholesale and retail market structures at fault? Explaining Ethiopia‘s high inflation as
arising from insufficiently competitive and functioning wholesale and retail markets is difficult,
in our view, since there is no strong case to be made that such markets became particularly
monopolistic or dysfunctional within the past year. Of course, there are sometimes legitimate
criticisms—for example that wholesalers and retail segments for a given commodity are
sometimes controlled by the same business or that only a few wholesale importers/distributors
dominate a given commodity in some rare cases—but why these market characteristics would
suddenly contribute so strongly to inflation when they did not in the past is not clear and thus
seriously undermines whether this can be seen as an explanatory factor.
28 On the basis of the imports of goods and services to GDP, Ethiopia shows a ratio of 36 percent which is actually identical to
the African average according to the IMF (Regional Economic Outlook of October 2011); still, inflation rates were four times
higher in Ethiopia in 2011 compared to the region.
47
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. 30
See IMF‘s October 2011 Regional Economic Outlook, pages 73 and 82, for inflation and money supply data across African
countries, available at www.imf.org. Although credit caps on private banks remained in place to April 2011, credit growth in the
banking system as a whole still reached 36 percent, reflecting strong lending growth by public banks and the non-trivial (21
percent) lending growth allowed for private banks even under the system of credit caps. We estimate that the lending growth of
48
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.
49
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 Inflation--2011
Country Inflation--2011
1 Ethiopia 38.1
Belarus 65.3
2 Sudan 22.0
Ethiopia 38.1
3 Guinea 18.4
Republic of Yemen 25.5
4 Democratic Republic of Congo 16.4
Venezuela 24.5
5 Sierra Leone 16.0
Sudan 22.0
6 Uganda 15.7
Suriname 19.9
7 Angola 15.0
Vietnam 19.0
8 Burundi 14.0
Guinea 18.4
9 Eritrea 12.3
Democratic Republic of Congo 16.4
10 Swaziland 12.3
Sierra Leone 16.0
Top 10 average 18.0
Top 10 average 26.5
Source: IMF Data Mapper of September 2011 WEO at www. imf.org
50
Ethiopia Macroeconomic Handbook 2011-12
Table 5.2. Decomposition of Inflation for November 2011
FOOD INFLATION ACROSS
REGIONS
FOOD INFLATION BY
COMPONENTS NON-FOOD INFLATION BY COMPONENTS
Month
-on-
month
Year
on-
year
Weight*
Month
-on-
Month
Year-
on-
Year
Weight*
Month
-on-
Month
Year-
on-
Year
COUNTRY -1.1 50.3
Food
total 57.0% -1.1 50.3 Non-food total 43.0% 0.9 24.0
ADDIS
ABABA -2.8 27.0 Cereals 22.5% -0.3 64.8 Beverages 2.0% 1.8 35.2
AFAR 0.2 36.1 Pulses 4.3% -1.8 75.7 Cigarettes & Tobacco 0.5% -0.6 14.7
AMHARA -1.5 49.6
Bread
& other 1.9% 3.8 31.9 Clothing & Footwear 8.3% 1.5 33.5
B.GUMUZ 4.3 99.1 Meat 2.8% 2.4 40.9
Rent, construction materials,
utilities 20.6% 0.1 18.8
DIREDAWA -0.1 39.8
Milk,
eggs, cheese 2.0% 1.3 24.9
Furniture, Household equipments 3.7% 2.0 24.6
GAMBELA -3.3 63.1
Oils
and
Fats 2.4% -6.2 41.6 Medical care & Health 1.1% 1.0 10.5
HARAR 2.7 28.8
Vegetables &
Fruits 2.5% -2.5 -5.4
Transport &
Communications 2.5% -2.3 25.7
OROMIA -0.7 51.3 Spices 2.0% -14.7 71.6
Recreation, Entertainment,
Education 1.1% 1.0 16.6
SNNP -2.3 61.5
Potatoe
s,
tubers,
stems 4.2% 4.3 53.5 Personal care and effects 0.8% 2.8 35.1
SOMALIA 5.0 28.2
Coffee,
tea 4.3% -1.3 67.5 Misc goods 2.3% 6.2 17.4
TIGRAY -3.0 36.1
Other
food 1.2% 0.5 9.8
Milling charges 1.2% 1.8 7.8
Food away
from
home 5.8% 1.1 31.6
*Weight in the overall Consumer Price Index
Source: CSA Consumer Price Index Monthly Survey--November 2011
51
Ethiopia Macroeconomic Handbook 2011-12
Table 5.3: Inflation Analytics by Type of Commodity/Service
CPI Weights Inflation
A Domestically produced and domestically consumed 46.7
1 Cereals 22.5% 64.8
2 Pulses 4.3% 75.7
3 Bread & other 1.9% 31.9
4 Meat 2.8% 40.9
5 Milk, eggs, cheese 2.0% 24.9
6 Potatoes, tubers, stems 4.2% 53.5
7 Beverages 2.0% 35.2
Sub-Total 39.7%
B Domestically produced but also heavily exported 44.5
1 Coffee, tea 4.3% 67.5
2 Vegetables & Fruits 2.5% -5.4
3 Spices 2.0% 71.6
Sub-Total 8.8%
C Import-heavy commodities
24.4
1 Oils and Fats 2.4% 41.6
2 Other food 1.2% 9.8
3 Cigarettes & Tobacco 0.5% 14.7
4 Clothing & Footwear 8.3% 33.5
5 Rent, construction materials, utilities 20.6% 18.8
6 Furniture, Household equipments 3.7% 24.6
7 Personal care and effects 0.8% 35.1
8 Misc goods 2.3% 17.4
Sub-Total 39.9%
D Services
18.4
1 Milling charges 1.2% 7.8
2 Food away from home 5.8% 31.6
3 Medical care & Health 1.1% 10.5
4 Transport & Communications 2.5% 25.7
5 Recreation & Entertainment 1.1% 16.6
Sub-Total 11.6%
All CPI components 100.0%
Source: Access Capital analysis based on Central Statistical Authority Nov 2011 inflation data
52
Ethiopia Macroeconomic Handbook 2011-12
Table 5.4. Inflation and Broad Money Growth Rates for Top 20 Fastest Growing
Countries in 2011
Rank Country GDP Growth
at Constant
Prices
Inflation Rate
Year Average End of Period
1 Qatar 18.7 2.3 2.3
2 Ghana 13.5 8.7 9.0
3 Mongolia 11.5 10.2 15.1
4 Turkmenistan 9.9 6.1 7.5
5 Iraq 9.6 5.0 5.0
6 China 9.5 5.5 5.1
7 Papua New Guinea 9.0 8.4 9.5
8 Lao People's Democratic Republic 8.3 8.7 9.7
9 Eritrea 8.2 13.3 12.3
10 Bhutan 8.1 6.5 5.8
11 Argentina 8.0 11.5 11.0
12 India 7.8 10.6 8.9
13 Ethiopia 7.5 18.1 38.1
14 Panama 7.4 5.7 5.5
15 Democratic Republic of Timor-Leste 7.3 10.5 6.5
16 Mozambique 7.2 10.8 8.0
17 Equatorial Guinea 7.1 7.3 7.3
18 Islamic Republic of Afghanistan 7.1 8.4 2.0
19 Uzbekistan 7.1 13.1 12.7
20 Kyrgyz Republic 7.0 19.1 13.0
21 Moldova 7.00 7.9 9.5
Note: Growth rates of countries as per IMF's 2011 growth projections in the September 2011 WEO
Source: International Monetary Fund, World Economic Outlook Database, September 2011
53
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
54
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 on-
the-ground realities.
