Mismanaged, Trade Liberalisation Could Pour Cold Water on Local Hopes

Mar 2 , 2025.

The domestic economy has endured a punishing half-decade. A global pandemic throttled trade, a civil war inflicted grave damage to livelihoods and external financing, and persistent unrest in two of its largest regional states continues to sow misery. Yet, Prime Minister Abiy Ahmed's (PhD) administration has advanced a range of liberalisation measures, opening sectors once barred to foreign or even domestic private investors.

The latest gesture comes from AliExpress, a subsidiary of China’s Alibaba, whose executives are reportedly considering accepting Birr (the Brewed Buck) for online purchases. Though this may sound like a relief in a country perennially short of hard currency, it shows how foreign firms seek creative ways to dodge structural impediments that have challenged Ethiopian policymakers for decades.

For optimists, charging local users in Birr proves the wholesale import liberalisation is starting to pay off, broadening consumer choice and spurring domestic businesses to upgrade their products. Allowing cheaper imports, they note, can help ease the supply bottlenecks that have stoked inflation and undermined living standards.

Critics suspect such openness poses an existential threat to local industries that are unprepared for global competition. They see potential for rampant contraband, soaring import bills, and a worsening foreign exchange crunch as dollars exit the central bank vaults faster than they enter.

This predicament echoes across Africa.

Over the decade starting in 2015, many African countries dismantled cross-border capital restrictions. They cut import tariffs in hopes of attracting investors, diversifying away from exports of raw materials, and addressing their vulnerability to price shocks. Alongside prudent macroeconomic management, openness proved crucial in some of the continent's growth successes. Nearly half of Africa’s population resides in countries whose economies grew above 4.2pc through the 2010s, especially in mid-sized countries that used fresh capital and trade flows.

Côte d’Ivoire, for instance, emerged from conflict to register average GDP growth of 8.2pc between 2012 and 2019, aided by a shift to more business-friendly policies. Rwanda, which consistently embraced liberal reforms, managed annual growth of around seven percent. Others that maintained stifling controls or grew addicted to commodities, among them Nigeria, South Africa, and Ethiopia, saw far slower expansion, dragging the continent’s growth rate to about 3.3pc from 2010 to 2019.

The pandemic that erupted in 2020 did the region no favors, pushing African GDP down by roughly 1.7pc. But the countries that had cultivated open markets rebounded more vigorously, to the extent that 12 of the world’s 20 fastest-growing economies in 2024 were African, including Niger, Senegal, Rwanda, Côte d’Ivoire, and Tanzania, each forecast to grow between six percent and 11pc. Foreign direct investment (FDI) was crucial in explaining this divergence. Although total FDI dipped across Africa in the mid-2010s when commodity prices fell, it roared back to a record 83 billion dollars in 2021, retrenched to 45 billion dollars the following year, and recovered to 53 billion dollars by 2023.

Egypt did particularly well, attracting between five billion to 10 billion dollars, annually, for much of the past decade, then reaching 11 billion dollars in 2022 after floating its currency in 2016 and rolling out large privatisation schemes. Nigeria and South Africa remain magnets for headlines but have faced fluctuating inflows tied to arbitrary policy moves. Ethiopia’s record has been similarly dramatic. It was mostly closed to foreign capital until 2018 but leaped by 79pc to 4.3 billion dollars in 2021, as industrial policy drives powered investor enthusiasm. Ironically, capital controls and tight exchange restrictions later cooled the excitement.

Trade, too, has flourished in more liberal settings. Africa’s overall trade plunged to 904 billion dollars in 2020 during the worst of the pandemic, then surged to 1.375 trillion dollars a year later. Having signed free trade agreements with major partners, Morocco leveraged its advantages in automotive exports, while Ghana diversified beyond raw cocoa into processed goods, boosting its export profile. For Ethiopia, a surge in imported consumer items, facilitated by digital platforms such as AliExpress, could aggravate the perennial shortage of foreign exchange unless stronger export revenues or new financing simultaneously materialise.

However, liberalisation can extend gains beyond trade and capital inflows. African economies that once relied on subsistence farming have seen manufacturing and services expand, creating new jobs and rising incomes. Ethiopia's leaders sought to capitalise on this trend by building industrial parks to attract foreign garment and shoe makers, creating tens of thousands of positions. By 2019, close to 16,500 jobs had been recorded in a handful of export zones, of which nearly 90pc went to women.

Nonetheless, opening financial systems carries both benefits and risks. African governments have increasingly borrowed from global bond markets to fund development, pushing the continent's Eurobond stock to about 140 billion dollars by 2021. But portfolio capital is fickle. Many countries faced sudden outflows in 2020, at the onset of the pandemic, or in 2022, when global interest rates rose. By 2023, nine African countries, including Ethiopia, were in debt distress, while 11 others moved into a high risk zone. Zambia defaulted in 2020, Ethiopia followed, and Ghana restructured its debt in 2023, reminding everyone that reckless borrowing leads to painful reckonings.

Ethiopia, which once touted state-led expansion as the path to prosperity, has found its reserves under strain and debts spiraling since 2018, forcing its leaders to contemplate more market-oriented reforms. They pledged to embrace openness without exposing domestic producers to immediate ruin, a promise that has proven to be perilous. They have been reminded that the line between promoting global competition and undermining local industry can be thin. Any abrupt liberalisation risks hollowing out industries that have yet to mature, leaving the economy more dependent on external supply chains.

Economic and trade liberalisation should be complemented by efforts to strengthen exports, lest foreign exchange reserves seep away to pay for imported consumer goods. Prolonged overprotectiveness is also unwise, as it perpetuates inefficiency, keeps prices high, and limits choice. Balancing these concerns requires steady hands at the Central Bank and Finance Ministry. Better oversight of external loans, more transparent rules on cross-border transactions, and nurturing domestic businesses may help Ethiopia reap the benefits of liberalisation.

The idea of AliExpress accepting Birr could thus be a glimpse into what may lie ahead. More foreign businesses are tapping local consumers and pushing policymakers to refine their financial and regulatory apparatus. Much will depend on how rapidly the country can put in place safeguards against illicit trade and capital flight, develop a domestic productive capacity and global export competitiveness that generate reliable inflows of hard currency, and manage debts without succumbing to the fate of highly indebted countries.

Openness, accompanied by sound policy, has often spelled success, while restrictive regimes have tended to languish in low growth and crisis. Ethiopia has an opportunity to follow the continent’s shining examples, provided it avoids the blunders of excessive borrowing and slipshod regulation and enforcement. Whether the acceptance of the Brewed Buck on a global e-commerce platform is a turning point or another footnote in Ethiopia’s decades-long struggle with crushing forex crunch will become clear once the dust has settled. If it does at all.

PUBLISHED ON Mar 02, 2025 [ VOL 25 , NO 1296]

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