On June 23, 2016, the United Kingdom’s citizens voted to leave the European Union, sparking buzz and market volatility throughout the world. However, the impact the ‘Brexit’ will have on the numerous countries that rely on aid from the UK has remained relatively silent in post-referendum conversations. This is an especially pertinent question for Ethiopia, which received just over USD432 billion in aid from the UK in 2014. EBR’s Samson Hailu explored the issue to learn more about the potential implications of Brexit and what it means for Ethiopia.
As the world acclimates to the United Kingdom’s (UK) decision to leave the European Union (EU), spectators in many sub-Saharan African countries wonder whether the Brexit will affect the UK’s spending on aid as well as trade and investment relations that have created opportunities for millions of people in developing countries.
The concern is especially pertinent, as Britain is one of just a handful of developed countries that have reached the United Nations’s (UN) target to allocate at least 0.7Pct of gross national income towards global development projects. Only three other EU member countries – Sweden, Luxembourg and Denmark – met the 0.7Pct target, which was mandated by the UN and promised by the EU at the G8 summit held in Scotland ten years ago.
To that end, the UK spent 11.7 billion pounds on international development in 2014, of which Ethiopia was the largest recipient of bilateral Official Development Assistant (ODA) globally, receiving around USD 432.5 million, roughly 322 million pounds. In fact, a report released by Department for International Development in 2015 reveals that Ethiopia has been among the top three recipients of aid from the UK for the last five years. The primary areas of support were education, health, and water supply and sanitation. Globally, Africa received the most aid overall, collecting 2.6 billion pounds in 2014.
What’s more, of the total development aid that Ethiopia receives from the UK, nearly 80Pct goes towards the provision of social services, such as education and healthcare, as well as other direct development-related activities.
With such substantial investments, Ethiopian government officials see the European nation as a reliable development partner. “There is no denying that the UK has been our strongest alliance,” Haji Ebsa, Director of the Public Relations and Information Directorate at the Ministry of Finance & Economic Cooperation (MoFEC) told EBR. “More than any other country in the world, Britain has been involved in many developmental areas.”
However, Haji downplays the impact the Brexit will have on Ethiopia. “What will be concerning is losing the influence of Britain in the EU, which is also our strongest partner,” he argues. “All the agreements we signed with UK will remain active.”
The UK, which started formal diplomatic relations with Ethiopia in 1897, has been involved in many developmental activities in the past. More recently, both countries signed two major agreements with the intention of boosting investment and trade relations. In 2009, the two countries signed the Investment Promotion and Protection Agreement – and the agreement on Avoidance of Double Taxation was signed during the London Business Conference held in 2010 and ratified in 2011 by the parliaments of each country.
As long as these agreements remain intact, according to Haji, Ethiopia will not be affected by Britain’s decision to leave the EU. “We have survived the global financial crisis that began in 2008,” he says. “So, the changing global dynamics will not have a real negative effect on Ethiopia.”
Despite the official’s calm demeanour, a lot is at stake as Britain leaves the EU, as even a slight change in its foreign aid can have drastic consequences for ongoing development projects. This is because Ethiopia expects a lot of money from the UK to fund the current fiscal year’s budget, which was recently endorsed by the Parliament. According to the document, Ethiopia expects ETB1.9 billion from UK in the form of aid to finance its budget. This is, however, only part of the Kingdom’s bilateral assistance. Other financial institutions, such as banks operating there, are also expected to provide Ethiopia credit through multilateral channels.
Many agree that the departure of UK from the EU will have a direct impact on Britain’s ability to play a significant role in global efforts to attain a long list of development and humanitarian goals, including ending extreme poverty, increasing educational opportunities, reducing income inequality and combating climate change.
However, UK officials say that the result of the referendum won’t impact their ability to pursue these goals. On Wednesday, June 29, the International Development Secretary Justine Greening said that while things are in flux, the nation is committed to their projects: “Part of our work has been through the European Development Fund [EDF], so work is now under way to understand where the end point of Brexit is and, critically, the transition plan in the meantime. That work is under way, but I emphasize that overwhelmingly our work is not through the EDF, and that, of course, is unaffected.”
When asked whether a withdrawal from the EU will affect the overall amount spent on aid, she said: “This government came in on a manifesto of maintaining the 0.7Pct commitment. Under the coalition government that we led, it was brought in and achieved for the first time. We legislated for it, and we stand by that.”
