Supporting small business vital as Ethiopia privatizes

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Over the past two decades the government of Ethiopia has taken small steps toward privatization and deregulation to change its internal market.
This is what two of the Bretton Woods Institutions structural adjustment programs (SAPs) have suggested. As the market has opened up over the past few years, private banks and insurance companies (only for Ethiopian nationals) have been allowed to compete in the market and some big public companies have been privatized either for local investors or overseas companies. However the telecom and electricity sector are still under the government monopoly.
The International Monetary Fund (IMF) and the World Bank in the past have insisted that the government open the market including the telecom and financial sector to external investors as well.
Even though several foreign institutions have strongly suggested that the government liberalize the market as a whole, the government, which considers itself an implementer of developmental state ideology, has resisted the pressure until the ruling party announcement early this week when it said it would partially privatize the shipping lines, Ethiopian Airlines, the telecom, the railway, Ethiopian Electric Power and other mega projects.
In its June 5 communiqué the EPRDF’s Executive Committee set a direction to transfer the whole or partial share of government owned companies delivering services as well as those constructing railway, sugar plantations, industrial parks, hotel and various manufacturing organizations to private sector companies. The directive stated that the major shares of Ethio Telecom, Ethiopian Airlines, Electric Power Stations and Maritime and Logistics will be owned by the government, and the remaining shares would be privatized to local and foreign investors.
“The Executive Committee noted that implementation has to be characterized by a developmental democratic state model which makes fast and continuous growth and the administration has to ensure sustainable benefits to the country; the details are to be practiced under close follow-up and supported by experts,” the communiqué stated.
Since the ruling party announced the new decision many people both here and abroad have been discussing the implementation, and the positive and negative effects of privatization.
Even though the ruling party stated that the new implementation has to be characterized by developmental states experts argued that it could be difficult to know if the coming situation will be run as the policy of developmental state as seen in other countries like in far east Asia. Others also expressed that the latest decision is coming due to the failure of the developmental state policy that the government put in place a decade and half ago.
Daniel Getnet, Founder and General Manager of Dabe Investment Consultant and Conveyance PLC, a legal consultancy firm mainly for FDIs’, said that the current decision is a good indication that the policy was not applied properly.
“It is understood that there is a hard currency shortage but local businesses have not been able to make enough surplus products to produce goods for import substitution,” Daniel said.
“Small businesses were not supplied with enough finance, which they needed for creativity and capital. Besides a loan facility, facilitating ample land and markets have been crucial for that sector to be accelerated as a developmental economy but it was not going with the trend observed in other countries like Vietnam and South Korea,” he added.
However if you see the finance law they favored the corporate companies over small industries, farmers or other medium business, Daniel argued. Besides the priorities of facilitating adequate start ups corruption is also considered by Daniel as one of the major reasons for the government to fail to speed up on its developmental policies. “In China it was observed that corruption was a serious crime with serious consequences and that reduced the practice, while it is very weak when it comes to Ethiopia,” the FDI consultant said.
According to Daniel, looking at the success of Vietnam and South Korea at this moment the small scale industries are expected to produce import substitution products and the government has to be able to control the expected corruption.
Farmers are expected to harvest a high yield in this stage but agricultural products are one of the country’s major import items.
“In the developmental state strategy there are three stages; initial, medium and transformation. As far as Ethiopia, I think currently we are in the medium stage. From the 10 to 15 year there is expected to be a significant hard currency shortage since it is a basic transformation period from poverty to medium level and strategic works like mega project and export oriented investments undertaken through high involvement from the government in the economy,” he explained. He said that the third stage is the transformation that where the government leaves the economy for the private sector.
He argued that the government is the major user of hard currency for the implementation of projects like sugar and other mega projects, which are expected to expand the export and earn hard currency, the projects were delayed for several years due to different factors including corruption that caused the economy to become stagnant and unable to transform to other stages which led to starvation of the hard currency.
On the other hand the hard currency shortage comes from being unable to product adequate raw materials like cotton, which should be produced by small and medium industries and farms locally to feed the industrial parks developed by the government.
Next Market Opening
The FDI’s will be interested in joining the economic activity in the country particularly from the western world. “They may consider that the current government’s decision is considered to be a path for the openness of free trade and opening of the financial sector in the future,” the FDI consultant added.
On his Twitter page Gemechu Waktola (PhD), executive founder and CEO at the i-Capital Africa Institute and Assistant Professor at Addis Ababa University (AAU), said that now it is about time to consider liberalizing the market, restructuring the National Bank of Ethiopia (NBE), full opening of the financial sector for the Diaspora and controlling the opening for foreign investment and competition, and establishing a well regulated stock market to boost startups and fresh investment.
