Worth 100 million USD, the DBL Group launched a garment factory in Tigray two years ago. For the company, this was to have been an opportunity to take advantage of Ethiopia's duty-free access to the American market with ample and accessible land and cheap labor.
A year after it started, however, the COVID-19 pandemic disrupted the global chain, impacting its contracts with its international partners and forcing it cut production. As its survival looked certain for a revival, it was forced to temporarily suspend operations after the outbreak of conflict between the forces of the now-defunct Tigray People Liberation Front (TPLF) and the federal government.
With much of the region's vulnerable infrastructures in ruin, part of its compound was damaged by an explosion, trapping much of its workers who were shielded and transported via United Nations convoy. "Some of us felt hopeless to a point we did not know of our fate, whether we would make it alive or not (before the UN assisted us). Many prayed, some cried and we felt defeated," an official of the company told Financial Perspective.
Local investors were also impacted by the fast-changing, unpredictable environment of investment that has changed the narrative of the once aid-dependent nation that was beginning to own one of the fastest economies in the region.
“Everything seems unpredictable. When we attempt to solve the issue of forex, the political uncertainty hits. It seems we are trapped with no long-term vision, but small solutions," Girma Yohannes, an Investor engaged in imports and production of textiles said.
Although Ethiopia has attempted to refurbish its image of conflict, famine, and political uncertainty, the East African nation was beginning to transition from a basket case of the world's pity to an important nation with a respectable economy and one of the world's important diplomatic nations.
The economic trajectory achieved by Ethiopia helped it even to become the second top destination of investment amongst African countries, next to Egypt, overtaking South Africa, Nigeria, and Kenya in 2017. With the political situation deteriorating in the country, keeping up the momentum remain impossible as negative international headlines dominated some of the current protracted war happenings in the nation of more than 110 million.
With factors such as COVID and the war affecting its economy, the nation is to see a reduction of its Foreign Direct Investment (FDI). This comes as it is being squeezed on high unemployment, a fast rise in the cost of living, and a long belated federal election that is expected to further impact its vulnerable economy.
FDI inflow plummeted from almost 3.7 billion dollars in 2017/18 to just 2.4 billion dollars last year, according to the National Bank of Ethiopia (NBE). The number of investments that became operational also declined from 54 to 37 during the same period, while the capital that they have invested declined from 5.1 billion Birr (128 million dollars based on current market price) to 645 million Birr (16.1 million dollars).
Analyzing these figures, it is easy to understand the current conflict contributed to its end, first noticed by the popular Oromo uprising. Further decline is expected with the war in Tigray preventing both local and foreign investors to undertake their daily operations while eroding the relatively good image and favorability the country had among international investors.
Lelise Neme, Ethiopia’s Investment Commissioner, while briefing journalists acknowledged political instability, coupled with bureaucratic hurdles and COVID-19, played a big role in foreign direct investment, reflecting the fall in investors’ confidence.
“Of course, the political instability in our country contributed to the fall in foreign investment in the country, although this is not the only factor for such an outcome,” she said.
Under the administration of Prime Minister Abiy Ahmed (PhD), there was hope that peace and stability was to be restored across Ethiopia. To the dismay of optimist investors, however, the country remains fragile, with internal conflicts and the death of civilians becoming an everyday phenomenon.
For instance, a recent uprising that happened following the death of artist Hacalu Hundessa last summer in the town of Shashemene, not far from Zeway with European investment in wine and fresh flowers, more than 20 buildings, and 79 hotels were destroyed by protestors giving investors a glimpse of the vulnerability of the Ethiopian security. Dozens of industries in other parts of the region have been also damaged during the same period. The fighting in Tigray between the government and TPLF forces also damaged factories owned by multinationals owned locally and from abroad.
The country is also losing USD20 million monthly in export due to the war in the region, while two billion birr has been lost in taxes due to the same reason. A quarter of one billion Birr worth of electricity infrastructure lines has been also damaged catalyzing an economy to a standstill.