However, Alemayehu Geda, Professor of Economics at Addis Ababa University (AAU), who has published research about aid and its effectiveness in Ethiopia, argues that since the specific outcomes of the transition are unknown, it will have a great impact on UK or countries that have strong ties with it. “The Brexit will hurt the UK’s economy badly,” he argues. “To recover from the economic slowdown quickly, politicians are likely to rearrange and prioritise spending. This most probably will lead to cutting much of the ODA.”
In fact, one week before the referendum the International Monetary Fund (IMF) warned that leaving the EU will affect British living standards, stoke inflation and wipe out up to 5.5Pct of the gross domestic product (GDP). Under this scenario, the UK would fall into recession in 2017, according to the Fund.
To be sure, the immediate consequences of Brexit came within 24 hours of the decision, wiping USD2 trillion off world markets while stocks were suffered badly, which lead investors in the UK’s financial market to shed a quarter of their value amid forecasts of a UK recession by the IMF. Additionally, the British pound suffered its biggest one-day selloff in recent history with a jaw-dropping plunge, from USD1.50 against the US dollar to just USD1.33 within a day.
It is not only UK’s financial market that tumbled. The Frankfurt Stock Exchange and Cotation Assistée en Continu, a benchmark French stock market index, fell by 7Pct each. Indices in Italy and Spain posted their sharpest one-day drops ever, falling more than 12Pct, led by a dive in European bank stocks.
Asia had already tumbled as results from across the UK flooded in, which caused Japan Nikkei index to register its biggest fall since the Fukushima disaster of 2011. On the other hand, the U.S. stock market suffered its worst drop in 10 months.
Currencies, stocks and bonds also plunged across Africa after the UK’s vote to leave the EU triggered concerns. For instance, South Africa’s benchmark share index fell the most since May 2010, while yields on pound bonds from Ghana to Kenya declined.
Due to such worldwide panic and uncertainty, many agree that the losses for Africa could be drastic. For instance, Razia Khan, Chief Economist for Africa at Standard Chartered, was quoted by The Africa Report: “The immediate impact of a vote in favour of Brexit would be financial market volatility which would affect [sub-Saharan African] markets adversely as well. Many emerging market and frontier asset markets will come under pressure.”
For those who follow the issue closely in Ethiopia, the vote prompted questions regarding the importance of Britain to the Ethiopian economy.
The bilateral trade relations between UK and Ethiopia reached USD222 million in 2015, according to the data obtained from the Ethiopian Revenues and Customs Authority. However, the UK enjoys a favourable trade balance, since it exported USD181.8 million in commodities, mostly capital goods such as machineries and spare parts, to Ethiopia. On the other hand, Ethiopia exported USD40.3 million worth of goods mainly coffee, leather and textiles to the UK.
With this in mind, experts stress that sub-Saharan countries that have a negative trade balance with UK will benefit from the declining purchasing power of the pound sterling against the basket of major hard currencies. “When the purchasing power of the pound declines Ethiopia can import capital goods cheaper than the previous period,” argues Alemayehu. “This means the overall effect of Brexit on Ethiopia’s international trade is somehow positive, since the country spends more than five times on commodities that it imports from the UK compared to Ethiopia’s earnings from exporting to Briton.”
However, economists are still concerned by the broader implications of the Brexit, fearing that heightened uncertainty over Britain’s relationships with other countries will damage confidence and investment for the foreseeable future. Alemayehu also stresses that unlike the positive trade effect, the consequence of Brexit on investment will be damaging for Ethiopia when trying to attract investors who may be more wary of funding projects in frontier markets.
This is an especially salient point, as the government has been working to attract more investors from UK by participating in UK-Ethiopia Trade and Investment Forum. As of 2015, some UK companies are already operating in locally, such as Diageo, Pittards, GSK and Vasari.
According to the information obtained from the Ethiopian Investment Commission, UK’s investors hold the ninth position among foreign countries in terms of investment capital flow to Ethiopia between 1992 and 2014. Accordingly, 40 projects, with the combined registered capital of ETB420 million, were registered by Briton’s investors.
Despite this, Alemayehu stresses that Brexit still may have a positive impact vis-a-vis investment. “It will affect those investors who are planning to come to countries like Ethiopia in search of cheap labour,” he concludes. EBR
4th Year • July 16 2016 – August 15 2016 • No. 41