Ethiopian Business Review

A Friend in Need, Indeed China Offers Billions for Cash-Starved Ethiopia Featured

Over the last 20 years, China has grown at a rate of nearly 10Pct per year.  The growth was driven primarily by expansion of industrial and export-oriented sectors. This has opened the door for improved Ethio-China relations, which have witnessed unprecedented growth in the last decade. Whenever Ethiopia seek loan, technical assistance and investment, China responds positively by providing debt reduction and support with no political strings attached. 

The recent visit by Li Keqiang, Premier of the world’s second biggest economy, brought hopes of acquiring billions of dollars for cash-starved Ethiopian government. China’s promise to offer much-needed financing for several mega projects in Ethiopia comes at a crucial time. The old saying that ‘a friend in need is a friend indeed’ is perhaps a fitting one for relations between the two countries. Samson Hailu, EBR’s Research Editor ,explores the economic relations between the two countries and what China’s increasing presence and economic interest in Africa mean for Ethiopia and the continent at large.

It has been more than a decade since China started its equal-access policy for African states, virtually knocking at every door in an attempt to create economic partnerships on the Continent. Since then, China has become an important trade and investment partner for Africa. Along with the government’s new venture of seeking external support for domestic development, China’s leading companies started to do business in African countries, including Ethiopia.

The relationship between Ethiopia and China is also nurtured by the frequent high-level officials’ visits. In fact, the diplomatic relationship between Ethiopia and China started when Chinese premier Zhou Enlai visited Ethiopia back in January 1964. Emperor Haile Selassie I also visited Beijing in October 1971, where he was received by Mao Zedong. However, the official visits by top government officials of the two countries’ ceased until the late Prime Minister Meles Zenawi visited China in 1995, which was reciprocated by President Jiang Zemin’s visit in 1997. After that, frequent visits between leaders became common between Ethiopia and China.

Honouring this tradition, Li Keqiang, the current Premier of China, visited Ethiopia from May 4 to 6, 2014 for the first time since he was appointed as head of government for the world’s second biggest economy on March 15, 2013. Li’s visit to Ethiopia was the first stop in an African tour that will also take him  to Angola, Nigeria and Kenya. His visit comes three months after a trip to the continent by President Xi Jinping in March 2013, when he renewed an offer of USD20 billion in loans to Africa between 2013 and 2015.

Senior Chinese officials and company executives accompanying premier Li signed 16 different economic and development agreements with their Ethiopian counterparts. The deals include a Comprehensive Framework Agreement to be enacted from 2015-2024 and a loan release for the Addis Ababa – Djibouti Railway Project. China agreed to extend USD1.4 billion in loan for the Railway Project, whose construction is more than 37Pct complete. The Chinese also agreed to provide financial assistance for the Dire Dawa – Dewalle highway road project as well as Welkait Sugar Development Project in the Tigray Region. In addition, four Chinese companies, including the China Communications Corporation Company, China Civil Engineering Construction Corporation, CGC Overseas Construction and China Railway Engineering Corporation, have agreed to set up industrial parks in Ethiopia.

One of the purposes of Li’s visit was to inaugurate the six-lane Addis-Adama expressway, which has been under construction by China Communications Construction Corporation for the past three years. The road, which is regarded as a flagship project of the Ethiopian government and cost USD612 million, is funded by a USD350 million loan from the Export-Import Bank of China. The remaining USD262 million was covered by the Ethiopian government.

Ethiopias trade with China in million USDIndeed, Ethiopia has received billions of dollars from China in concessional loans for infrastructural projects, including the Addis Ababa Ring Road and the Gotera interchange projects. In 2007 Ethiopia was one of the four countries (Nigeria, Angola and the Democratic Republic of the Congo being the others) entitled to receive a USD25 billion loan. After the government launched its ambitious Growth and Transformation Plan (GTP) in 2010, the Chinese also disbursed close to USD6.2 billion to finance the national railway project. This puts China as a major player in the development of infrastructure such as roads, dams and telecommunication projects, according to the World Bank, which estimated 60Pct of the major construction projects in Ethiopia were undertaken by Chinese companies. 

Scholars and analysts knowledgeable on the issue attribute strong tie between Ethiopia and China to the growing Chinese need for new markets. The Chinese officials also affirmed this by stressing infrastructure development in Africa is closely linked to China’s strategy of achieving better access to Africa’s consumer market. This demonstrates the need to find new markets for products that are in oversupply has become a matter of survival for many Chinese companies. With the biggest foreign reserve in the world, which stood at USD3.31 trillion in 2012, scholars argue that China has real potential to solve the capital scarcity in Africa. 

Some scholars even believe that this strong relationship plays an important role for both countries to gain diplomatic recognition from international organizations like the United Nations and the Africa Union, since China is a permanent member in UN Security Council, while Ethiopia is the seat of the African Union. In fact, both countries have demonstrated this power in the past. During the 1930 Italian aggression and invasion of Ethiopia, China strongly opposed it, standing on the Ethiopian side and, in quid pro quo, Ethiopia supported China’s claim to become a member of the UN Security Council even though Ethiopia had not established diplomatic relations with China at that time. This policy has been firmly followed by the current ruling party, the EPRDF. When the late Prime Minister Meles Zenawi, visited Beijing three times during the 2000s, he affirmed his government’s adherence to Chinese policy and its firm support to China on Taiwan and human right issues.

