After a decade of impressive economic growth, Ethiopia has been experiencing a slowdown in the past two years. The situation is evident in all sectors. However, the construction sector and international trade have suffered more visibly. The lack both of local and hard currencies exacerbated the problem.
However, according to NBE, during the first quarter of the current fiscal year, ETB23.3 billion was disbursed in fresh loans, indicating a 19.7Pct yearly growth. Out of the loans, the housing and construction sector received ETB2.8 billion, 10.2Pct of the total disbursed credit while the import and export sector was also one of the major beneficiaries of the fresh loans amounting to ETB4.4 billion, which is 18.8Pct of the total loans.
EBR’s Tamirat Astatkie talked to stakeholders, experts and consulted relevant reports and documents to compile this story.
Fuelled by substantial public infrastructure investment, Ethiopia has witnessed rapid economic growth in the past decade, with an annual real gross domestic product (GDP) growth rate of more than 10Pct, on average. However, the recent economic slowdown in the country is looming over this impressive achievement.
Be it in formal or informal conversations, the talk in several parts of the country has been become the stern business slowdown in through out the country. Although this has become more common in recent months, it dates back to the failed Belg rain in March 2015. There are a number of indictors to substantiate the evident business slowdown in the country. The low supply of local currency in the market and inadequate supply of loans in the banks and in the hands of people to purchase goods and services as well as the acute shortage of hard currencies are clear indicators.
The stalemate in a number of public construction projects such as the 40/60 housing development programmes as well as the big slowdown particularly in theimport and export sectors that are highly visible than other sectors. The hospitality and other sectors have also become a victim of the situation.
The construction sector has been the engine of the economy for the last decades in terms of the capital investment and employment. In the past five years, the sector has been growing at a rate of over 30Pct annually. Its contribution to real GDP rose to 8Pct from 4Pct five years ago.
However, in recent months the construction sector has been shrinking due to the lack of finance both in local and foreign currency. A founder and general manager of Berhanu Kassa Building Contractor (BKBC), Berhanu Kassa told EBR that construction sector is hugely affected by the slowdown of the economy. “The sector, especially middle-level contractors like us, is hit by the economic slowdown.”
BKBC is a construction company that has been in business since 1993. It has primarily engaged in constructing building complexes. The Company is currently engaged in four projects, ranging from five to fifteen storey buildings in Addis Ababa. The total cost of these projects reaches close to ETB 120 million.
However, Berhanu is worried because his clients do not have enough money to settle payment. “After long years of service in the construction sector, I am now shifting to the service sector, which is less risk-averse. This is mainly because construction is increasingly becoming a highly risky business,” He told EBR with frustration. Affected by its inability to collect payment, the company has significantly downsized its human resource to 30. This is way below to the 350 employees the company used to have in the old good days where all projects go smoothly and cash collection was never a problem. “Now we are working with our minimum capacity and minimum number of workers due to the financial deficit.”
Berhanu says his company is now squeezed on two sides: “On one hand, we already spent our money and we are not getting payment from our clients. On the other hand, we are paying workers who are not actually productive.”
A similar situation has loomed over the public housing projects. Zewdeneh Terefe, a project manager at Data Construction, which is involved in the 40/60 saving housing scheme at Senga Tera Site here in Addis Ababa. He says, there are many businesses in construction sector hindered by financial shortage. “The reason for the shortage of money is both due to the global as well as the local market slowdown. We are suffering with uneven flow of money. We sometimes get money and some other times do not.”
Exemplifying the impact of the slowdown in his project, Zewdeneh explains that his project was initially set to be completed within a year and half. “Though there are different reasons such as the delay in the design work, the project didn’t start according to the schedule, mainly because of financial problems,” he explains.
To be specific, Zewdeneh started the project in January 2013 and the final phase of works was still in progress in early March 2017 while EBR visited the site.
Yalemzewed Eneyew, Communication officer at the Addis Ababa Saving Houses Development Enterprise, attributes the delay of the construction projects supervised by his office, to two reasons: the failure of releasing money on time and limited capacity of contractors. “Being part and parcel of the economy, we can’t deny the effect of the overall business slowdown on our projects,” Yalemzewed admits.
The Enterprise supervises the construction of 39,229 houses under 60/40 scheme on 12 sites. According to the Enterprise, the 40/60 housing scheme created jobs for over 21,000 people in the last fiscal year while the scheme created ETB208 million market linkages for over 500 associations engaged in micro and small business activities.
