Ethiopia's foreign investor drive facing headwinds

Ethiopian Prime Minister Abiy Ahmed's initiative to attract foreign investors and stimulate economic growth is facing setbacks due to the country's security challenges and foreign exchange shortages, both of which are hampering international investment. Bloomberg has recently reported that Ethiopia received no bids for a new mobile telecommunications licence, with the disinterest largely attributed to concerns about conflicts in parts of the country.

The peace deal reached between Abiy's government and the Tigray People’s Liberation Front in 2022 ended a two-year civil war in the northern Tigray region. However, this agreement soured relations with Abiy’s allies in the Amhara region, where clashes between government forces and militias have recently intensified. In August, insurgents briefly took control of major towns before being ousted by government forces, but they remain active in the countryside. Additionally, in the Oromia region, which is home to about 35 million people, the insurgency led by the Oromo Liberation Army (OLA) is causing increasing instability across large portions of the area.

In 2021, Ethiopia opened up its telecommunications sector by awarding an international consortium an $850 million mobile network operating licence. The consortium is led by Kenya's Safaricom and also comprises Vodafone, Vodacom, British International Investment, and Sumitomo Corporation. Safaricom Ethiopia has since started operations, challenging the monopoly of the state-owned Ethio Telecom for the first time.

Earlier this year, Ethiopia initiated a tender for a second new wireless licence, but the process has now been cancelled due to the inability to secure a bidder. Additionally, in November 2022, the government revived a process to sell up to a 45% stake in Ethio Telecom to an international entity.

In a further setback for Ethiopia's foreign investment ambitions, Ethio Lease, the only foreign-owned financial services company in the country, is pulling out due to foreign exchange constraints. A unit of the New York-based African Asset Finance Company, Ethio Lease purchased business equipment – such as agricultural machinery and energy backup devices – with foreign currency and leased them to customers who had the option to pay in Ethiopian birr, helping businesses overcome the severe foreign exchange scarcity. 

Ethio Lease's difficulties began in 2021 when Ethiopia's central bank mandated that all lease agreements must have fixed payments denominated in Ethiopian birr, as opposed to being set in foreign currency and payable in birr against the exchange rate at the time of settlement. With Ethiopia’s official exchange rate halving since Ethio Lease started operations, the company was unable to reprice its loans for currency fluctuations, putting it at risk of failing to repay its own financing. The company said that despite sustained efforts, it has been unable to achieve a resolution with the Ethiopian government, while the central bank Governor Mamo Mihretu blamed Ethio Lease’s woes on the company’s poor management.

Ethiopia's ongoing instability has exacerbated its foreign currency shortage. The 2020/21 fiscal year saw a significant outflow of US$307m in foreign exchange reserves due to hefty government spending on the war. This conflict has also constrained the inflow of foreign currency by reducing tourism and foreign direct investment. Furthermore, economic sanctions and the suspension of aid and loans have limited access to hard currency.

 

References

‘Ethiopia awards telecom licence to Safaricom-led consortium’, Al Jazeera, 22 May 2021

‘Ethiopia raises size of planned Ethio Telecom stake sale’, Reuters, 10 February 2023

‘Ethiopia’s informal currency exchanges: validate or veto?’, Institute for Security Studies, 11 May 2023

‘Ethiopia’s fragile stability remains at risk’, Carnegie Endowment for International Peace,  01 November 2023

‘Are Ethiopia and Eritrea on the path to war?’, Foreign Policy, 07 November 2023

‘Ethiopia fails to attract any bids for third telecom license’, Bloomberg, 14 November 2023

‘Ethiopia’s only foreign-owned financial services licensed company is to close’, AAFC, 15 November 2023

‘Ethiopia’s ominous new war in Amhara’, International Crisis Group, 16 November 2023

‘Ethiopia cancels process for international telecoms licence - official’, Reuters, 17 November 2023

‘An investor darling is becoming a hard sell: Next Africa’, Bloomberg, 17 November 2023

‘Tigray war’, Wikipedia, Accessed 19 November 2023