A better political environment means a welcoming atmosphere for investors since it lowers the level of uncertainty. This is because policies concerning to businesses would be predictable when there is a stable political situation, adversely impacting productivity.
“The first assessment foreign investors do is analyze the political situation in the host country. They don’t dare to invest a penny if they feel unsafe, or their investment might be compromised or there is no system that protects their assets and investments," said Daniel Getnet, an Investment Consultant. “Although politics is not the only factor for FDI inflow, it has a higher importance than any other determinants.”
Supportive political environments, stable macroeconomic conditions, and conducive regulatory regimes are their top three investment decision factors of foreign investors— even more important than low taxes, low labor and input costs, or access to natural resources, according to a Global Competitiveness Report of World Bank published last year.
The report, covering over a hundred countries, found out that foreign investors prioritize political stability over incentives, including tax holidays and even availability of land. “Investor protection against political and regulatory risks are of far greater importance than investment incentives. If these risks at the country level are not reduced, addressing project-level risks will not lead to increased investment and growth in developing countries,” the report observed.
The fact that fragile and conflict-affected situations account for just one percent of global flows is a reminder that addressing political risks will pay off, while a failure to do so will discourage foreign investors from putting in their hard-earned money, no matter how the host country is ready to implement economic reforms.
“Political uncertainty is not good for any economy. It has dimensions of effects in both attracting and retaining investments,” says Christian Roggy, Development Director of Green Commonwealth and Development Officer, who believes addressing the fighting in Tigray, internal conflicts in other parts of Ethiopia, and taking preventive measures to avoid possible political unrest requires the attention of the government to boost investor’s confidence.
Few months after Prime Minister Abiy assumed power following a six-year-long protest against the EPRDF-led administration, who himself was a part of, he announced a series of reforms targeted at opening up the economy. Launching an economic reform which he called “homegrown”.
So far, his administration has unveiled a slew of economic reform packages, while introducing legal frameworks that opened the economy to foreign competition. Telecom, aviation, and finance are amongst sector that was partially and fully liberalized since he came to power, with international banks and the local aviation under possible considerations.
The liberal approach adopted by the Prime Minister helped the nation swiftly grab the attention of the international community, largely those running the corporate world. But this had not been without challenges. Economic uncertainties, including the unpredictable nature of the exchange market, the inflationary pressure haunting the country, and unprecedented legal restrictions put in place by the National Bank of Ethiopia, undermined the reforms that are being undertaken by the government.
In particular, inflation has been mounting lately, reaching 19.2 percent during January 2020, while food inflation surge to 23.1 percent. The non-food component of inflation has also increased to 14.5 percent. While the inflationary pressure driven by supply gap shocks resulted from the shortage in foreign currency and unmatched growth of demand and supply, it has made the economy unpredictable and susceptible to shocks, becoming difficult for investors to make business forecasts.
A case in point is the construction industry which is suffering from inflationary pressure, despite being the backbone of the economy. With the ever-rising price of construction materials, contractors have been struggling to stay afloat due to cost overrun. “Many construction companies, especially those which have a lower grade, have been forced to terminate operations,” Haben Abraha, a Building Contractor with over a decade of experience told Financial Perspective. “Such circumstances also resulted in a dispute between contractors and their clients, while leading to a delay in construction of projects.”
Explaining the much higher inflationary pressure in regions, including Tigray, where inflation has reached above 30 percent, the Ethiopian Economic Association, in its latest policy working paper, finds out that Inflation has negatively affected the economic life of the great majority of the population. This has had severe implications for the welfare of wage earners prone to inflation and particularly those on minimum wages and pensioners with fixed incomes not subject to wage or income indexation, according to the study.
“To respond to the deteriorating welfare cost of inflation, supporting the productivity of the real sector, should be espoused as a necessary condition. Constraints that obstruct productivity and destabilize production should be eliminated from the real sector, the agricultural and manufacturing sectors,” the study said.