The 40/60 housing scheme has targeted middle-income citizens, and close to 155,000 people registered and continued to save since September 2013. Although the Enterprise said the construction of 1,292 houses found in Senga Tera and Crown Hotel sites were completed last year, it failed to transfer the houses for beneficiaries.
Sources told EBR that although the government has allocated ETB6.5 billion for the ongoing 40/60 housing projects in the current fiscal year, no major construction work have taken place this year. In addition, insiders indicate that the housing projects under 20/80 scheme will not significantly improve this fiscal year due to budget constraints. The government, however, says it will speed up construction. In line with that, the Construction Bank of Ethiopia was recently ordered to avail sixteen billion birr to the public housing schemes.
Fikremariam Tilahun, a site supervisor of 40/60 house scheme at Senga Tera says, although the construction sector has been a leading source of investment and job creation, the sector has never been without problems. He categorizes the problems into four: organizational capacity of contractors, shortage of construction material supplies, project delay and project cost inflation.
He underscores that the recent shortage of money in the market has hugely affected the sector’s growth. “You don’t see any new projects, for example, starting of new condominium projects and also I have observed that the construction sector is not as vibrant as it used to be. What’s more, quite a number of graduates of engineering are without a job.”
The government plans to construct 250,000 condominium houses under 20/80 housing scheme in the second phase of the Growth and Transformation Plan (GTP II) period that started in 2015/16 fiscal year. This means, 50,000 houses should be build annually. Despite such ambitious vision, insiders indicate that the projects are not going as planned due to a wide range of problems such as a lack of financial resources.
Although middle and small construction companies are being hit massively, the economic slowdown is affecting giant companies too. Yitbarek Getahun, general manager of Sunshine Construction – one of the giant construction companies currently engages in two road projects, two real estate projects, building its own brand hotels as well as a number of multipurpose complex buildings – says they too are experiencing the effects of the business slowdown. However,it is at a smaller magnitude because big companies such as Sunshine have a better capacity to absorb such shocks than smaller ones.
“Fortunately enough both during the recent political unrest and afterwards to the present slowdown, our projects have not been affected due to the location and the time our projects started. However, we are now facing challenges to get spare parts to our heavy duty machineries in the market due to shortage of foreign currency,” Yitbarek decries. “Our machineries are getting stuck with lack of spare parts worth USD5,000 to10, 000. It is not acceptable by any standard to halt projects that cost hundreds of millions of birr with such minor issue.”
Putting in figures the damages caused due to lack of spare parts, Yitbarke indicates 20-30Pct of the machineries are out of operation. “Those problems that seem minor will have the muscle to affect the project as a whole unless they are addressed on time,” he explains.
Perhaps, the recent business slow down in Ethiopia has a lot to do with the political unrest in the country and the ever looming uncertainties it has created. If there is one thing that business owners want to avoid is risk, which increases during periods of instability in a country. Businesses operate based on forecasts and scenarios about the future to take calculated risks.
Brandon Julio and Youngsuk Yook, researchers at London Business School and Sungkyunkwan University respectively conducted a study on Political Uncertainty and Corporate Investment Cycles. They documented cycles in firm-level corporate investment corresponding with the timing of national elections across a sample of 48 countries between 1980 and 2005. During the year leading up to the election outcome, they found that firms reduce investment expenditures by an average of 4.8Pct relative to non-election years, controlling for growth opportunities and economic conditions.
They further investigated several potential explanations and find evidence that electoral and political uncertainty leads firms to temporarily reduce investment expenditures. Decreases in corporate investment correspond with temporary increases in corporate cash holdings. Overall, these findings suggest that political uncertainty is an important channel through which the political process affects real economic outcomes.
Despite the challenge on the ground, the National Bank of Ethiopia (NBE) says the broad money supply by the end of the first quarter of the current fiscal year stood at ETB463.8 billion showing a 21.8Pct growth compared with corresponding quarter of last fiscal year mainly driven by 27.2Pct rise in domestic credit.
According to NBE’s quarterly report, during the first quarter of the current fiscal year, ETB23.3 billion was disbursed in fresh loans, indicating a 19.7Pct yearly growth. Of the total loans disbursed the share of public banks was 40.8Pct while that of private banks was 59.2Pct. The housing and construction sector received ETB2.8 billion, 10.2Pct of the total disbursed credit.
