In an unprecedented move, Ethiopia’s ruling party, in its meeting held last Tuesday, decided to partially privatize its key state-owned enterprises, including Ethiopian Airlines, Ethiopian Shipping Lines & Logistics Services Enterprises and Ethio telecom. The decision comes with plans of either expanding mixed ownership or allowing outright full privatization in other sectors, including the railway, industrial park and sugar production.
The move is said to be a part of the government’s plan to raise its foreign currency reserve, which has reached a historic low at below 1.2 months of imports. However, exports have been constant over the past five years.
“Allowing the private sector to participate would make the growth of the country more inclusive,” states the official statement of the ruling party, Ethiopian People’s Revolutionary Democratic.
Industrial parks, railways, sugar development projects and manufacturing companies that are owned by the state would be partially or fully sold to the private sector. However, the stake in key State Owned Enterprises (SOEs), including Ethiopian Airlines, Ethio telecom as well as the Shipping Enterprise, would be transferred to the private sector while the government remains as a major shareholder.
The move is expected to open opportunities to domestic as well as international investors in the second fastest growing economy in Africa. According to the International Monetary Fund, Ethiopia has a projected economic growth of 8.5% this year. Despite the deep involvement of the state, the economy of Ethiopia, whose GDP stood at 84 billion dollars in 2017, grew by an average of 10% over the past decade. This has even helped the country to overtake Kenya, whose economic size was twice Ethiopia’s in 2000. This was driven by public investment in infrastructure and agriculture. Such economic change must be accompanied by the private sector to make the growth of the country sustainable.
Zemedeneh Nigatu, an investment consultant who used to be a managing partner of Ernest & Young, is amongst those that have welcomed the latest move.
“This is an excellent opportunity to establish ‘Addis Abeba Stock Exchange’ and list shares (Initial Public Offering) of all state owned companies to-be privatized,” said Nigatu.
Against such optimism, however, some still found the move of the government unnecessary and untimely. Economists says it is not wise to sell profitable state owned enterprises, such as Ethiopian Airlines, the biggest airline in Africa with international destinations covering five continents. In fact, the Airline, which has recently signed a management agreement to jointly develop Zambia and Guinea Airways, is one of the most profitable SOE in Ethiopia, with 232 million dollar profit last year. Likewise, the Shipping Enterprise and Ethio telecom had registered a gross profit of 370 million dollars and 1.1 billion dollars.
“It is not clear why the government decided to transfer the state of the companies against such backdrop,” said a macroeconomist and a lecturer, who wants to remain anonymous, with 15 years of experiences. He added that, “Such move would create an income inequality, instead of being a panacea to the nation’s Forex, thereby export, crisis.”
The foreign currency shortage has always been a headache to the Ethiopian government, but it got worse in the past half a decade when a balance of payment deficit and a surge in external debt, reaching 24 billion dollars last year, become more common. Especially, for a country like Ethiopia whose consumption and local production is highly dependent on imports, the instability of the foreign currency market has a big impact on the economy.
While the export earnings was stagnant around three billion dollars over the past five years, imports bill surged from USD13.7 billion to USD17 billion. The gap between the two has resulted in a trade deficit of around 14 billion dollars- accounting for four percent of the GDP.
More than half of the country’s export are agricultural productive, whose price is unstable in the international market, pushing the country to be a price taker, instead of being a setter. Various measures were taken by the government to promote exports, none of which managed to bring the much needed change. The 15% of devaluation of the Birr that became effective eight months ago did not reverse the export trend, indicates data obtained from the Ministry of Trade. In the first three quarter of the current fiscal year, the export revenues of the country was around 2.1 billion dollars, showing a meagre four percent rise compared to the same period last year.
Economists say that privatization cannot be a solution to back the trend of declining export proceeds.
“Although it is one step for liberalization, privatizing big corporates, including Ethiopian Airlines, that were brining millions of dollars for the country would not bring the much needed change in export,” said the macroeconomist.
“Diversification of the export proceeds and import substitution are the solution for the export crisis. Additionally, the government must refrain from big infrastructural development projects, which are not payoff in short term, to reduce unnecessary external debt, thereby solve the forex crunch.”
Getachew Alemu, in his commentary published on Addis Standard in June 8, 2018, also opposed the recent decision of the government.
“Looking at the challenges of the economy, it is obvious that the existing problems, such as dwindling forex reserve, are taller, wider and deep-rooted than what can be solved through privatization,” wrote Alemu.
His argument is that, the major challenges to businesses and exporters, such as cumbersome entry barriers, uneven competitive space, poor skills, undeveloped market structure, unwise regulation, restrained access to finance, would not be solved through privatization of SOEs. .
“It should be understood that selling the minority stake of SOE, before undertaking market reforms, is a recipe for oligarchy where opportunistic capitalists and their cronies would be the billionaires,” Alemu said.