The past year-and-a-half has witnessed a series of abrupt, challenging, and erratic regulatory
changes applied on various segments of the private sector. By our count, there are have been close to
ten significant regulatory reforms introduced covering business registration, taxation, retailing, coffee
exporters, real estate/land development. A listing of the regulatory changes as well as their presumed
objectives, intended/unintended consequences, and current status is summarized in Table 6.1.
Three over-arching motivations appear to have driven the new directives: (i) reducing tax evasion;
(ii) removing monopolistic and oligopolistic businesses practices; and (iii) minimizing unduly
profiteering ―rent-seekers‖ deemed to be engaged in largely unproductive economic activities. We
address each one of these in turn.
Tax Evasion: Driven by the need to raise Ethiopia‘s low tax-to-GDP ratio of just 12 percent of GDP,
the country‘s revenue authorities—the Ethiopian Revenue and Customs Authority—have been hard at
work expanding the tax net, removing tax loopholes, and ensuring that individuals and businesses in
all corners of the economy make their due tax contributions. The increased audit and monitoring of
business establishments has been supplemented by two measures focused on small business—
mandatory cash registers (of which 100,000 are expected by June 2012) and estimated tax
assessments on small businesses (using variables such as square meter space of the business to
estimate its income and tax obligation). A requirement that all banks first secure a tax clearance
certificate from any borrower before extending a loan has also tightened the scope for tax evasion by
business. Although the implementation of some of these initiatives has been heavy-handed in some
well-publicized cases (i.e., criminal penalties applied on failing to give receipts or use cash registers),
the thrust of all these initiatives to address tax evasion are—in principle—worthy and welcome
initiatives both from a macroeconomic perspective (to boost much needed revenues) and from an
equity point of view (to provide a level playing field between those businesses that are duly paying
taxes and those that are not).
Monopolistic and Oligopolistic business practices: Efforts to address (real or perceived)
monopolistic and oligopolistic business practices are also, in principle, welcome as competitive forces
55
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 wide-
ranging capacity building efforts). In short, it must be recognized within the business community that the
possibility that one can operate with little chance or prospect of paying taxes is now becoming history in
the Ethiopian context, and this is fundamentally a good thing with widespread long-term benefits to the
56
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.
57
Ethiopia Macroeconomic Handbook 2011-12
Table 6.1: New Policy Regulations
Intended Objectives Some Consequences-- both intended and
unintended Current Status of Measures
Addressing Tax Evasion
1 Mandatory cash
registers
To ensure 100,000 new
taxpayers using cash
registers by June 2012.
High cash register cost for some micro/small
businesses; large business for about half dozen
authorized cash register companies.
Under enforcement.
2
Estimated
taxation methods
on small business
To capture even small and
medium-sized businesses
within the tax net
Widespread complaints of inflated tax assessments
due to crude (presumptive) estimation methods used Under enforcement.
3
Tax clearance
certificates for
bank borrowing
To ensure that all borrowers
have fulfilled their tax
obligation before they obtain
a bank loan.
Use of banks to cross-check tax evasion. Has created
a tight system for ensuring tax payments by any
potential bank borrower.
Under enforcement.
Addressing Monopolies & Oligopolies
1 Price controls
directive
Meant to stabilize price
increases and introduced in
January 2011 on 18 items
including edible oil, bread,
meat, soft drinks, and beer.
No significant change in inflation, retailers found
inventive ways to evade controls and severe shortages
emerged in some commodities.
Discontinued in June 2011, except for a few remaining
items still subject to controls such as sugar, palm oil, and
bread.
2
Commercial Re-
registration &
Business
Licensing Law
To update business registry
under a new 983-cateogry
classification; to limit
multiple registrations of on
business across multiple
business lines; to ensure
some basic necessary
qualifications for business
registration, including valid
business address unique to a
given business
Requirement for unique business addresses caused
difficulties and some shortages in finding rental
space, at least in city center locations, and has likely
contributed to higher rental costs.
Under enforcement. Each trader granted the possibility to
have several commercial registration (and respective
business licenses for each) to stay engaged in several
business lines.
3
Trade practice
and consumers'
protection Law
To limit price fixing,
hoarding, and collusive
behavior among
retailers/wholesalers by
imposing severe penalties on
such activity, including
penalties of Birr 2 million
and 5-10 years imprisonment
Some publicized cases of traders' stocks being
confiscated on account of "hoarding" goods-- in some
cases even for goods allegedly simply being stored or
in transit.
Under enforcement.
Addressing "rent-seeking" & "undue profits"
1
Real Estate
developers'
unused land
In July 2010, the Addis
Ababa City Land
Administration and Build
Permit Authority announced
plans to take over all real
estate developers unused
land and penalize those who
sold land without adequately
built-up premises
Reported slowdown in construction activity in
part linked to uncertainty created by this measure.
Measure largely retracted, with real estate developers getting
financial penalties, but no criminal penalties imposed and
lands largely not taken.
58
Ethiopia Macroeconomic Handbook 2011-12
2 Urban land lease
proclamation
Directive puts all previously
free-hold lands under the
lease system upon transfer to
third parties (excluding
inheritances). Sales of free-
hold lands (through any other
modality other than
inheritance) will require
conversion of the possession
into a leasehold tenure.
Time limits established for
construction on leased lands
(of 24 to 48 months).
Home/land sales are frozen until detailed
implementing regulations are put out. Large
uncertainty created over exact application and
implication of directive. Reported slowdown in
construction activity in part due to this measure
as well.
Implementing regulations from relevant Ministry expected in
early 2012.
3
Restrictions on
coffee exporters’
stocks
Directive passed in May
2011 places limits on the
level of stock that a coffee
exporter can hold at anytime.
Holding 500 tons without
legal shipping contract
results in three-month ban
from ECX, while holding 54-
500 tons results in a two-
month ban.
Accumulation of stocks at ECX. Under enforcement--some 55 exporters were accused of
hoarding in May 2011 and banned from ECX.
4
Requirement to
Conduct Coffee
Exports only in
Containers rather
than bags
To modernize coffee sector
transport and logistics and
remove "spoiled bag"
problems.
Large groupS of buyers not able/interested to
purchase in containers due to quantities required. Retracted
5
Restrictions on
major goods
imports
Imports of four widely
consumed and imported
commodities are not allowed
to be conducted by private
businesses or traders:
cement; wheat; sugar; and
palm oil.
Government has become the sole importer of
these four commodities and removed previously
active private sector importers in commodities
such as palm oil. Despite government
intervention, all four commodities have still faced
periodic domestic shortages and sudden price
spikes in past year.
Restrictions remain in place and government conducts imports
in periodic batches.
6 Windfall Tax
Directive decreed "windfall
profit" as "a profit obtained
by any person as a result of a
change that occurs in local or
international economic or
political situations without its
own effort." Businesses in
mining, petroleum industry,
and banking are considered
potential beneficiaries of
windfall gains.
Large tax income on the order of Birr 1.5 billion
collected from 14 banks. Enforcement completed.
7
Housing Agency
directive on Sub-
Leasing
Directive intended to punish
those tenants of government
commercial property who
had rented the premises to
third parties. Allows third
parties the right to buy the
premises at a new price set
by the Agency.
Created severe conflicts among tenant and third-
party renters given sudden shift in a commonly
utilized and long-standing practice that had not
attracted government attention for decades.
Under enforcement.
Source: Government proclamations, regulations & directives in 2009/2010/11, various news articles
59
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
60
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).
61
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.
62
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.
63
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.
