Will Liberalisation Spark Growth, Expose Vulnerabilities?

Sep 14 , 2024
By Geremew Milkias

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After years of a state-led model, policymakers' decision to open up the economy could begin attracting various players across different sectors. The policy shift, which follows in the footsteps of many of Ethiopia's neighbours that opened their economies earlier, is expected to bring with it valuable operational experience from international markets. One of the most visible examples of the benefits of this economic policy liberalisation has been the transformation of Ethio telecom, the largest state-owned company, which has restructured its operations to become more innovative and efficient.

Whether other sectors will follow Ethio telecom’s lead is a question that lingers across the economy.

The financial sector, which has long been protected from foreign competition, has remained profitable under a closed system. Yet, its operational efficiency and capacity for innovation remain untested as the market prepares for the arrival of international and regional competitors.

The banking industry, in particular, faces a difficult time ahead as its executives wrestle with the recent liberalisation of the exchange regime. The Birr has depreciated more than 100pc  over the past few weeks as policymakers moved to float the foreign currency market. The sharp decline in value has effectively halved the banks' capital when measured in foreign currency. Some analysts have called for the merger of smaller banks in response, arguing that consolidation would create larger, more competitive financial institutions capable of meeting international standards.

Nigeria’s banking sector's experience should offer a possible roadmap. Over the years, the West African country reduced the number of its banks from 87 to fewer than 25, with eight now recognised as meeting international standards.

Beyond the financial sector, the export sector has struggled to keep pace with its ballooning imports, a dynamic that threatens the long-term sustainability of the economy. In 2023, exports were valued at 6.2 billion dollars, according to Afri ExIm Bank, while imports reached 13.6 billion dollars, resulting in a trade deficit of 7.4 billion dollars. This imbalance is particularly pronounced when viewed through the lens of intra-African trade, where Ethiopia’s trade volume with other African countries was only 1.7 billion dollars, 9.1pc of its total trade. According to the Afri ExIM Bank, it was well below the regional average of 18.6pc.

The foreign currency reserves have also taken a hit, declining to an estimated 727 million dollars in 2023 from a high of a little over three billion dollars four years ago. This dramatic drop in reserves has added pressure on businesses, particularly those dependent on imported goods and services, to find new ways to survive the international marketplace.

Due to the ongoing liberalisation, companies well-prepared to enter international markets could thrive. However, a lack of experience dealing with foreign competition and managing complex transactions could hinder their progress. One area of concern should be the financial sector’s limited experience conducting forward transactions and other forms of risk management that are commonplace in more liberalised markets. While coffee exporters have some experience with futures contracts, many different sectors lack the expertise needed to engage in such deals, which could leave them vulnerable to speculative attacks and market volatility.

Manufacturing, too, faces a structural crisis, with inefficiencies and bottlenecks inhibiting the sector’s ability to improve export performance. The country has made notable strides in increasing its power capacity, which is crucial for the manufacturing sector’s growth. But, without further reforms and improvements in infrastructure, exports may struggle to compete on the global stage.

Despite these challenges, there are signs of progress, particularly in efforts to develop the private sector.

The private sector’s ability to create and maintain market linkages will also play a crucial role in the economic future. While several promising initiatives have been designed at improving market access, these efforts should be supported by businesses with established networks in some of the world’s largest economies. Agricultural products, for instance, have potential buyers in markets such as Europe, the Middle East, and Asia, but without better market linkages, these opportunities will remain largely untapped.

The African Development Bank (AfDB) recently committed 43.8 million dollars to support young entrepreneurs and small and medium-sized enterprises (SMEs) in Ethiopia, focusing on the agricultural sector. These initiatives are essential for encouraging private sector growth and creating a more diversified economy.

However, private sector development alone will not be enough. Businesses need to adopt a more international outlook to compete in the global economy. The "think global, act local" approach, which encourages firms to leverage international opportunities while maintaining a solid domestic presence, could be a starting point. Partnerships with trade centres and commercial chambers in target markets could help companies tap into global demand and improve the country's overall trade performance.

One area that needs particular attention is networking.

Ethiopian businesses, especially those aiming to expand into regional and global markets, should improve their ability to form connections and partnerships. The gap in networking skills has been a factor holding back intra-African trade, as businesses miss out on opportunities to capitalise on the connections that can be made through business travel and international forums.

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PUBLISHED ON Sep 14,2024 [ VOL 25 , NO 1272]

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