Ethiopia

RISK ASSESSMENTS

POLITICS

Government Stability
PM Firmly In Charge, Despite Retirement Talk
In May Prime Minister Meles Zenawi marked the 20th anniversary of his coming to power. The attendance at a public rally by his supporters fell far short of what the organizers hoped for, and the event was eventually cut short by bad weather. Whether discontent over soaring inflation and shortages of basic commodities also figured in the lack of public enthusiasm is difficult to say. But equally conspicuous was the failure of an online campaign that called for mass anti-government protest on the same day. Perhaps more than ever, there seem to be few credible alternatives to Zenawi’s government.
His Ethiopian People’s Revolutionary Democratic Front (EPRDF) won its fourth term in office in the May 2010 legislative elections. The opposition witnessed a complete debacle losing its stronghold in the capital Adis Abeba to the ruling party, which now controls 545 out of 547 seats in the National Assembly. Unlike the 2005 polls, there were no demonstrations despite unfavorable reviews of the fairness of the electoral process by international observers, and despite the main opposition alliance – the Ethiopian Federal Democratic Unity Forum (Medrek) – rejecting the outcome as illegitimate. Subsequent attempts at new coalition building and party mergers appear to have only fragmented further, rather than rejuvenated, the opposition ranks.
Against this background, the EPRDF held its 8th congress in September last year from a position of confidence and strength, but nevertheless recognized long-term concerns over political stability under what is essentially a one-party rule. The paramount issue is the transition from Zenawi’s leadership that has defined the last two decades of political and economic development. A five-year plan for change in leadership has been launched, starting with Zenawi’s proposed departure in 2015, new names taking over the federal party branches, and retirement of several heavyweights such as former deputy primeminister, Adissue Legesse. The main player to watch will be Hailemariam Desalegn, the new foreign minister and deputy prime minister, who is now widely considered the strongest contender to succeed Zenawi.
Policy Continuity Assured
Needless to say, there is a long road ahead for Desalegn. Hailing from the traditionally underrepresented Southern State, he will have to ward off challenges from the powerful Tigray, Amhara and Oromiya regions, leaving the outcome of the succession struggle entirely open. But more importantly, while the transition plan may usher in a welcome and long-promised renewal of the party leadership, this does not entail a revamp of official policies. The newly promoted cadres such as Desalegn remain staunchly committed to the model of state-led development – the new foreign minister has been praising the “China model” in interviews – meaning that the pace of economic liberalization reform needed to allow a greater role for the private sector will remain sluggish.
At any rate, the prime minister remains firmly in charge. Moreover, his latest retirement plan has been greeted with considerable skepticism given that his past promises of stepping aside never materialized. With no plans to loosen its grip on power, the EPRDF will continue to ground the legitimacy of its rule in economic performance. The government points to the average growth of 11% achieved over the past five years (a figure somewhat at odds with international estimates), with the construction boom in Addis Ababa, along with Chinese-funded transportation projects, among the most visible signs of progress. The ambitious “Growth and Transformation Plan 2010-15” aims to achieve all the United Nation’s Millennium Development Goals by 2015, turning Ethiopia into a middle-income country by 2025.
Investment Profile/External Relations
Egypt Pauses on Objections to Flagship Power Project
Boosting the power capacity is a key component of the plan, its success depending on high levels of foreign investment and aid. In April, Zenawi launched the “Renaissance Dam,” a hydropower project that aims to generate 5,250 megawatts from the Blue Nile to power development plans. The $4.7 billion project, awarded to Italy’s Salini Costruttori Spa, is supposed to be entirely domestically financed, with the first 700 megawatts coming online in 2015. In light of the amount of financial and political capital invested, the “Renaissance Dam” has become an issue of paramount national importance in the official rhetoric, providing a test of sorts for government performance in at least two areas.
Construction on the Nile has been a source of much tension with Egypt, with rhetoric heating up on both sides since Ethiopia joined other upstream countries in signing the Nile Basin Initiative Cooperative Framework. The framework, yet to be implemented, aims to strip Egypt of its veto over hydropower projects constructed by the Nile Basin countries, putting an end to Cairo’s preferential access to water as stipulated by the old 1959 agreement. The fall of former Egyptian president Hosni Mubarak, and the consequent turmoil in the country, has provided a stroke of fortune for Ethiopian diplomats who suddenly found themselves in a position of considerable strength.
The May meeting between Zenawi and his Egyptian counterpart Essam Abdel Aziz Sharaf eased the tensions. It appears that the post-Mubarak Egypt may be more amenable to changes to the old water agreement, and could accept the construction of the Renaissance Dam provided it were able to import electricity. For its part, the Ethiopian government placed a freeze on the ratification of the 2010 Cooperation Framework, and put on hold any irrigation schemes until Egypt gets a new elected government that can join the negotiations.
Of course, the composition and policy approach of the next government in Cairo is not clear. With the elections there possibly postponed to 2012, the final agreement could be a long way ahead. In the meantime, a Joint Ministerial Commission and a committee bringing together Egyptian, Ethiopian and Sudanese experts will study the impact of Ethiopian plans, providing some minimal bilateral mechanisms of regulating the issue.
Questions Arise Over Investment Funds
The other key challenge concerns the financial feasibility of the dam. International donors and private investors have stayed out because Ethiopia failed to sign export agreements with state power providers in neighboring countries, and partly due to fierce Egyptian lobbying against the project. This leaves the government with a financing gap estimated at more than $3 billion, a shortfall that has been left unaddressed by the budget for 2011/12. Instead, the Ethiopian Electric Power Corporation (EEPCO) has issued a bond guaranteed by the government and state media urging citizens to purchase the bond as a patriotic duty.
However, it is questionable whether this exercise in collectivism can raise sufficient funds. Rather, it is conceivable that an eventual rapprochement with Egypt would open the doors to grants from international institutions. Chinese loans could be another source of finance, as the economic partnership between the two countries continues to grow. The Industrial and Commercial Bank of China has recently approved a loan of around $400 million for the completion of another major hydroelectric power, the Gibe III dam, undeterred by international criticism of the project’s environmental impact that had led to Western partners pulling out.

