DailySun
On December 17, 2024, the Ethiopian parliament sanctioned a new law that permits foreign banks to penetrate the previously inaccessible financial sector. This law, known as the Banking Business Proclamation, permits foreign banks to establish subsidiaries, set up branches or representative offices, and acquire stakes in domestic banks.
The liberalization of the financial sector—which includes the creation of a stock market—is part of the ongoing initiatives by the administration of Abiy Ahmed to privatize and liberalize critical sectors of the Ethiopian economy.
As an element of its Homegrown Economic Reform Agenda—overseen and funded by the International Monetary Fund (IMF) and the World Bank—the Abiy government has adopted several risky economic strategies, steering Ethiopia’s economy away from a developmental state model that focused on manufacturing and industrial growth towards neoliberal policies.
This transition accelerates the economic liberalization and privatization of vital sectors while allocating limited foreign exchange revenues to tourism and mining.
At present, the Abiy administration’s agenda encompasses telecommunications, banking, energy, logistics, and transportation. There are ongoing talks regarding the divestiture of shares in Ethiopian Airlines, the nation’s most profitable state-owned enterprise. Furthermore, following a new IMF structural adjustment program signed in July 2024, the Abiy government reformed the exchange rate system and allowed the Ethiopian birr to float, resulting in an extraordinary 170% depreciation of the currency, escalating poverty levels, and inciting a cost-of-living crisis. Concurrently, recent months have witnessed the liberalization of the banking, retail, and real estate sectors.
The drive towards liberalization and privatization is motivated by a desire to attract foreign direct investment (FDI). Since Abiy assumed office in 2018, FDI inflows have sharply decreased due to poor economic stewardship, rising conflicts, and Ethiopia’s exclusion from the US’s tariff-free African Growth and Opportunity Act (AGOA)—leading to a significant decline in both total FDI and its share of GDP, primarily due to a dramatic fall in manufacturing FDI.
GDP Growth (Annual %) (2017-2022)
Notably, the unexpected surge in FDI during 2021-22 was largely driven by the sale of Ethio telecom to Safaricom, part of the ongoing privatization initiatives (as shown in the graph above). Economic growth has also notably declined since Abiy gained power—falling from 9.6% in 2017 to 5.3% in 2022, according to World Bank statistics.
Perhaps more concerning than the widespread privatization and liberalization strategy is the way the policies are being implemented. Neoliberal strategies are being enforced through shock therapy in a “one big bang” format. Experiences from Russia and Eastern European countries have illustrated that such shock therapy can lead to inflation, wage-price dynamics, austerity measures, de-industrialization, corruption, and rising poverty and inequality—all of which are currently prevalent in Ethiopia.
Government Obfuscation
While the Abiy government’s clear shift towards neoliberalism is evident, officials are delivering inconsistent messages. In a recent interview with African Business, Brook Taye, CEO of the government-owned Ethiopian Investment Holdings, remarked:
“Liberalizing the market does not equate to selling off state assets. The government lacks a privatization strategy; rather, we have a strategy for reforming state-owned enterprises.”
This assertion is not only factually incorrect but also contradicts the official economic policies outlined by the Abiy regime in the so-called “Homegrown Economic Reform Agenda: A Pathway to Prosperity.”
The official document articulates that the government aims to “strengthen public finances, including through improving the efficiency of state-owned enterprises and privatization.”
Moreover, as underscored in the “Ten Year Development Plan: A Pathway to Prosperity,” a core objective of the plan is: “expediting the privatization of large state-owned enterprises and liberalization of priority sectors.”
In essence, the agenda involves the liberalization and privatization of the economy, including state-owned enterprises through shock therapy—a policy framework consistent with the mandates of international financial institutions that are overseeing and funding the Abiy government’s economic policy, particularly the so-called “reform agenda.”
This obfuscation by government representatives merely highlights incompetence and fosters confusion, ultimately undermining the policy certainty essential for reassuring the private sector and attracting foreign investments.
Gradual and Sequenced Market-Oriented Reforms are Needed
Contrary to the shock therapy approach of the Abiy administration, a gradual and sequenced strategy for market-oriented reforms would be more advantageous for the Ethiopian economy. Such reforms would enhance the competitiveness of local firms against foreign entities while addressing challenges like regulatory complexities; destabilization of the banking, retail, and real estate markets; and the risks associated with market fluctuations and financial contagion. This gradual, sequenced approach to market-oriented reform is a vital lesson drawn from the Chinese development experience and the rapid economic growth observed in eight East Asian nations between 1965 and 1990.
Simultaneously, economic priorities should center on attracting FDI that capitalizes on the country’s dynamic comparative advantages, with the main aims of boosting manufacturing productivity and industrial capacity, creating jobs, and raising wage levels. This should be paired with initiatives to enhance human capital, facilitate technology transfer, and reinforce linkages between foreign and local firms. Unfortunately, this focus is being neglected in favor of superficial projects in the tourism sector, like erecting resorts, lodges, and opulent buildings.
Regrettably, instead of genuinely advancing the Ethiopian economy, Abiy appears intent on divesting state assets while “developing corridors” through the mere installation of decorative lighting, bike lanes, and water features.