“Productive businesses generating employment and value-adding potential should be incentivized. Constraints should be removed for exiting small businesses and entry conditions slackened to the point of allowing and facilitating entrepreneurs to start businesses with minimum requirements while they proceed to formal licensing,” remarked Atnafu G. Michael, who has conducted the study.
Be that as it may, the recent financial limits introduced by the Central Bank are restraining investors from making future business decisions, while adversely impacting trade activities.
For instance, businesses have been unable to make payments to their partners due to the transaction cap, which is five times a week, levied by the bank in a bid to discourage illegal money transfer operators. While the measure helped the government slightly reduce the gap between the parallel and the official market, it has pushed companies handling many transactions on a daily basis to cut ties with their clients.
A case in point is the situation in Merkato, Ethiopia's iconic open market where traders face a business slowdown ever since the effectiveness of the ceiling. “Many of my customers are retailers based in regional towns. They used to come and buy many items from me in bulk. But since there is a transaction limit, they have no choice but to buy fewer items,” says a wholesaler of clothes in Merkato. “We are losing money because of the attempt of the government to overregulate us, adding to our growing burden and pushing us to our limit".
COVID-19 Still Wreaking Havoc
Even if the economic uncertainty resulted from the inflationary pressure managed, there is yet another challenge that businesses are expected to deal with in the tourism sector, an important source of forex for the nation. Local hotels are still registering an occupancy rate below five percent, registering a loss of 35 million dollars monthly in Addis Ababa alone, according to the Addis Ababa Hotel Owners’ Association. The tourist peak season, which runs between September and January in Ethiopia, just ended with expected disappointment.
Many travel agencies and tour operators have been either forced to shift to another business or close their business for good. “We are registering literally zero revenue. COVID-19, coupled with the political instability in the country, has killed our business, which had been portraying an impressive growth before coronavirus disrupted everything,” said Kibrom Tesfay, an expert specialized in the tourism sector with over a decade of experience.
Likewise, the biggest player in the tourism sector, Ethiopian Airlines, which was able to register a positive profit opposite to what its competitors experienced, is still experiencing a drastic fall in revenues from commercial flights. This is as it attempts to offset its loss by giving more emphasis to cargo lines of business, which accounts for the lion share of its revenues since the pandemic began, something that is being emulated by its competitors, including Kenya Airways.
There is also fear that FDI would fall in 2021 since the likelihood of complete recovery from the economic crisis caused by the pandemic is very unlikely.
UNCTAD, in its latest Investment Monitoring Report released at the beginning of this year, reported global foreign direct investment (FDI) collapsed in 2020, falling 42 percent from USD1.5 trillion in 2019 to an estimated USD859 billion. Such a low level was last seen in the 1990s and is more than 30 percent below the investment trough that followed the 2008-2009 global financial crisis, according to the UN body, which expects FDI flows to remain weak in 2021 due to uncertainty over the evolution of the COVID-19 pandemic, keeping its last year projection that a 5-10 percent FDI slide would happen in 2021.
“The effects of the pandemic on investment will linger,” said James Zhan, director of UNCTAD’s investment division. “Investors are likely to remain cautious in committing capital to new overseas productive assets.”
It seems Ethiopia’s government is embracing its fate.“It is obvious that the impacts of the pandemic on attracting new investment are yet to be over. That is why we are preparing for any eventualities by unveiling new packages to grab the attention of investors,” Lelise further said.
Meanwhile, efforts are also underway by the government to ensure peace and stability across the country. In Tigray, where a six-month of state emergency has been declared, the interim government is attempting to rebuild the region’s civil service and police force.
Ethiopian Electric Power, the country’s electricity infrastructure developer, is rebuilding power lines, while electricity and telecommunications services are being resumed across Tigray, while Ethio telecom already announced the resumption of service in most parts of the region.
The federal government also pledged to provide compensation, in form of a low-interest loans, to industries and businesses damaged during the fighting. While time will tell whether these measures would help the government improve investor’s confidence by ensuring political stability, there is a narrow opportunity to make this a practical reality anytime soon or whether it will remain a far-fetched dream far from reality.