World Economy

Ethiopia Needs More Private Sector Investment

Ethiopia Needs More Private Sector Investment
Ethiopia Needs More Private Sector Investment

Ethiopia, whose economy is one of the fastest growing in the world, needs to encourage private sector investment to sustain its rapid expansion, the International Monetary Fund said.

Hefty state-led investment has kept the economy of Africa’s second most populous nation growing at more than 8% a year for over a decade, but economists say Ethiopia’s rulers need to relax their grip and give room for more private enterprise to maintain momentum, Reuters reported.

Foreign investors are also barred from key sectors of the economy, such as banking or telecoms, which is a state-monopoly.

The IMF said gross domestic product is set to grow 8.75 in the fiscal year ending in June, and 8% in the same period in 2015/2016. In 2013, it forecast Ethiopia’s economy would expand by 7.5% in 2014/2015.

 Resource Mobilization

“Looking ahead, the mission identified two key factors to sustain rapid and broad-based growth over the medium term: boosting domestic and foreign resource mobilization, and reducing bottlenecks to doing business,” the IMF said in a press release on Friday.

“These should allow for a growing role for the private sector, which holds the key to job-rich growth going forward.”

The IMF’s growth forecasts are lower than those of the government, which expects growth of about 10% by the end of the 2014-15 fiscal year.

The World Bank forecast growth for this year at about 9.5%, rising to 10.5% next year.

The IMF urged Ethiopia to maintain its “cautious monetary policy” as food prices are pushing inflation close to 10%.

Growth in the Horn of Africa country has been propelled by huge public spending on infrastructure, mainly hydropower dams, roads and rail, while an expansion in services and agriculture has also boosted the economy.

Earlier this month, Addis Ababa proposed a 223.3 billion birr ($11 billion) budget for the fiscal year starting on July 8, an increase of nearly 20% from the previous year in a bid to fund more development projects.

“On public investment, which is to a large extent executed by state-owned enterprises, the team advised that its pace should remain consistent with macroeconomic sustainability, and with allowing for more credit to flow to the private sector,” the IMF said.

The Washington, DC-based body recommended that Ethiopia should improve its tax revenue collection, saying its tax-to-GDP ratio was below the average in East Africa.

The IMF also called for structural reforms to boost export amounts and diversification. The body said flexibility of the country’s exchange rate could enhance Ethiopia’s competitiveness and reserve accumulation.