64
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 Ethiopian Airlines 6,638
2 Commercial Bank of Ethiopia 6,200
3 Ethiopian Insurance Corporation 350
4 Ethio Telecom
5 Ethiopian Electric Power Corporation 23,622
Agriculture and Agricultural Services
6 Agricultural Materials and Technical Service Enterprise 184
7 Agricultural Input Supply Enterprise 38
8 Agricultural Mechanization Service Enterprise 16
9 Natural Gum Production Enterprise 8
10 Arsi Agricultural Development Enterprise 217
11 Bale Agricultural Development Enterprise 220
12 Awassa Agricultural Development Enterprise 33
13 Fruit and Vegetable Development Enterprise 3
14 Upper Awash Agro Industry 208
15 Coffee Preparation and Storage Enterprise 41
16 ETFRUIT 52
17 Coffee Plantation Development Enterprise 558
Sub-Total 1,580
Construction and Construction Services
18 Building Materials Supplier Enterprise 11
19 Awash Construction S.C 93
20 Construction Design S.C 33
21 Transport Construction Design S.C 44
22 Batu construction S.C 70
23 Tikur Abay Construction S.C 125
24 Tabor Ceramic products factory 178
25 Construction Works and Coffee Technology Expansion Enterprise 18
26 Bricks Products Factory S.C 11
27 Ethiopian Marble Product Enterprise 5
Sub-Total 588
Hotel and Tourism
29 Ethiopia Hotel 7
30 Ethiopian Tourist Trading Enterprise 38
31 Ras Hotels 7
32 Felweha Services Enterprise 5
33 Wabe Shebelle Hotels 11
34 Ghion Hotel 32
Sub-Total 100
Transport Services
35 Ethiopian Shipping Lines 758
36 Ethiopian Maritime and Transit Enterprise 24
37 Walya Cross Country Transport S.C 19
38 Weyira Transport enterprise 63
39 Anbesa City Bus 530
40 Bekelcha Transport S.C 125
41 Comet Transport S.C 270
42 Shebelle Transport S.C 124
Sub-Total 1,914
Trade
43 Merchandise Wholsale and Import Trade Enterprise 98
44 Ethiopian Petroleum Enterprise 306
Sub-Total 404
Services
47 Industry Project Service Enterprise 8
48 Public Procurement Services Enterprise 12
65
Ethiopia Macroeconomic Handbook 2011-12
Sub-Total 20
Food Manufacturing
49 Dire Dawa Food Complex S.C 101
50 Awassa Flour Factory 22
51 Tigray Flour Factory 4
52 Kokeb Flour Factory 7
53 Nazreth Edible oil S.C 3
54 Hamaresa Edible oil S.C 75
Sub-Total 212
Iron & Steel Manufacturing
56 Akaki Spare parts and Hand Materials Factory 156
57 Nazreth Tractor Assemble 10
58 Ethiopia Plastic S.C 35
59 Kality Steel and Metal Works Factory 14
60 Ethiopia Steel Melting Enterprise 29
61 Ethiopian Cork and Can Manufacturing S.C. 41
Sub-Total 286
Paper & Printing
62 Artistic Printig Enterprise 5
63 Birhanena Selam Printing Enterprise 34
64 Commercial Printing Enterprise 7
65 Bole Printing Enterprise 10
66 Educational Material Producer and Distributor 181
67 Ethiopia Pulp and Paper Factory S.C 82
Sub-Total 318
Chemical Industry
67 Adami Tulu Anti Pest Manufacturing Enterprise 43
68 Costic Soda Factory 59
69 Awash Melkassa Aluminum Sulphate 95
Sub-Total 197
Pharmaceuticals
71 Ethiopia Pharmaceautical Factory S.C 150
Cement
72 Mugher Cement Enterprise 342
Mines
73 Ethiopian Mines Development S.C 219
74 Adolla Gold Mine Enterprise 63
75 Abijata Soda Ash S.C 34
Sub-Total 316
Beverage
76 Asela Malt Factory 55
77 Awash Wine Factory 63
78 Bedele Brewery S.C 178
79 Harar Brewery Factory S.C 157
80 Metabo Brewery Factory S.C 122
81 National Alcohol factory 13
Sub-Total 588
Textile and leather
82 Kombolcha Textile S.C 202
83 Bahir Dar Textile S.C 85
84 Anbesa Shoe S.C 16
Sub-Total 302
Source: Company Reports/Press Releases for "BIG 5" data; PPESA for State Enterprises (2009); and Access Capital
66
Ethiopia Macroeconomic Handbook 2011-12
Table 7.2: Valuing the "BIG 5" and Other Parastatals
"BIG 5" State Enterprises
Profits--
Birr bns.
Applied P-
E ratio
Estimated
Value-- Birr
bns.
Estimated
Value-- USD
bns.
1 Ethiopian Airlines 1,380 15 20,700 1,203
2 Ethiopian Shipping Lines 531 10 5,310 309
3 Commercial Bank of Ethiopia 4,200 15 63,000 3,663
4 Ethiopian Insurance Corporation 149 10 1,490 87
5 Ethio Telecom 2,800 15 42,000 2,442
TOTAL for "BIG 5" State Enterprises 9,060
132,500 7,703
Other State Enterprises
81 PPESA-listed State Enterprises* 3,315 10 33,150 1,927
Grand Total for Major State Enterprises
"BIG 5" plus PPESA-listed Enterprises 12,375
165,650 9,631
Grand Total with Govt. Retaining Majority Stakes
Valuation at just 49% stakes sold -
81,169 4,719
*Ethiopian Shipping Lines is excluded from the 82 enterprises in the PPESA tables, as it is presented as part of the "BIG 5"
Source: Company Reports/Press Releases for "BIG 5" data; PPESA for State Enterprises (2009); and Access Capital
calculations.
Table 7.3. Public External Borrowing and Outstanding Debt (2006-2011)
FY07/08 FY08/09 FY09/10 FY10/11
Foreign Borrowing by Government (Millions
USD) 395.1 1,750.2 1,564.5 2,079.1
Government Debt Outstanding 2,767.1 4,352.2 5,633.8 7,819.5
Debt to GDP Ratio (%) 10.3% 13.5% 19.0% 25.3%
Source: MoFED “Public Sector External Debt” Statistical Bulletin (2006/07-2010/11)
67
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
68
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-the-
pen‖ reform that potentially could reduce import prices facing urban consumers by 10 percent.
69
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
70
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 long-
term mortgage instruments). Accordingly, a desirable shift in focus would be on boosting the
supply of truly low-cost housing developments and on making such low-cost ventures profitable
and sustainable projects that would attract willing private investors. Preferential land allocations
for such developers—as is done for SMEs or flower growers—could help especially if strictly
limited to low cost homes (with prices below a specified threshold). Successful schemes of this
sort, driven by private developers but supported by government incentives have had exemplary
results in places such as South Africa and Brazil and deserve to be emulated.
Many of the above measures would, to some degree, cut back on government income and thus seem
to go against the overall direction of the GTP; however they do provide some measure of relief to
urban consumers, something that deserves to be a priority for the period ahead. The same level of
priority given to raising fiscal revenues needs to ideally be accorded to urban residents given the severe
income compression seen in urban areas on account of inflation, particularly in food, transportation and
rental/home ownership costs.41
All of this is important given the sheer numbers of people that now
comprise the urban population (10 million according to latest statistics) and the need to ensure healthy,
balanced urban environments that can support industry and contribute towards urban or near-urban
economic growth corridors and clusters.
