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Currently most private sector investment is in service oriented businesses. However, the government is working hard to change that as it has begun applying pressure to members of the business community in an attempt to convince them to shift focus to manufacturing.
When the Growth and Transformation Plan (GTP) began in 2010 the plan was for manufacturing to take the lead over agriculture and service by registering huge results. However things did not go quite according to plan as the revenue has been below the projected earnings.
The government says that they created various regulations and policies to encourage private sector investment in small and medium scale manufacturing endeavors. It had hoped that these policies would lead to a lot of companies springing up in a wide range of industries. The Ministry of Industry was established separately at the beginning of the GTP with the goal of providing more attention to manufacturing.
One thing that the government hoped for that did not occur was for international industrial companies to invest in the Ethiopian market. This is something that has been occurring recently but it has been slow to develop. This is considered to be a primary reason for the slow growth of manufacturing, according to experts. However, another challenge faced in the attempt to grow industry in Ethiopia is that members of the local business community had a lack of knowledge which contributed to not stoking their interest in all that manufacturing had to offer. This has greatly challenged the growth of manufacturing in Ethiopia.
The government has undertaken detailed studies and identified that the private sector particularly businesspeople working in wholesale and retail business and importing or exporting goods, have the potential to establish industries even major manufacturing plants.
Many members of the private sector operate at the nation’s largest open air marketplace, Merkato. Often they are successful and have acquired significant capital. However they tend to focus on trading and real estate investment as opposed to manufacturing.
According to experts at the ministry, the business community which has invested in trading is not interested in getting involved in the manufacturing sector. There are many reasons for this but one is that some potential traders do not fully understand the government’s strategy, policy and the benefit of investing in industry.
After a study the Ministry of Industry (MoI) has decided to put into place measures to convince the traders to invest their huge capital in priority manufacturing areas during the last year of the GTP.
Although it will be challenging there is hope that at least a few of the targeted investors will find the government’s strategy attractive, experts said.
On Wednesday July 2 at the Millennium Hall there was a public/private annual dialogue conference that addressed the issue, which has been gaining momentum over the past year.
The second national business conference brought together the private sector and the government with the goal of coming up with solutions to challenges the private sector faces. Prime Minister Hailemariam Desalegn chaired the meeting. During the discussions the private sector raised some issues of concern but primarily the focus was on the government’s hope that they would invest in manufacturing.
At the event the private sector via its representative Solomon Afework, president of Ethiopian Chamber of Commerce and Sectoral Associations (ECCSA) presented key challenges that they were hoping the government would assist them with.
Some key policy and regulatory challenges that members of the private sector are hoping will be alleviated include poor access to finance, and the 27 percent National Bank of Ethiopia (NBE) Bill. The other point that the private sector is hoping for help with is governmental assistance to facilitate access to additional sources of finance from private equities and venture capitals to create a more conductive business environment. The capital market is another important way of obtaining finance for business.
There were ten issues that the private sector was hoping would be addressed by the government, the ECCSA president has asked the government to revise the required 50 percent deposit when tax payers felt that taxes were too high.
The PM, who attended the conference after the Monday and Tuesday training which was led by top government officials for over 700 business community members, mainly focused on leading the discussion towards the development of the manufacturing sector.
The two day training on the ‘industry strategy and policy’, which was issued by the government 12 years ago, was focused on explaining the government’s strategy on developing industry and how to make the private sector become a part of that vision.
The training was organized by the Chamber in collaboration with the Ethiopian Renaissance Business Community Association, and Ministry of Trade. It was part of a continual effort to lobby the private sector to become more involved in manufacturing and to make sure they understand the strategy and policy to encourage private sector industrial investment.
“Most members of the private sector do not have a detailed knowledge about the government’s strategy and incentives that the government provides if the private sector invests in industries, so the training will be effective and it has the potential to generate new capable investors who can invest in significant industries,” one expert said.
The PM has also advised the private sector to see the priority areas that are included in the government’s policy and strategies for growth.
The private sector that has knowledge about the government’s policy and strategy with regards to manufacturing often does not get involved because they still face hurdles of going through a lot of process and it takes much effort. Still efforts are being made to encourage them to produce products here rather than focusing on importing commodities.
Even though the chamber president asked the government the usual questions regarding the financing, mainly hoping that they would lift the 27 percent NBE Bill and improve access to finance, the PM clearly stated that the government does not have any intention to suspend the NBE Bill. Hailemariam said that the NBE Bill which was enforced on private banks to buy bonds when they give loans is the strategy that has enabled the state bank to facilitate loans for developmental projects for both the private sector (local and international) and public enterprises.
He said that the money collected from banks is available for loans via the Development Bank of Ethiopia (DBE) for developmental projects, and because of this the private sector is not affected by the NBE bill. A new study undertaken by Awet Teki, an economic expert, indicated that the private banks are only providing 20 percent of the total amount that is available for credit. He insisted that banks have to expand their marketing strategy of accessing finance, while the banks are claiming the NBE Bill is hindering them from providing loans to the private sector.
The PM also stated that the government has sufficient creditable finance for the private sector who wants to invest.
He scorned the private sector’s requested to lift the NBE Bill. “This question is not new it is directly copied from the international financial intuitions like IMF who wants the government to ease it with the goal of making more credit available for the private sector,” he said.
He said that the government has provided loans, but the largest amount is taken by foreign based companies. He blamed the local investors that are not coming to get finance from DBE.
International financial organizations stated that the government should minimize public investment in the manufacturing sector and they claimed that the government should encourage the private sector in terms of finance to be more active in the nation’s economic development.
The PM said that the government is only engaged in mega projects that the private sector does not have the interest or capacity to be involved in. He said that from the total 22 billion birr that DBE gave in the current fiscal year the government enterprises only received two billion birr, while the balance went to the private sector.
“In the first nine months of the fiscal year the private sector received 52 percent from the total loans provided by both private and state banks,” he added.
“Are you investing in the sectors that are free for the private sector and on how much level are you investing in the manufacturing sector?” he asked the participants. “How many of you are getting involved in light industry like garments?”
“We have stated that we want the contribution of the private sector and public activity. If you do not get involved in the sector then the government will be forced invest in it to narrow the gap,” he added.
“Unless the private sector gets involved in manufacturing which is the future hope of the country, it will never get a loan,” he strongly disclosed.
He claimed the manufacturing sector’s contribution to the GDP has not improved from five percent, which is very low compared with other east African countries like Kenya and Uganda, who have over 10 percent.
“We encourage investment in the manufacturing sector, despite some barriers. But the problems will be solved in the process,” he insisted.
Some who attended the meeting said that many of the questions raised by members of the private sector via the chamber were off point.
The PM preferred to give more attention to industrial development and access to finance for manufacturing instead of responding to points raised by members of the private sector although he did respond to some questions raised about the tax dispute, private equity and venture capital.
The tone of the meeting was very different than the event one year ago when many observers felt there was more of a mutual dialogue which reached concrete solutions.