New Ethiopian Leader's Challenge: Unleash the Economy

(Bloomberg) -- Ethiopia's new leader faces a critical decision on whether to open up parts of the Horn of Africa nation's booming economy after making moves to reduce the stake of the military, former Prime Minister Hailemariam Desalegn said.

Premier Abiy Ahmed inherited what the International Monetary Fund ranks as Africa's fastest-growing economy when he took office in early April. But he also confronts the biggest challenges to the ruling coalition's power in a quarter-century as sporadic unrest against its authoritarian rule and inter-communal violence threaten the federal structure of Ethiopia, a U.S. ally in its battle against Islamist militants in the region.

Hailemariam said he last year introduced a proposal to the ruling coalition's 36-member politburo to partially liberalize all but the financial sector of the economy, including the state telecommunications monopoly EthioTelecom.

While the debate isn't finished, Hailemariam said he's laid the foundations for partial liberalization. “I am sure Abiy is going to complete it,” he said in an interview in the capital, Addis Ababa.

Military Role

Hailemariam quit as prime minister in February after failing to end protests in the Amhara and Oromia regions that began almost three years ago amid demands for the state-planned economy to provide greater inclusiveness. Abiy has already made some cuts to the role of Ethiopia's military -- one of Africa's largest -- in the economy. The army has been involved in projects including the $6.4 billion Grand Ethiopian Renaissance Dam.

Abiy took office three months after Hailemariam appointed Deputy Prime Minister Demeke Mekonnen as chairman of the military-industrial conglomerate Metals & Engineering Corp. Since then, Metec has had a key sugar project contract canceled and a deal to build a fertilizer complex is under review.

Only the country's second head of state since the then-rebel Ethiopian People's Revolutionary Democratic Front seized control in 1991, Hailemariam's six-year reign saw foreign direct investment surge from less than $1 billion to more than $4 billion, mostly in manufacturing. PVH Corp., the parent company of Tommy Hilfiger and Calvin Klein, and China's Huajian Group have factories in Ethiopia.

Corners of Opposition

The earlier, closely guarded discussions on liberalization were met positively by the majority, “but there are some corners who somehow oppose it,” Hailemariam said. “In the majority, I hope they will endorse it.”

Abiy's term began halfway through Ethiopia's five-year Growth and Transformation Plan, which emphasizes large-scale infrastructure and export-focused manufacturing. He'll have an opportunity to address unspecified “imbalances” during an interim evaluation, Hailemariam said.

Abiy will have a “very deep influence” on the next plan to be implemented from 2020, though “a big directional shift” is unlikely because “you don't fix something which is not broken,” he said.

A problem hampering growth has been foreign-exchange shortages, a result, Hailemariam said, of a widening gap between exports and imports. The country's trade deficit quadrupled to $14 billion in 2016 from $3.19 billion a decade earlier, as imports grew by a similar margin, according to United Nations data. Ethiopia's central bank devalued its currency by 15 percent in October to boost export earnings.

Forex Crisis

Two weeks into office, Abiy told local business leaders that what he described as a foreign-currency crisis could last two decades. Hailemariam said he expects the problem to last “maybe a decade or a decade and a half as experience shows elsewhere,” citing China at an earlier stage of its development.

“It is export-led industrialization that helps to bring more foreign currency and on the other hand helps the forex problem to be resolved,” he said. “Our structural transformation into industrial development, especially in manufacturing, has been a little bit delayed.”

Hailemariam said a 17-day meeting in December of the EPRDF's 36-member politburo identified areas for reform including corruption and bad governance, the trade regime and licensing, land administration, administration of public contracts, and tax and customs.

In his last year in office, Hailemariam presided over a purge of alleged corruption that led to the arrests of dozens of officials including a state minister of finance. That, he said, will likely continue under his successor.

Abiy, who previously served as deputy president in the restive Oromia region, “has been a very prominent fighter of corruption” there, which can be “extrapolated to the national stage,” Hailemariam said. Abiy at the December meeting showed “adamant” support for the consensus of rooting out corruption, according to the ex-prime minister.

To contact the reporter on this story: Nizar Manek in Addis Ababa at nmanek2@bloomberg.net.

To contact the editors responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net, Michael Gunn, Paul Richardson

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