Table 8.1. Recent Prices of Major Import Commodities with Quantitative Restrictions in Ethiopia
Import Commodity FOB Price (USD/ton) Local Price (USD/ton)
Wheat 300 321
Palm Oil 835 1,259
Sugar 550 845
Cement (OPC) 64 169
Source: Various International Commodity Markets Watch sites (October-2011), local markets survey
41 It should be noted also that while Ethiopia‘s revenue-to-GDP ratio of just 12 percent is seen as unusually low in comparison to
many other African countries, this partly reflects the still large size of the agricultural sector in the overall economy. Revenue
relative to non-agricultural GDP is closer to 20 percent, suggesting that effective tax rates within those parts of the economy that
are taxed are actually much higher than appears at first sight. Thus, there is a need not to overdo efforts to intensify taxation on
the urban and already taxed sectors, which may bring short-term gains in term of added collections but do so at the cost of longer-
term weakness in business creation and expansion.
71
Ethiopia Macroeconomic Handbook 2011-12
Table 8.2: Cross-country comparations in tax rates and applicable thresholds
COUNTRTRY
Minimum Income
Threshold at which
Tax Applied (USD)
Income where
Highest Income
Tax Rate Applies
(USD)
Highest
Income Tax
Rate Payable
(%)
GDP per
capita (in
USD)
Democratic Republic
of Congo (DRC) 7 213 50% 211
South Africa 1,433 5,650 40% 8,342
Namibia 415 7,782 37% 6,087
Ethiopia 9 292 35% 351
Benin 94 1,000 35% 756
Cameroon 344 861 35% 1,234
Zambia 161 825 35% 1,355
Zimbabwe 5 48 35% 735
Mozambique 129 436 32% 551
Kenya 108 415 30% 882
Uganda 50 159 30% 453
Tanzania 57 414 30% 550
Djibouti 169 3,376 30% 1,500
Malawi 55 73 30% 350
Rwanda 49 162 30% 585
Ghana 52 838 25% 1,588
Nigeria 16 84 25% 1,541
Botswana 4,082 16,327 25% 8,844
Angola 263 2,423 17% 5,061
China 79 15,751 45% 5,184
Vietnam 239 3,819 35% 1,362
India 263 822 30% 1,527
Africa Average* 98 726 32% 1,107
* Excluding South Africa, Botswana and Namibia
Source: Computed from results in World Tax Rates 2010/11--Tax Rates cc. & Country Revenue Authorities
72
Ethiopia Macroeconomic Handbook 2011-12
Table 8.3 ROAD FREIGHT TARRIF SERIES--Djibouti to Addis Ababa (Birr/Quintal)
Year DRY BULK TARIFFS (in Birr) DRY BULK TARIFFS (in USD)
2000 36.1 4.4
2001 32.0 3.8
2002 32.0 3.7
2003 38.8 4.5
2004 40.7 4.7
2005 42.8 4.9
2006 44.0 5.1
2007 50.6 5.8
2008 58.2 6.3
2009 70.0 6.7
2010 71.8 5.6
2011 79.5 4.9
Source: AC Price Database, Regional Transport Surveys, PSD Hubs "Management of Commercial Road Transport in
Ethiopia" (2009), Transport Cost in Ethiopia: An Impediment to Exports (2004)
73
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
74
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 low-
yielding seeds that farmers can readily access from prior harvests or at low cost within their farm
area, convincing a farmer to opt for higher-cost, high-yield seeds is a challenge if its value is often
uncertain and only anticipated after a long period time. The large scale supply of high-yielding and
42 Illustrative of the need for significant changes in the smallholder sector is the $300 million of food aid requirements for 2011
(see ―Humanitarian Requirements 2011‖ document of July 2011).
43 According to press reports, Ethiopia imported 571,000 tons of fertilizer in 2010/11 which was supplemented by a carryover
stock of 249,000 from the previous year. The fertilizer was distributed to farmers in 245 cooperative unions at a price of Birr
1080 for one quintal of urea and Birr 884 for one quintal of DAP. A new state-owned fertilizer plant aims to provide 550,000
tons of fertilizer by 2014/15.
44 By way of comparison, existing budget allocations are as follows: 24 percent for roads; 22 percent for education & capacity
building; 11 percent for agriculture; 9 percent for defense; 7 percent for water & sanitation; 4 percent for health; and 1.4 percent
for rural electrification.
75
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 small-
holder farms who would not readily go about getting such a license. However, tractor imports will of
course be used in agriculture and there is little need to require an investment license to import it duty
free—better to let everyone who makes such a purchase benefit, as is the case in most other
neighboring countries for example.
An Agricultural Bank: Credit is a key input still in short supply for Ethiopia‘s small-holder farmers.
While the proliferation of MFIs in rural areas has addressed rural credit needs to some extent in recent
years, the establishment of a professionally run agricultural bank targeted at small and medium-size
farmers can make a major difference. The key value-added of such an institution (relative to existing
commercial banks, for example) would be its ability to specialize solely in agriculture-related
financial products which should allow it to offer tailored funding for small scale farmers and
potentially for others in the agricultural value chain. A policy lending bank, the Development Bank
of Ethiopia, is of course already in place but its focus of attention is mainly on industry (60 percent of
its planned Birr 28 billion in new lending under its five-year plan is for manufacturing) and whatever
remaining funds are dedicated for agriculture go largely to large commercial farms rather than
smallholders.
Stronger price stabilizing tools for key agricultural goods, via stronger food reserve
management systems or price bands: Given the high (57 percent) contribution of food in the
overall price index, it should not be forgotten that agricultural policies that control food inflation
effectively help control overall inflation. However, in recent years, food prices have been
characterized by large price swings, both for key grains such as teff, wheat and corn as well as for
other food items such as onions, spices, fruits and vegetables. Although detailed technical and expert
evaluations would be necessary, instituting mechanisms for stabilizing at least the staple cereal crops
(teff, wheat, and corn) appear to us as very worthy of consideration in the Ethiopian context. This
could be accomplished via a strong food reserve management system that could, for instance, buy
stocks when prices are collapsing and sell stocks when prices are spiking—this is best perhaps
supplemented by a price band for key highly consumed food items. The mixed and sometimes dismal
record of such food reserve management agencies is, of course, not lost on us but this need not imply
76
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.
77
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.
78
Ethiopia Macroeconomic Handbook 2011-12
more appropriate basis for calculating the real return on equity may be on the basis of the year-
average inflation (18 percent at June 2011), which yields a real return on equity of around 12 percent.
Given Ethiopia‘s high inflation, not just last year but also the 20 percent average inflation rate of the
previous five years, the average return on equity within the banking sector is more or less in line with
that in other African countries when considered in real terms. In any case, as we have noted in the
past, one distinctive feature to note about banking is that it is—by its very nature—more profitable
than other businesses simply because it relies on leverage; in other words, a bank deploys a given sum
of its own funds (its start-up capital) but is then able to multiply this initial start-up investment by ten-
fold or more by collecting public deposits and by subsequently generating income from that much
larger sum of collected deposits. Thus, the high profitability of banks in Ethiopia or anywhere else is
simply a reflection of this ―multiplicative effect‖ of leverage, which tends to offer shareholders of
banks much higher returns on their investments compared to other non-bank businesses. There is
probably no more telling indication of this than looking at the results of the state-owned CBE, whose
return on equity was near 50 percent—even higher than the private banks‘ average.47
In short, high
ROEs are not unique to Ethiopia‘s private banks and—in any case—should be seen in the proper
perspective, i.e., in real as opposed to nominal terms.
Lending to ―unproductive‖ sectors? The lending of private banks is typically seen as being
dominated by large flows to finance the ―unproductive‖ import and domestic trade and services
sectors. In fact, two-thirds of loans are directed to sectors such as manufacturing, exports,
agriculture, construction, and tourism. Private banks‘ loan books do show about one-third of loans
going to the two much-maligned import and domestic trade and services sectors.48
But even this one-
third ratio should not be seen as unusually inflated. Some level of imports and domestic trade and
services are simply indispensable in any economy. In Ethiopia‘s case, with a total annual import bill
of near Birr 120 billion in 2010/11, net new import-related loans during the same period amounted to
just Birr 3.5 billion—thus only around 3 percent of the annual import value. The vast majority of
imports are thus not financed by private bank loans at all.