ECONOMY

Growth Slowdown in the Cards
While the government insists economic growth is not slowing down, international projections are more cautious. ICRG expects the economy to expand around the 7% mark this year, fueled by a bumper harvest and high exports, particularly gold. Growth will decelerate to 6% in 2011/12, with high inflation, restrictions on private bank lending and a weak business environment among the main impediments.
The government intends to borrow more than $23.5 billion from home and abroad through 2015 to finance investment plans. Overheating of the economy has been one of the donors’ main concerns. The World Bank recently warned authorities that the investment push may be unsustainable unless growth in private savings, undermined by high inflation, increases. The minimum deposit rate is currently set at 5%, with plans to increase it to 15% by July 2015. Meanwhile, the inflation soared to 38% in June and is expected to reach an average rate of 12.9% this year. The government has attributed growing prices to factors largely outside its control, namely the cost of food and fuel imports, while the IMF pointed to the excessive monetary growth as the principal reason for inflationary pressure. The rising cost of imports will also push the current account deficit to 8.1% of GDP.
Recourse to domestic financing increased this year and is set to continue under the expansionary 2011/12 budget recently approved by the parliament. The $6.9 billion budget brings spending levels up by 22% from the $5.7 billion in 2010/11. The bulk of the new funds will go toward developing infrastructure, health and education services, which will amount to around 41% of the total budget. According to the government, domestic revenue will account for more than 67% of the budget, with the rest covered by external loans and grants. On the back of the efforts to increase revenue collection the deficit is targeted at 1.5% of GDP, with more than 60% of the shortfall covered by domestic borrowing.
The external public debt outlook remains at a low risk of distress, estimated at 25% of GDP, provided that export and remittance levels remain strong.