However, many African experts argue that China is using Africa in general and Ethiopia in particular as a commercial launching pad. The Chinese companies, which are not yet confident enough to penetrate in to Western countries, have adopted the approach of entering less competitive African markets in which Chinese companies can test their strength, according to the study conducted by Gedion Gamora, a researcher at the United Nations Economic Commission for Africa. 

Despite these concerns, the government of Ethiopia continues to see China as an alternative to the West, especially after the suspension of finance by the European Union due to allegations of human rights violations during and after the 2005 Ethiopian election. After the 2005 election in Ethiopia, China became the top trading partner of Ethiopia in the year 2006/07 and even top officials of the government started to call China as “most reliable trading partner.” 

Indeed, the trade volume between Ethiopia and China doubled between 2006 and 2013. Ethiopia’s exports to China reached USD627.2 million in 2012/13 fiscal year from USD132 million in 2006/07, showing a 60Pct growth, on average, each year. In terms of exports to China, Ethiopia’s main commodities include sesame seeds, leather goods and coffee. But this figure is dwarfed by the value of Chinese exports to Ethiopia, which reached USD2.4 billion in 2012/13. This trade asymmetry, according to Tesfaye Maru, international trade lecturer at Hawassa University, is not surprising, as Chinese consumer products are extremely cheap and due to poor Ethiopian exports competiveness vis-a-vis China’s capital goods. “Until Ethiopia manages to export manufacturing products, the balance of trade will continue to skew heavily towards China,” Tesfaye argues.

In response to this imbalance, however, the Chinese government provided special treatment to 442 African commodities to reach China’s market duty and quota-free. The suspension of tariffs on mainly agricultural products has been beneficial in boosting Ethiopian exports. For instance, compared to the 2005/06 figures, sesame exports increased by 500Pct in direct response to China’s zero-tariff policy. 

A significant implication of trade relations for Ethiopia is China’s exportation of labour-intensive products, such as textiles and footwear products. A study undertaken on the effect of Chinese footwear on small-scale Ethiopian shoe producers found that local producers downsized their activities significantly. This may have a negative long-term effect on the domestic growth and expansion of certain sectors, according to Tesfaye.

Chinese FDI in Ethiopia in millions of USDAs the Chinese economy booms and its trade relations with most African countries continue to grow, Chinese Foreign Direct Investment (FDI) into Africa also keeps rising and reached USD25 billion in 2013. Most Sub-Saharan African countries have also become a major investment destination for Chinese enterprises, where over 2,500 Chinese companies have invested in various sectors, including electronics, telecommunications and transport. China’s investment in Ethiopia has also increased steadily. Chinese firms have invested heavily in Ethiopia in recent years with their worth swelling well over USD1.1 billion until 2013.

Despite reports of China’s increased investment in Africa, economists argue that China does not currently have a big economic effect on Africa. “Close to 90Pct of FDI into Africa is from the United States, United Kingdom and France,” Alemayehu Geda, professor of Economics at the Addis Ababa University, was quoted by China Daily newspaper in March 2014. “Chinese FDI combined with India’s in Africa is less than 6Pct.” Africa is also the third largest recipient of Chinese FDI after Asia and Europe, according to a World Bank report. By the end of 2013, the cumulative Chinese direct investment net stock in Africa reached USD25 billion, while this figure stood at USD755 billion and USD560 billion in Europe and Asia, respectively.

Nevertheless, Chinese investments in Africa have raised many eyebrows, as some Western nations argue that it is motivated by Beijing’s desire to exploit the continent’s resources. While some are optimistic, many are concerned about China’s real interests. Few economic experts in Africa have argued that the engagement is apparently meant to repeat what western countries did decades ago when they exploited African resources. This has begged the question of whether China is a new colonizer, an exploiter or a partner in development in Africa. 

The Chinese have dismissed such allegation many times. “I wish to assure our African friends in all seriousness that China will never pursue a colonialist path like some countries did, or allow colonialism, which belonged to the past, to reappear in Africa,” Li said at the ceremony held in National Palace on Sunday, May 4, 2014. Appreciating the Chinese effort to support Ethiopia’s development agenda in the past, Prime Minister Hailemariam Desalegn also said the comprehensive cooperation between Ethiopia and China has promoted Ethiopia’s economic growth and transformation. “The two countries share a common destiny and we will continue working with China to achieve a common goal,” Hailemariam said.

Some scholars, like Thompson Ayodele and Olusegun Sotola, experts at the Initiative for Public Policy Analysis, an independent policy research organisation based in Nigeria, argue that Chinese investment in Africa is not a threat to African countries and they are full of gains. In a study published in February 2014, they stress that Chinese firms are willing to invest where Western companies are unwilling. In addition, Chinese government imposes no political conditions on African governments before signing contracts, either for exploration or other economic activities. 

The economic growth of China demonstrates that economic growth could be brought about by many types of government -- democratic or non-democratic -- Ayodele and Sotola state in their study.  Yet, others stress that Africa, and Ethiopia in particular, must do more to leverage Chinese engagement for maximum benefit. The stream of trade and investment gives African countries such as Ethiopia a unique opportunity to translate these external supports into overall gains. To take full advantage of this relationship, however, African countries must play their political cards well; not as separate countries, but united as one.

2nd Year . June 2014 . No.15

Samson Hailu


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