China scales back investment in Ethiopia

by Zelalem

China is scaling back investment in Ethiopia in the face of rising foreign exchange shortages and government debt, highlighting the fragility of the African nation’s economy as the new prime minister prioritises political reform to quell three years of deadly social unrest

For much of the last decade Ethiopia has been a leading investment destination in sub-Saharan Africa, particularly for China. But Beijing’s waning enthusiasm for the region’s fastest-growing economy reflects the challenges facing Abiy Ahmed, the prime minister, as he juggles demands from a public hungry for both democracy and development and myriad vested interests. 

Business people, diplomats and bankers said Chinese entities, which have loaned more than $13bn between 2006 and 2015 for everything from roads and railways to industrial parks, were now taking a “more cautious approach” to Ethiopia. “The Chinese have said they’ve reached their limit,” one diplomat in Addis Ababa said. “’We’re way overextended here,’ they told us openly.”

Two investors said that Sinosure, China’s main state-owned export and credit insurance company, was no longer extending credit insurance to Chinese banks for projects in Ethiopia as willingly as it used to. “There’s a new reluctance to back investments in Ethiopia,” one investor said. “It’s not completely clear why but it appears they’re worried about the debt profile and forex crisis.” This reluctance comes as some flagship Chinese-financed projects, such as freight rail services from Addis Ababa to Djibouti, are running below the expected capacity.

Analysts applaud Mr Abiy for opening up the political environment since he became prime minister in April — on Saturday the cabinet recommended lifting the state of emergency two months early. But they warn the economy is on “autopilot”. The International Monetary Fund forecasts growth of 8.5 per cent this year, which while high for the region represents a fall from the highs of recent years.

“There’s a lot of excitement around the political opening,” said Hallelujah Lulie, an independent analyst in Addis Ababa, referring to the release of thousands of political prisoners, unprecedented engagement with opposition politicians and promises of greater democratisation. “We’ve never witnessed such a level of optimism, hope and unity. But the economy is not getting the attention it deserves. 

“The moment people are over with the political excitement the economic reality is going to bite and it’s going to bite hard.” 

Ethiopia’s economic headwinds centre around the increasing shortage of foreign exchange as imports have outstripped exports by around 400 per cent each year for at least the last five years. Foreign exchange reserves held by the National Bank of Ethiopia, the central bank, are thought to be only sufficient to cover a little more than one month of imports, according to Ethiopian bankers. The NBE did not respond to requests for data or comment.

Added to concerns about foreign exchange are anxieties about the country’s rising debt. Earlier this year the International Monetary Fund raised Ethiopia’s risk of debt distress to “high”. Government debt now stands at 59 per cent of gross domestic product, up from 46.8 per cent four years ago after the government borrowed heavily to invest in infrastructure projects and industrial parks. 

Chart showing Ethiopia's public debt

Ahmed Shide, the government’s chief spokesman, admitted the foreign exchange crisis was a “serious challenge”. “We need to address it with different policy instruments,” he said. “The most important is production and increasing exports.” 

However, analysts say this is a medium-to-long term solution, because exports of goods, while growing at 14 per cent annually, only account for 3.6 per cent of GDP. Zemedeneh Negatu, a prominent Ethiopian businessman, said “interim sources of forex [should] be explored” to bridge the gap until exports increase. In the medium term, exports should be promoted and the the banking sector consolidated. “[Mr Abiy] should also look into the establishment of capital markets,” Mr Zemedeneh said. “Ethiopia is the largest emerging economy of its size anywhere in the world which doesn’t have an organised and regulated stock market.” Mr Ahmed, the government spokesman, stressed that opening the financial sector to foreign institutions, long demanded by investors and diplomats, was “not yet being considered”. 

The economic pressures have yet to be felt by many in Ethiopia’s large informal sector. “By the end of this year they don’t have better policies in place jobs are going to start going and that will change the dynamism,” one diplomat said.

Neither China’s Export Import Bank, the leading state-owned development lender, nor Sinosure responded to requests for comment. A Chinese foreign affairs ministry spokesperson stressed that “Ethiopia is an important partner of China in Africa”, but added: “Chinese financial institutions operate according to market principles”. 

Read More News Here Source link

Related Posts

Leave a Comment