AMore options and lessons to Ethiopia’s robust economy
Toumelisan G/Wold
Big media houses had recently reported that Lonto Garment PLC, one of the subsidiaries of the Chinese Shangtex Holding, has commenced production with its newly installed sweater manufacturing plant in Ethiopia. Currently, it has received supply order of 30,000 sweaters from Italian buyers and it has planned to export around 50,000 sweaters this year.
Scheduled to be inaugurated on April 28, 2018, Lonto Garment has finalized machinery installations inside the huge plant located within the vicinity of the Eastern Industrial Zone, Addis Ababa. The company is anticipated to introduce state of the art operational system and machineries which include knitting and linking.
It was said that the factory is the first African plant operational in Ethiopia. It is eyed to supply major international buyers all over the world (it has targeted market destinations in Italy, Russia, Brazil, Turkey, Japan and the US). At home, it has created 400 jobs. Upon going full operational, the garment maker would generate annual revenue of 10 million USD and create 1,000 more jobs.
The company wanted to start in Ethiopia and see how things work in east Africa. It said it is in fact considering Ethiopia to be a hub for its operations in Africa; the company under its subsidiaries is studying ways to install its own industrial park in Ethiopia.
Ethiopia, Africa’s second most populated country, is forecast to be the fastest growing economy in Sub-Saharan Africa this year, according to new data from the IMF. Ethiopia’s economy is predicted to grow by 8.5% this year. The figures signal continued economic expansion following a long period of impressive growth.
To boost the economy, the country is pursuing a number of large-scale infrastructure projects, including the Grand Renaissance Dam and a railway network. It has had a very high growth rate. And mostly, this stunning growth to a large extent has been effective due to a very concentrated effort of the government to boost industrial production and manufacturing.
Secret in public, in any given economy, the role of a government is directed towards leading and helping the economy of that country grow. The state of the economy determines the role its government plays. In the case of Ethiopia, the developmental state or the rational plan state approach from strategy point of view could be seen as a necessary and a right approach.
It is because the focus is towards reducing poverty and creating a strong powerful force of industrial sector. However, there are issues that we could argue on like how long the government should remain as the main leader of the economy (including some are questioning “when would it be stepping aside its leading role in the economy and instead play a supportive role? When will the private sector be empowered to assume the central ground? ).
Most international organizations have predicted that Ethiopia may follow in China’s footsteps, and become a destination for labor-intensive and medium wage manufacturing jobs. According to IMF estimates, from 2000 to 2016, Ethiopia was the third-fastest growing country of 10 million or more people in the world, as measured by GDP per capita.
Same outlook for the next five years is bright. In its latest global forecast, the IMF projected that Ethiopian GDP per capita would expand at an annual pace of 6.2% through 2022—among countries with 10 million or more people, only India and Myanmar are expected to grow faster. Any country making such progress would be cause for celebration, but because of its size, swelling population, and the depths of its poverty, Ethiopia’s gains are particularly heartening.
Ethiopia’s economy experienced strong, broad-based growth averaging 10.3% a year from in the last decade, compared to a regional average of 5.4%. According to official statistics, Ethiopia’s gross domestic product (GDP) is estimated to have rebounded to 10.9% in FY2017. The expansion of agriculture, construction and services accounted for most of this, with modest manufacturing growth. Private consumption and public investment explain demand-side growth, the latter assuming an increasingly important role.
As a major catalyst of development, the government is implementing the 2nd Growth and Transformation Plan (GTP II). The plan aims to continue developing physical infrastructure, through public investment projects, and to transform Ethiopia into a manufacturing hub of Africa. Growth targets were set to be as much as 11% per annum. However, this figure has been projected to decline below ten (due to various factors including the aftermath of the unrest impinging on the current development.)
A case in point, unfortunately, the export sector is found to be in a serious structural economic problem currently, and this has forced the country to wage an uphill battle to cover its shortage of hard currency and sustain businesses as healthy as possible (records evidenced that the country, in its 112 years of international trading practices, had spent 110 years in trade deficits; the export of coffee and spices alone could not any more guarantee an improved hard currency gains and export diversification should be the immediate task of the country).
Nevertheless, despite recent improvements, ease of starting business, dealing with construction permits, utilizing epileptic electricity, opaque regulatory requirements and corruption are said to have negatively affecting the cost of doing business.
Besides, lack of competitiveness in the international market, underdeveloped private sector and its poor quality of production and instability of the country being witnessed in the last two years are noticeably constraining development of manufacturing, export expansion and creation of jobs.
As a result, Ethiopia has to rule out its wobbling performance, sustain its positive economic growth and accelerate poverty reduction which requires progressive job creation and improved governance. In addition, devising sustainable ways to finance infrastructure, support private investment endeavors and tap into the growth potential of structural reforms are exigent tasks of the country to maintain its economic growth and reach the desired level in foreseeable future.
Indubitably, development of manufacturing activity and export hinges on improved transport and energy infrastructure and greater agro-processing sector productivity. Accordingly, to achieve these goals, groundbreaking reforms should be introduced by the country to improve the afore-mentioned bottle necks and alleviate the burdensome business ecology.
Whatever the case, Ethiopia believes, the poor quality and efficiency of services are compounded by weak rule of law and pervasive corruption and it should be reformed as well in an innovative manner. Undoubtedly, with the initiation of the new cabinet and the PM, these sectors will soon be deeply transformed to help facilitate lofty volume of investment and export.
In addition, many economists are of the opinion that more foreign companies should be invited to engage in areas where local firms lack in expertise; like fertilizer manufacturing production, mining and construction. And as a possibility, these projects should be implemented on the basis of credit financing; foreign firms who are interested to build these projects should not be very much worried to bring excessive finical resources and seed money that are ruinous to their business.
Hence, henceforth, they stressed, other cost-effective financial operations should be tried (and implemented) and many alternatives have to be sought to finance development projects. For instance, more options of Public Private Partnership (PPP), joint venture, Build-Operate-Transfer and the like should be considered as alternative financing approaches; many projects should be implemented via alternative project financing methods to avert country’s dependence on foreign finance (and ensuing debt burden that may inevitably heap up following the implementation of loan-based pervasive mega projects).
Most importantly, economists are advising that the solution to the current shaky (as currently witnessed decline from double digit to close to nine) economic development is to bring about a profound structural change in the economic system. To this end, they stressed that Ethiopia can learn a lot from the experiences of south East Asian countries like Vietnam (in just about 20 years, Vietnam has been able to earn 244 billion USD form exports). Hence, Ethiopia can mimic the development path of Vietnam and take lessons from its performance.
Fortunately, currently, the economy is booming robustly, in uninterrupted manner due to enhanced flow of foreign direct investment. However, all alternatives have to be exercised to bring meaningful improvement in the economy of the country in the coming few years. So far, the country’s economy has been blooming resiliently amid challenges and Ethiopia has realized justifiable economic development that could be equally accessed by all citizens.