To help the expansion in credit to the private sector, a modification of this past year’s NBE Bills
directive would be welcome. Without violating the objective of shifting some loanable funds from
private banks to priority national projects, the manner in which the directive is implemented and the
introduction of compensatory measures can make an important difference. More specifically, we think
the directive could: (i) usefully exempt loans to priority sectors, namely manufacturing and exports; (ii)
apply the 27 percent calculation on the stock of loans at the end of a given period rather than on new
lending flows; (iii) broaden the range of eligible instruments (such as including DBE bonds, Abay Dam
Bonds, and other similar higher-yielding public sector instruments); (v) allow banks to temporarily
liquidate their stock of NBE Bills when warranted for short-term liquidity needs; and (iv) adjust the
interest rate to the same average levels that state banks receive when they lend to priority sectors so there
is a level playing field between the two sets of banks.49
Beyond the above modifications, and once
47 CBE earned gross profits of Birr 4.2 billion in 2010/11 and had a Birr 6.2 billion paid-up capital. Its pre-tax ROE would thus
be 68 percent and its after-tax ROE 48 percent. 48 See NBE Bulletin of First Quarter 2010/11, page 43. 49 As it is, private banks lending to priority sectors (via NBE bills) is fixed at 3 percent, while the lending of the two state banks
to priority sectors is generally well above that. DBE, for example, offers long-term loans at interest rates of about 8 percent and
the CBE‘s most favored interest rate is offered to exporters at rates of 7 percent.
79
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 risk-
related safeguards in place, allowing private banks more latitude to borrow from abroad would
expand their pool of loanable funds and, most important, allow them to extend the maturity of their
on-lent loans to the extent that they secure long term external financing. Such funding arrangements
would be available to private banks from a host of potentially interested providers, including
multilateral development banks, regional development banks, development finance institutions, and
Africa-focused funds; taking advantage of the interest of such investors in working with Ethiopia‘s
private banks is to something that should ideally be encouraged rather than discouraged.50
50 It is notable that the state-owned already borrows from foreign banks, as seen in its recent MOU to borrow $300 million from
China EXIM Bank and also a $100 loan million agreement with the Turkish EXIM Bank. A similar opportunity to private banks
could help strengthen their operations while providing much-needed long-term capital to their clients who stand to benefit from
the associated on-lending.
80
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.
81
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)
Loans
(Mn Birr)
Period Average
Equity (Mn Birr)
Profit After Tax
(Mn Birr)
Earnings
Per
Share
Return
on
Equity
Return
on
Assets
Abay 263 … … -4 -2.4% … -0.8%
Abyssinia 6,075 3,316 505 178 56.7% 35.3% 2.6%
Awash 7,744 3,986 901 361 56.0% 40.0% 3.6%
Berhan 694 332 124 21 17.5% 17.1% 3.4%
Bunna 491 366 194 19 10.2% 10.1% 3.1%
Dashen 11,841 6,221 1,042 451 75.3% 43.3% 3.3%
LIB 1,297 676 264 44 17.6% 16.6% 2.8%
NIB 5,157 2,767 863 246 38.0% 28.5% 3.8%
OIB 1,526 662 236 44 20.5% 18.8% 2.9%
United 6,066 3,277 616 232 52.8% 37.7% 3.4%
Wegagen 5,734 2,910 990 323 44.8% 32.7% 4.7%
Zemen 1,163 645 159 85 58.1% 53.4% 6.3%
Private
Bank
Average … … … … 40.7% 30.3% 3.6%
Source: Private Bank's Annual Reports (2010/11)
Annual Reports of FY 2010/11 for CBO and Addis International not yet available at the time of publication.
82
Ethiopia Macroeconomic Handbook 2011-12
Table 10.3. Corporate Bond by Holders in 2010/11
First Quarter (In Millions of Birr)
Issuer of the Bond
2010/11
Quarter I
Outstanding
1.Puplic Enterprises 22,495
EEPCO 18,200
ETC -
DBE 4,295
2. Regional Governments 6,672
Oromia 1,588
Amhara 1,152
Tigray 660
SNNPRS 866
Dire Dawa 184
Harari 129
Addia Ababa 2,093
3.Grand Total(1+2) 29,167
Source: NBE QIV 2009/10 Bulletin
83
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).
o IMF assessment of overall economic growth: After years of accepting the authorities‘ national
income statistics (including all historical growth data since the start of the period of high growth
in FY 2001/02), the IMF has for the first time reported, in a publicly released Joint Staff
Assessment Note co-authored with the World Bank, that its ―staffs have not been able to confirm
[the] very high growth rates reported in the official statistics that appear to significantly overstate
actual growth. Staff estimates suggest robust growth in the 7-8 percent range.‖56
In addition, the
JSAN (p10) notes: ―official GDP growth rates imply productivity increases that appear
implausible, casting doubt on some aspects of national accounts compilation.‖
52 See FY 2010/11 GDP Estimate Figures of Ministry of Finance and Economic Development at www.mofed.gov.et 53 Demand-side GDP figures are not yet released, but we assume the strongest contributors will have been—in line with recent
years—Public Consumption followed by Investment (gross fixed capital formation). 54 In PPP terms, the IMF ranks Ethiopia as the fourth biggest economy in 2011 with a GDP of $95 billion, following those of
South Africa ($555 billion), Nigeria ($415 billion), Angola ($116 billion). 55
See http://www.fao.org/giews/countrybrief/country.jsp?code=ETH for the FAO‘s Crop Estimates report. CSA‘s 2010/11 crop
estimate data is provided in its October 2011 publication ―Agriculture in Figures: Key Findings of the 2008/09 – 2010/11
Agricultural Sample Surveys‖ 56 See http://www.imf.org/external/pubs/cat/longres.aspx?sk=25282.0
84
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 one-
third of the total services sector). Within industry, normal supplies of electric power should help
the manufacturing sector, which was in the previous two years hit by lengthy cuts in this critical
service. In fact, with two large dams having come on stream within the last year, Ethiopia‘s
power supply prospects look very secure for 2011/12, though this could be short-lived without
still further capacity expansions. Given very high inflation and the consequent compression of
57 Growth outturns have been at exactly around 11 percent for at least six years now, in contrast to the large deviations in growth
rates seen in prior years and elsewhere in the world. Indeed, we find that the standard deviation of growth in Ethiopia was among
the lowest in the world in the past 8 years, a surprising outturn for a country so reliant on agriculture and the associated
weather/price shocks common to this sector.
85
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
86
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 ever-
growing credit demands of their customers. Moreover, aggregate money supply growth will be restrained
by two notable developments this year: (i) policy makers‘ recent commitment to ensure zero direct
government borrowing from the central bank will eliminate this source of money growth; and (ii) the
smaller balance of payments surplus forecast for the year (see below) will imply reduced money supply
growth arising from increases in banks‘ foreign assets. Thus, one should expect a double impact to be felt
by private sector borrowers, as overall broad money growth will slow down from last year‘s high rate of
36 percent (most likely to the 24 percent average annual growth seen in the previous five years) and as the
share of credit directed to the private sector is squeezed given the new NBE Bill directive that became
operational in May 2011. In an environment where there is little upward movement in lending rates at
banks, and unless the implementation of the NBE Bill directive is modified in the coming months, this
implies continued excess demand for credit at private banks and the associated symptoms (prolonged
delays and queues) to be faced by private sector borrowers. Given the still limited size of those who
access bank loans in the Ethiopian banking system (as highlighted in Chapter 10), and the added fact that
many projects are able to rely on self-financing, this credit squeeze will not necessarily weigh down
significantly on short-term growth and export prospects, but it will mean that performance in these areas
will be much lower and much more restrained than it could otherwise have been under more conducive
financial conditions.59
Balance of Payments and the Exchange Rate .