Surprisingly, the NBE report reveals that the import and export sector was also one the major beneficiary of the fresh loans amounting to ETB 4.4 billion, which is 18.8Pct of the total, although industry players says the sector is one of the major economic activities affected by the economic slowdown the country has been experiencing for over a year now.
In fact, stakeholders stress that the problem has been exacerbated due to hard currency shortage. Muhdin Werake, director general of AL-SAM explains how shortage of foreign currency affected their business. “Access to foreign currency is not as easy as it used to be two and three years ago,” he told EBR.
AL-SAM with nearly two decades of engagements in the business of import merchandise goods has diversified into export, real estate, transport, transit, manufacturing, and domestic trade in recent years.
“Previously we could easily access foreign currency immediately after requesting foreign currency permit to a bank. However, in recent months, we wait up to three months,” he says. “I believe this problem is a short-lived one.”
Especially after the introduction of the first phase of the Growth and Transformation Plan (GTP I) seven years ago, there has been a serious of discussions about foreign currency shortages and crisis in Ethiopia. As the result, many sectors and core economic activities are being affected. However, the problem has been hitting the private sector the most since commercial banks allocate the scarce foreign currency to importers based on priority list with government mega projects getting the highest amont. Although the problem has been there for long, the widening exchange rate quoted in the formal and informal markets in recent months indicate the worsening problem.
Of course, history reveals that the country’s foreign trade balance, which is the main factor behind the foreign currency shortage, has been in deficit for many years. However, the growing balance of payments is reaching its pick currently.
The overall balance of payments deficit registered during the first quarter of 2016/17 was USD 336.3 million compared to USD88.3 million a year ago, according to NBE’s report. This was mainly attributed to 3.6Pct expansion of merchandise trade deficit and 491.8Pct increase in net services payments coupled with 27.2Pct decline in net private transfers as well as 9.7Pct fall in net official transfers.
Merchandise trade deficit during the period quarter also increased by 3.6Pct to USD3.6 billion, due to slowdown in export earnings and an increase in import bills. In fact, total export earnings including electricity decreased by 4.2Pct against same period last year while the import bill reached USD 4.2 billion, showing a 2.3Pct quarter- on-quarter growth.
Haile Kibret (PhD), director of research at the Horn Economic and Social Policy Institute and professor of macroeconomics at Addis Ababa University, attributes the shortage of foreign currency mainly to the declining demand of export goods in the world market which in turn affects the price negatively. “In short, the available foreign currency can’t accommodate the increasing demands of both the public and private sectors,” Haile told EBR.
In Ethiopia, one of the sources of hard currency is the export sector. However, the country’s export sector has never performed up to the government’s expectations. In 2015/16, Ethiopia earned USD2.8 billion from exports – about half the amount the government hoped to earn. As the government continues pursuing the GTP II, the export sector is at a crucial juncture – how to effectively address the problems that plague it, including fluctuating commodity prices in the international market, especially the agricultural products that comprise the majority of Ethiopia’s exports.
According to a bulletin published by the European Central Bank in 2016, the weakening of growth in some emerging economies has affected a large section of the population although the causes vary from country to country. In some countries, structural obstacles to growth and macroeconomic imbalances are increasingly limiting potential growth, while other countries are adjusting to lower commodity prices as well as global demand.
Structural obstacles, which can be considered as internal factor, emanate from within a given country. For instance, in China, years of credit-driven investment have lead to excess capacity in some sectors, as well as the misallocation of resources and increment of debt.
The literature also indicates the impact of external factors, such as global trade change, the global financing setting and international commodity market fluctuations. Among the external factors, sluggish demand in the international market and global trade has a damaging effect on emerging economies.
In Ethiopia, the problem also worsened by the government’s effort to invest the available foreign currency on its grand projects, which are not yet returning their costs. On the other hand, the increasing demands of the private sector to import goods and services have been exacerbated the shortage even further.
There are policy options that can be taken by the government, according to Haile. “First, the single digit inflation gives a room for the government to play with its monitory policy by supplying more credit in order to speed up the economy. Second, proper utilization of foreign currency based on priority is needed.” EBR
5th Year • April 2017 • No. 49