Ethiopia Plays Cards Right by Opening Economy to Foreign Investors

Ethio Telecom, Ethiopia’s State telecom monopoly, photo courtesy: Bloomberg

Ethiopia plans to open its telecommunications industry to international and foreign investors at a very critical point in time. In a report released in April 2020 by the Ethiopian Government, it was established that the Ethiopian government plans to sell more than 35% of the state-owned telecommunications company Ethio Telecom for the very first time in history. The company has been a monopoly for the longest time ever and the Ethiopian government has always maintained a closed form economy. When Safaricom, the largest telecommunications company in East and Central Africa, tried to penetrate the Ethiopian market, they were denied entry. This recent development therefore, gives the impression that foreign investors could start owning shares of Ethiopian companies in the Telecommunication industry.

The Government under the leadership of Prime Minister Abiy Ahmed has also seen the opening of the Ethiopian economy from closed form to a free trade area. The country is also pushing ahead to sell two new licenses to new telecommunications companies. The Prime Minister had stated the need to part-privatize the market in order to propel economic growth and attract investors. This attracted investors such as Jack Ma during distributions of personal protective equipment (PPE) in late March 2020. The pledge was to distribute PPE to the most vulnerable countries in Africa making Ethiopia the central distribution point. This move has set the ball rolling and moving forward, brutal competition is set to reign. The country is the second largest in Africa in terms of population and as a result there will be a high competitive bidding process for companies such as Orange, Vodacom and MTN group to try and get a slice of the cake. Competitive services and prices are set to unleash the tech industry in Ethiopia leading to an increased number of jobs and innovation.

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Source: UN, World Economic Forum, EIU, CIA World Factbook

The decision comes at a very critical time when the world is fighting the COVID-19 pandemic. In addition, the country was set to hold an election August. However, due to the pandemic outbreak, the elections have been postponed indefinitely due to the increase of Coronavirus cases in the country. This decision of opening up the economy to foreigners is set to drastically increase the number of Foreign Direct Investments (FDI) inflows to the economy especially for consumer goods. With the global economy in a supressed state, investors will be looking for the slightest opportunity to make money. The ratification of a new investment law early this year is expected to add momentum to Ethiopia’s reform efforts. The new law, which updates the 2012 Investment Proclamation, consolidates reforms and confirms that only a few sectors will be restricted for foreign direct investment.

Ethiopia will, however, not open up its banking and insurance firms to foreign ownership, even as it clears the way for overseas investors to buy into other sectors of its economy. The law says that banking, insurance, micro-credit and micro-saving services will be reserved for domestic investors. Hence, financial markets remain out of reach to foreign investors even under the revised investment law. Even so, the opening of the telecommunications industry could spark something that could result to partial-opening. This is attributed to the fact that the telecommunications industry in the current era is almost positively correlated to the finance industry. For instance, it’s through the telecommunications industry that people are able to send and receive money, buy insurance products and access credit facilities. Innovative ideas have, therefore, enabled telecommunications companies become giants in the space while reaping hundreds of billions of dollars.

Moving forward, the country is set to experience a wave of change. Foreign investors bring in huge amount of cash. The cash is then used for infrastructural projects, growth capital for enterprises and innovation. Fintech companies could start emerging in order to provide sufficient access to credit to retailers and consumers. Ethiopia has a huge market that hasn’t been addressed yet in regards to financial inclusion. Financial inclusion is at 35% compared to Kenya’s 86% (Financial inclusion here defined as account ownership at a financial institution or with a mobile-money-service provider). Cash is an overwhelmingly dominant payment method. Most people still rely on cash to pay utility bills and receive payments. Almost all (99%) adults pay utility bills with cash, compared to 12% of people in Kenya and 59% in the region as a whole. Interest rates are also quite high compared to Kenya.

Ethiopia is set to become a favourable investment destination among East African countries. Currently, Ethiopia is one of the African countries managing the pandemic well, especially considering her huge population and the fact that only 8 deaths have been reported as at 30 May 2020. Based on samples from other countries such as Singapore and Germany that are said to manage the pandemic well, the economic liability brought by the pandemic may be on the downside compared to other states. The opening of economy is also set to increase the number of Foreign Direct Investment  inflows and should the transition of power after elections be on the positive side, then the country is set to thrive.

Written by Kennedy Muturi
@kenmuturi5