Aided by the large devaluation of September 2010, the balance of payments for the fiscal year
ending in June 2011 registered a sizeable surplus. Among the main contributors within the current
account: (i) exports grew by a strong 38 percent from USD 2.0 to 2.8 billion, with coffee and gold doing
particularly well because of higher volumes and much higher prices; (ii) import growth was close to zero
in nominal terms, equivalent to a sharp contraction in real terms (Annex Table 6); and (iii) private
transfers rose to $2.8 billion (of which remittances contributed sharply, rising to a record level of $1.4
billion). Aided by all these factors, but thanks mainly to the sharp import compression following the
devaluation, Ethiopia‘s current account actually registered a surplus in the first quarter of the fiscal year
for the first time in recent history.60
Besides the favorable current account developments, two items in the capital account—large
external borrowing and FDI inflows—were also critical for the overall balance of payments
surplus. New borrowing of $2.1 billion was undertaken last year, which has raised Ethiopia‘s foreign
debt stock to $7.8 billion this year from just $2.1 billion five years ago. As a share of GDP, external
58 The IMF‘s 2011/12 inflation projection is provided in their October 2011 Regional Economic Outlook (page 73). 59 Given unusually tight private sector credit as of end-2011, there is a reasonable chance that a policy reversal may be
implemented to ease such monetary conditions. This might include modification to the NBE Bills directive (as noted in Chapter
10) or a reduction in reserve requirements once inflation drops in the coming months. 60 See NBE Bulletin of First Quarter 2010/11, page 51.
87
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.
88
Ethiopia Macroeconomic Handbook 2011-12
ANNEX Table 1: Economic Sectors Percentage Distribution in GDP and Growth Rates, 2010/11
Sector Real Growth Percentage Share
Agriculture 9.0 41.1
Industry 15.0 13.4
Services 12.5 46.6
GDP Total 11.4
Source: Ministry of Finance and Economic Development--2003 EFY GDP Estimates
ANNEX Table 2: Production of Cereals (Mn. Tons)
2008/09 2009/10 2010/11
CSA 15.6 17.3 19.1
FAO 15.2 16.8 17.5
Difference 2.6% 3.0% 9.3%
Source: CSA and FAO Crop Prospects and Food Situation (March--October 2011)
ANNEX Table 3: Alternative Measures of Economic
Activity in 2010/11
Indicator Growth rate
Real Growth Variables
Electricity usage (sales) growth 22.5%
Volume of Exports growth 14.1%
Ports traffic growth -12.0%
Ethiopian Airlines Passenger growth 19.0%
Ethiopian Airlines Cargo growth 20.3%
Petroleum Products volume growth 16.6%
Tourist Arrivals growth 3.5%
Vehicle Registration growth 47.9%
Crop Production-- CSA data 9.3%
Nominal Growth Variables
Tax Receipts nominal growth 42.2%
Export value growth 38.3%
Import value growth 37.1%
Broad Money growth 36.0%
Deposit growth at private banks 29.1%
Loan growth at private banks 21.6%
Source: EEPCO, MoTI, IMF, EAL, EPE, Dry Ports Enterprises, Ethiopian Transport Authority, NBE, EIA, MoFED, CSA,
Banks' Annual reports, Press reports.
89
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)
Budget
(FY 2011/12)
Total Revenue and Grants 64.0 100.6
Revenues 48.7 79.2
Tax Revenue 40.9 70.0
Tax on Incomes, Profits, and Capital Gains 10.9 18.6
VAT on domestic goods and services 8.1 18.5
Excise tax and stamp duties 1.5 2.9
Taxes on imported goods 20.4 32.9
Non-Tax Revenue 7.7 9.2
Fees, charges, and public revenues 1.5 2.3
Government investment income (from SOEs) 5.5 4.1
Other non-tax revenue 0.8 2.7
Grants 15.4 21.4
Total Expenditure 77.2 117.8
by nature of expenditure
Recurrent Expenditure 17.1 23.3
Capital Expenditure 36.0 48.1
Subsidies to Regions 24.2 31.4
Support for Reaching MDG Goals … 15.0
by sector of expenditure
Administrative and General Service 7.2 10.6
Economic services 23.2 33.6
Social services 15.9 19.3
Miscellaneous 30.9 54.3
Overall deficit -13.2 -17.2
To be covered by external borrowing 4.7 6.6
To be covered by domestic borrowing 8.5 10.6
Source: MoFED's Federal Budget Summary (2010/11 & 2011/12)
90
Ethiopia Macroeconomic Handbook 2011-12
ANNEX Table 5: Consumer Price Index-General
Month
Price
Index
Month-on-
Month
Inflation
Year-on-
Year
Inflation
Year-Average
Inflation
Jan-10 178.2 0.8 7.6 6.6
Feb-10 178.9 0.4 7.1 5.0
Mar-10 179.6 0.4 7.4 3.9
Apr-10 180.7 0.6 6.8 2.9
May-10 181.3 0.3 7.4 2.4
Jun-10 183.7 1.3 7.3 2.8
Jul-10 183.2 -0.3 5.7 3.6
Aug-10 184.3 0.6 5.3 4.4
Sep-10 189.9 3.0 7.5 5.4 September 2010 Devaluation
Oct-10 194.0 2.2 10.7 6.6
Nov-10 194.1 0.1 10.2 7.5
Dec-10 202.4 4.3 14.5 8.2
Jan-11 209.7 3.6 17.7 9.0
Feb-11 208.4 -0.6 16.5 9.8
Mar-11 224.6 7.8 25.1 11.3
Apr-11 233.9 4.1 29.4 13.2
May-11 244.1 4.4 34.6 15.5
Jun-11 253.6 3.9 38.1 18.1
Jul-11 254.9 0.5 39.1 20.9
Aug-11 259.2 1.7 40.6 23.9 Peak Year-on-Year Inflation
Sep-11 266.0 2.6 40.1 26.6
Oct-11 271.1 1.9 39.7 28.1
Nov-11 270.2 -0.3 39.2 29.8
Dec-11 268.8 -0.5 32.8 32.9
Jan-12 267.5 -0.5 27.6 33.6
Feb-12 267.5 0.0 28.4 34.5
Mar-12 268.8 0.5 19.7 33.8
Apr-12 270.7 0.7 15.7 32.4
May-12 273.4 1.0 12.0 30.2
Jun-12 277.5 1.5 9.4 27.5 Return to single-digit inflation
Jul-12 278.9 0.5 9.4 24.9
Aug-12 283.1 1.5 9.2 22.3
Sep-12 285.9 1.0 7.5 19.6
Oct-12 288.8 1.0 6.5 17.7
Nov-12 287.9 -0.3 6.6 15.6
Dec-12 286.5 -0.5 6.6 12.6
Source: CSA for historical data and Access Capital projections in bold.
