Capital Investments Fall Off Cliff

Sep 17 , 2022
By Christian Tesfaye

There are many economic indicators that people are worried about at present. There is inflation, which has been in the 30pc to 40pc range for around a year. This is the stickiest inflationary pressure Ethiopia has experienced on record, with double digit inflation having lasted nearly half a decade, according to official figures.

There is a foreign currency shortage, which has debilitated the country for decades. It is only getting worse and contributes to headline inflation. Neither is debt burden a small matter. With principal payments for the 10-year one billion dollar Eurobond coming up, debt service will be the highest cost to the federal government in the short- to medium-term.

But one stands out for having a significant long-term implication. This is the fall in capital investments, especially in infrastructure. In the short term, a new road project benefits no one else except the few contractors and consultants that work on it. It may even be nuisance to households that need to be relocated or are impacted by the construction. But, over the long term, it is a high return investment that pays dividends in economic growth for decades to come.

Several developments point to the fall in capital investments. The most straightforward is the federal budget. For the first time, capital spending is lower than recurrent, coming in at 218 billion Birr. It will be only 2.9pc of GDP. It is a continued slide from 2020's 5.4pc and the previous year’s three percent. A decade ago, it was a tenth of GDP, according to Cepheus Research & Analytics.

Ethiopia’s import data underlines the fall in capital investment. Capital goods import fell 22pc last year to just over three billion dollars. The main underperformers were in the agriculture and industrial sector. We do not want import volumes to fall so the trade deficit and foreign currency shortage could ease. But capital goods imports are not where we want this to happen; instead, it is in consumer goods.

Ethiopia’s GDP growth over the past two decades was driven by infrastructure spending. It was a type of supply-side economics, where instead of cutting taxes to incentivise private sector investments, the government would take the lead by spending aggressively (especially on infrastructure). This, in turn, creates jobs, improves demand and subsequently increases goods and services in the economy and lifts economic output. It had its flaws, crowding out the private sector, feeding inflation and creating a debt burden. But few apolitical commentators would argue that it was not a net positive.

It is fine to slow down capital spending for a while, especially in the current environment, where raising debt financing is cost prohibitive due to high global interest rates. It will be harder on Ethiopia, which has a terrible credit rating, and needs to ease its debt burden. It is all the more sadder that the debt has not entirely been put to good use, with delays and outright corruption leading to massive wastage. It is a bill that the public has to foot through its tax burden for the foreseeable future.

Still, the current scenario should not continue for too long. There is a major gap in infrastructure, and building it up has been the primary driver of growth over the past three decades. The private sector may take some of the load off (for instance, in data centres and even electric transmission and generation) but could never substitute for the government. Highly underserved communities will not be targets for investment and large projects with a long-term horizon will not be incentivising. The government ought not to step away for too long.

PUBLISHED ON Sep 17,2022 [ VOL 23 , NO 1168]

Christian Tesfaye ( is a researcher and Fortune's Deputy Editor-in-Chief whose interests run amok in the directions of political thought, markets, society and pop culture.

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