Gemechu told Capital that the issues have been frequently raised in the finance summit including the recent one that i-Capital Africa Institute organized. “Since the government is able to move to this, many steps from its old strong stand to partly privatize the stated huge enterprises, the remaining part is not that much difficult for the government to decide and I expect that would be the next step,” he said.
He said that the government has to improve the capacity of the regulatory bodies and at the same time make it easier for those previously excluded to enter the market.
“For instance in the Ethiopian context NBE, the financial institutions’ regulatory body, by itself is not a dynamic entity to lead the financial sector as similar as entities in other countries, for instance like the regulatory body in Kenya. It may not be detached from politics but it needs to have a capacity to go with the global dynamism and to bring the macroeconomic policy that considers the current economic level of the country, finance regulation and entertains creative innovations instead of penalizing and taking forceful measures on financial firms,” he said.
He said that the system at NBE has to be restructured fundamentally and capable professionals that understand the dynamism should take posts there that will go with the changes.
He argued that it is a time to open a regulated stock market to accelerate the market and investment, while it has been delayed but it can be and easy to implement earlier than the latest move of the government. “In my view it should be a priority,” he said. On the other hand Gemechu said that the financial sector has to be open as soon as possible. “It has been closed with the goal of building local financial firms. The protection for the local finance industry is backfiring since they are focusing on the short term rather than looking at the long term sustainability through research development, investing in human capital, and lagging on innovation,” he added.
“In my consideration they are now dependent on the protection,” he argued. They are focused and competing on earnings per share rather than preparing for the bigger competition when the market is opened, “for that matter there are insurance firms that do not use technology, which is now common in all over the world,” he said.
According to Gemechu, the common argument on the opening of financial sector is to either open or close it fully. However, here it shall be opened on controlled manner with progressive opening that shall have gradual knowledge and technology transfer, and at the same time generating foreign currency, he said.
It will provide a learning opportunity in the sector, the expert said. “The other thing is the foreign currency issue. When the market economy is relatively liberalized the foreign currency issue will be solved,” he said. The demand and supply of the foreign currency will be narrow if the foreign currency market is opened.
Corruption
According to Daniel, the implementation of partial privatization should be closely followed. Illegal actors’ mainly local investors that do not collect the capital in illegal ways or corruption will be prevented from selling shares. “In my view the government will focus on foreign investors since it is looking at the dire hard currency,” he added.
At the current level even though the government is going to partly sold out the major public enterprises for the benefit of the economy and the stated developmental state economic trend there are still major challenges with corruption.
In his appearance at the fourth National Anticorruption Coalition conference held on June 6 at Sheraton Addis the recently appointed PM Abiy Ahmed (PhD) said that the implementation of partial privatization would solve the current hard currency disaster that paralyzes the manufacturing sector and the economy in general.
He underlined the privatization process should be closely followed by the public and the media to tackle crimes.
“To some extent I understand the concern of different opinions about the privatization of flagship business entities but at the same time the future business and economic change that needs strong human capital, innovation and must quickly respond to customers is a good decision, since the government owns the major share to fulfill the political and social perspectives,” he said.
He said that the critical issue is that illegal money that is stolen from the public shall be injected, which may create other political crises. “As the PM said it has to be applied carefully otherwise the consequence will be damaging,” Gemechu added.
Dawit Tadesse, Managing Partner of Lead Plus Management Consultancy and Training Center and Assistant Professor at AAU and business and management lecturer at different higher education institutions, told Capital that the argument from international institutions is that they should be opening the market as opposed to monopolizing it. “Their current strategy is to sell shares rather than opening the monopoly. The concept is confusing,” he said. “Maybe it is targeted to tackle the hard currency shortage but why don’t they fully open the market,” Dawit added.
“The partial privatization of the Ethiopian Airlines may not occur in the near future,” Dawit stated. He said that the telecom and power stations may be up for sale within a few years.
“I think in the near future they may sell shares of Ethio Telecom to Djibouti, which is a port partner for Ethiopia,” he said.
Dawit said that the valuation may be done for the airlines but he stated the latest valuation of other enterprises may not be done. “The valuation of one of the giant companies will take more than a year to get the current value of a single enterprise,” he added.
Recently, the Ethiopian government expressed its interest in constructing or managing a port with the government of Djibouti. In his first foreign visit to Djibouti PM Abiy stated that his government would be interested in owning a port at Djibouti, the major sea outlet for the country. At the same time both sides stated that they may swap public enterprises in both countries. It has been also stated that the government of Djibouti is interested in the airlines and swapping the telecom enterprises of the two countries.
The two countries have a joint company on the railway and are connected with electricity.

  • Abraham Bongosso

    This is rely interesting. i am eager to involve in this activities as currently i have my own business company to grow it better. please i need clarifications???