91
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 2010/11
Growth
Rates
CONSUMER GOODS 2,367,730 2,095,610 -11.5%
Durables 560,512 572,994 2.2%
Furniture, Furnishings, & Floor Coverings 38,709 46,916 21.2%
Household Appliances & Utensils 118,746 143,018 20.4%
Vehicles & Transport Equipment for "Personal" Use, Their
Spare Parts & Accessories 254,321 251,061 -1.3%
Audio-Visual, Photographic, & Other Electronic Equipment
(excluding ICT Products) 108,906 76,534 -29.7%
Other durables 39,830 55,464 39.3%
Non-Durables 1,807,217 1,522,616 -15.7%
Food & Non-Alcoholic Beverages 995,642 725,376 -27.1%
Food 994,753 724,565 -27.2%
Non-Alcoholic Beverages 889 810 -8.8%
Alcoholic Beverages & Tobacco Products 14,346 14,448 0.7%
Articles of Leather, Textiles, & Footwear (Wearing Apparels
& Accessories) 237,681 199,621 -16.0%
Healthcare Products 311,752 321,842 3.2%
Newspapers, Books & Stationery 124,658 121,671 -2.4%
Products of Personal Effects 90,781 100,813 11.1%
Other non-durables 32,356 38,845 20.1%
INTERMEDIATE/SEMI-FINISHED PRODUCTS 1,656,046 1,536,848 -7.2%
ENERGY 1,310,588 1,808,142 38.0%
CAPITAL GOODS 2,596,051 2,634,130 1.5%
Machinery 1,097,812 1,095,387 -0.2%
ICT Products 537,373 543,830 1.2%
Transport Equipment, Spare Parts & Accessories 520,816 696,288 33.7%
Railway or Tramway Locomotives, Parts & Accessories 217 64 -70.6%
Vehicles, Spare Parts & Accessories (used in the production
of goods & services) 517,641 667,752 29.0%
Aircrafts, Parts & Accessories 1,022 25,972 2442.2%
Ships, Boats, & Floating Structures, Parts & Accessories 265 103 -61.0%
Containers (designed & equipped for carriage by one or
more modes of transport) 1,671 2,397 43.4%
Other capital goods 440,050 298,625 -32.1%
RAW MATERIALS 189,088 194,735 3.0%
ARMS AND AMMUNITION; PARTS & ACCESSORIES 5,158 1,500 -70.9%
TOTAL IMPORTS 8,124,661 8,270,964 1.8%
Source: Customs Authority and Ethiopian Petroleum Enterprise
92
Ethiopia Macroeconomic Handbook 2011-12
ANNEX Table 7: External Borrowing and External Debt
2006/07 2007/08 2008/09 2009/10 2010/11
Total External Debt-- USD millions 2,314.6 2,767.1 4,352.2 5,633.3 7,819.5
Multilateral lenders to Ethiopia 1,193.06 1,540.49 2,032.31 2,737.28 3,589.20
World Bank 615.8 807.4 1,126.2 1,577.0 2,091.8
African Development Bank 46.1 33.1 19.8 12.8 8.2
IMF 0 0 51.8 217.6 297.7
Others 531.2 700.0 834.5 929.8 1,191.5
Bilateral lenders to Ethiopa 806.9 951.5 1,204.3 1,415.0 1,863.6
Paris Club 367.6 456.5 466.0 429.1 479.1
Non-Paris Club (China, India, Saudi, etc.) 439.3 495.0 738.3 985.9 1,384.5
Private lenders to Ethiopa 314.6 275.0 1,115.6 1,481.0 2,366.5
Commercial Banks 283.8 244.4 217.7 259.2 926.5
Suppliers 30.8 30.7 897.9 1,221.8 1,440.0
New external borrowing--USD millions 357.8 395.1 1,750.2 1,564.5 2,079.1
Multilateral 277 281 593 857 673
o/w World Bank 158 144 358 526 394
Bilateral 80 114 290 258 404
Private 0 0 867 449 1,002
External debt to GDP-- Ethiopia 11.9 10.3 13.5 19.0 25.3
External debt to GDP-- SSA average 24.5 21.8 24.4 20.7 19.9
Source: MOFED, Public Sector External Debt Statistics, Statistical Bulletin No. 7 (www.mofed.gov.et) and IMF
93
Ethiopia Macroeconomic Handbook 2011-12
ANNEX Table 8: Export Performance-- First Five Months of FY 2011/12
No
Export
Value: FY
2010/11
(USD
millions)
Export
Value: July-
Nov 2010
(USD
millions)
Export
Value: July-
Nov 2011
(USD
millions)
Value
Growth
Rate
Of
which:
Volume
growth
Of
which:
Price
growth
1 Coffee 841.7
280.2 288.2 2.9%
-38.0% 65.8%
2 Gold 485.3
133.8 209.5 56.6%
-8.3% 70.8%
3 Chat 238.4
107.1 110.5 3.2%
0.8% 2.4%
4 Oil Seeds 323.9
79.2 106.1 33.9%
22.1% 9.6%
5 Live Animals* 147.9
67.2 103.5 54.0%
8.1% 42.5%
6 Flower** 175.3
62.9 74.5 18.5%
10.6% 7.1%
7
Leather and Leather
Products 103.9
33.1 62.3 88.3%
58.3% 18.9%
8 Pulses 138.8
49.8 52.1 4.5%
-11.2% 17.6%
9 Textile and Garment 61.9
16.4 38.6 135.5%
55.3% 51.7%
10 Meat and Meat Products 63.3
23.2 36.1 55.8%
28.2% 21.6%
11 Fruit & Vegetables 31.7
12.5 17.2 38.2%
49.7% -7.7%
12 Spices 33.2
8.4 12.4 47.9%
45.1% 1.9%
13 Others 51.1
20.7 7.5 -63.7%
-70.7% 23.8%
14 Natural Gum 12.8
5.6 4.8 -14.5%
-21.4% 8.8%
15 Tantalum 28.1
4.7 4.0 -16.3%
-3.8% -13.0%
16 Flour 5.3
2.7 3.3 20.2%
-2.2% 23.0%
17
Mineral Products (excl gold
& tantl.) 6.0
1.1 3.1 168.4%
-97.3% 9748%
18 Beverages 2.2
0.7 1.9 181.5%
101% 39.6%
19
Hair Oil (Paprika
Oleoresin) 3.0
0.9 1.7 77.4%
67.5% 5.9%
20 Honey 1.7
0.7 1.4 109.8%
100% 4.6%
21 Processed Fruit Products 0.8
0.0 1.2
2466.5
%
330% 0.0%
22 Processed Spices 1.5
0.4 1.1 169.3%
145% 9.6%
23 Bees Wax 2.0
0.6 0.6 -7.2%
-14.4% 8.4%
24 Eucalyptus Tree (logs) 3.8
0.2 0.5 125.3%
221% -29.9%
25 Tea 1.3
0.4 0.4 1.7%
-17.5% 23.4%
26 Animal Vaccine 1.6
0.8 0.4 -47.9%
-56.9% 20.7%
27 Oil seed products (Tahina) 4.4
2.7 0.3 -88.7%
-85.5% -21.8%
28 Cotton 0.0
0.0 0.2 350.8%
407% -11.2%
29 Capsule 0.3
0.1 0.1 48.6%
34.5% 10.5%
TOTAL 2,771
916 1,143 24.8%
… …
Source: Ministry of Trade
94
Ethiopia Macroeconomic Handbook 2011-12
ANNEX Table 9: Ethiopia's Balance of Payments, 2009/10 - 2011/12
2009/10 2010/11 2011/12
Actual Estimate Proj.
Current Account (1,222) (930) (1,523)
Exports 2,003 2,770 3,532
Imports (8,269) (8,434) (9,910)
Net Services 513 641 737
Net Factor Income (92) (115) (132)
Private Grants 2,708 2,808 2,800
Public Grants 1,915 1,400 1,450
Capital Account 2,001 1,900 1,800
Official borrowing, net 1,327 1,200 1,200
Foreign Investment 956 1,000 1,100
Other private flows 227 200 -
Other flows (E & Os) (509) (500) (500)
Overall balance 779 970 277
o/w NBE net foreign assets 418 … …
o/w Banks' net foreign assets 361 … …
Gross reserves at FY-end 2,018 2,988 3,264
USD GDP in millions 29,689 30,943 38,443
Current Account to GDP -4.1% -3.0% -4.0%
FDI plus loans to GDP 7.7% 7.1% 6.0%
Export growth rate 38.4 38.3 27.5
Import growth rate 7.0 2.0 17.5
Source: NBE and IMF Staff Report of November 2010 for FY 2009/10;
Access Capital estimates for FY 2010/11 and projections for FY 2011/12
95
Ethiopia Macroeconomic Handbook 2011-12
Source: National Bank of Ethiopia
ANNEX Table 11: Exchange Rate Recent Trends and
Outlook
Month Birr per USD-- Buying
rate Birr per USD-- Selling rate
Sep-11 17.08 17.42
Oct-11 17.13 17.47
Nov-11 17.17 17.52
Dec-11 17.23 17.57
Jan-12 17.28 17.63
Feb-12 17.34 17.68
Mar-12 17.39 17.74
Apr-12 17.45 17.79
May-12 17.50 17.85
Jun-12 17.56 17.90
Jul-12 17.61 17.96
Aug-12 17.67 18.01
Sep-12 17.72 18.07
Oct-12 17.78 18.12
Nov-12 17.83 18.18
Dec-12 17.89 18.23
Source: NBE for historical data and Access Capital projections in bol
96
Ethiopia Macroeconomic Handbook 2011-12
ANNEX TABLE 12: Ethiopia--Ten Years of Key Macroeconomic Indicators: FY 2001/02 to 2011/12
2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12
Estimate Proj.
Real GDP growth
1.6 -2.1 11.7 12.6 11.5 11.8 11.2 10.1 10.5 11.4 9.1 By Sector
Agriculture growth
-1.9 -10.5 16.9 13.5 10.9 9.4 7.5 6.4 7.6 9.0 9.0
Industry growth
8.3 6.5 11.6 9.4 10.2 9.5 10.0 9.8 10.8 15.0 10.0 Services growth
3.3 6.0 6.3 12.8 13.3 15.3 16.0 14.1 13.1 12.5 9.0
GDP at current market prices (Birr billons)
66.6 73.4 86.7 106.5 131.6 172.0 248.3 335.9 383.3 511.2 664.5
GDP at current market prices (USD billons)
7.8 8.6 10.0 12.3 15.2 19.6 26.9 32.2 29.7 30.9 38.5 GDP per capita (USD)
118 126 143 171 205 257 344 402 361 355 442
GDP per capita (Birr)
1,004 1,077 1,236 1,478 1,778 2,260 3,176 4,188 4,656 5,869 7,638
Gross domestic investment (% GDP)
23.6 22.8 21.2 26.3 24.3 24.8 21.0 20.4 22.0 24.2 26.0
Public investment (% GDP)
14.1 14.0 12.1 15.4 16.7 18.1 15.1 14.5 15.1 16.6 19.0
Private investment (% GDP)
9.5 8.8 9.1 10.9 7.6 6.7 5.8 5.9 6.9 7.6 7.0
Consumer prices (end of period)
-1.0 23.5 1.7 13.0 11.6 15.8 55.2 2.7 7.3 38.1 9.4
Consumer prices (year-average)
-7.2 15.1 8.6 6.8 12.3 17.1 25.4 36.4 2.8 18.1 27.5
Broad money growth
8.1 10.9 14.7 19.6 17.4 19.7 22.9 19.9 24.3 36.0 24.0
Credit to the public sector (Govt & SOEs) growth
… … … … 16.6 21.1 35.7 5.8 11.8 41.0 27.3 Credit to the private sector growth
… … … … 28.3 27.3 22.0 12.6 39.9 25.0 20.0
Deposit rates (minimum, in percent)
3.0 3.0 3.0 3.0 3.0 4.0 4.0 4.0 4.0 5.0 5.0
Exchange rate (Birr per USD, year average.)
8.54 8.58 8.63 8.65 8.68 8.79 9.24 10.42 12.91 16.5 17.3
Exports, f.o.b.
452 483 600 818 1,001 1,189 1,466 1,447 2,003 2,770 3,532 Coffee
163 165 223 335 354 424 525 376 528 842 902
Noncoffee
289 318 377 483 647 765 941 1,071 1,475 1,928 2,630
Imports, c.i.f.
1,696 1,856 2,587 3,633 4,593 5,128 6,811 7,727 8,269 8,434 9,910 Fuel
268 288 311 669 861 895 1,621 1,257 1,127 1,808 2,124
Current account, after grants (% GDP)
-4.5 -2.1 -5.0 -8.2 -9.1 -4.4 -5.5 -5.0 -4.1 -3.0 -3.8
Foreign direct investment (% GDP)
1.9 1.4 1.5 1.2 2.4 2.5 3.0 2.7 3.2 3.2 2.9 External borrowing (% GDP)
6.2 4.2 2.0 2.2 1.3 1.2 2.6 4.8 4.5 3.9 3.1
External debt (% GDP)
97.4 85.4 73.3 48.1 39.6 11.9 10.3 12.9 14.0 25.3 24.0 Gross official international reserves
664 931 1,352 1,581 1,158 1,326 906 1,523 2,018 2,988 3,264
(in months of imports of goods & services)
3.3 3.7 3.7 3.4 2.2 1.9 1.2 1.9 2.2 2.1 2.0
Revenue
15.6 15.2 16.1 14.6 14.8 12.7 12.0 12.0 13.4 13.5 11.9
Tax revenue
11.9 11.2 12.6 11.6 10.8 10.1 9.6 8.6 10.7 10.8 10.5 Nontax revenue
3.7 4.0 3.5 3.0 4.1 2.6 2.6 3.3 2.6 2.7 1.4
Grants
3.2 3.2 3.2 3.2 3.2 3.2 3.2 4.3 3.2 4.5 3.2
Expenditure and net lending
26.5 27.9 23.7 23.3 22.3 20.7 18.9 17.2 18.1 20.1 17.7 Current expenditure
15.9 18.4 13.8 12.4 11.6 10.0 9.2 8.1 8.3 8.5 7.0
Capital expenditure
9.2 8.6 9.5 10.7 10.7 10.7 9.7 9.1 9.8 11.6 10.7
Overall fiscal balance, including grants
-7.2 -6.5 -3.0 -4.4 -3.9 -3.6 -2.9 -0.9 -1.6 -2.1 -2.6 External financing of the deficit
7.4 5.3 2.8 2.2 1.1 1.1 1.0 0.9 1.0 0.5 1.0
Domestic financing of the deficit
0.6 2.3 2.5 3.3 2.1 3.6 3.0 -0.1 0.6 1.6 1.6
Float/statistical discrepancy
-0.7 -1.0 -2.3 -1.2 0.6 -1.1 -1.0 -0.2 0.0 0.0 0.0 Gross stock of domestic debt
0.0 . 35.8 30.0 29.5 26.2 20.8 15.2 13.3 12.0 12.0
Population, mid-year estimate (in millions)
66.3 68.2 70.1 72.1 74.1 76.1 78.2 80.2 82.3 85.0 87.0
Sources: MOFED (for GDP data); IMF REO Oct 2011 and Nov 2010 Staff Report (for monetary, fiscal, investment, BOP data); CSA (for
inflation data); National Bank of Ethiopia. Access Capital estimates for most 2010/11 data points and for all 2011/12 projections.