Private Sector

Why the Private Sector Takes Back Seat in Digitising the Economy?

The Ethiopian government opened its telecom sector in 2021, welcoming competition for more significant technological innovation. It also focuses on modernising the retail payment sector, E-Governance, E-commerce and the overall payment landscape. Since then, there is marked progress in the way business is conducted. Indeed, Ethiopia’s digital economy is booming, with the country experiencing a surge in internet usage and mobile phone penetration. 

The government has launched several initiatives to promote the digital economy and entrepreneurship by broadening the avenues of participation for foreign investors and local job creation. However, the private sector lags in all these recent tech developments. Unlike other countries where the private sector is the leading player in technological innovation, in Ethiopia, the public sector has beaten in taking the lead in the digitisation evolution with Ethio Telecom and Commercial Bank of Ethiopia, two of the giant state enterprises powerfully taking the lead, writes EBR’s Bamlak Fekadu. 

Guided by the country’s development plan for 2021-2030, Ethiopia launched its digital transformation strategy in 2020. The strategy includes five priorities: Implementation of a digital ID, digital payments, e-governance, e-commerce and cyber security. The policy is complemented by more specific strategies, such as the National Financial Inclusion Strategy and the National Bank of Ethiopia’s National  Digital Payments Strategy (NDPS).

Digital Payments Strategy aims to transform the payment ecosystem and support building a cash-lite and financially inclusive economy. Ethiopia’s digital transformation strategy is aligned with home-grown agenda and international commitments to correct macroeconomic imbalances and address structural impediments to achieve inclusive prosperity. The transformation agenda highlights sectoral priorities such as agriculture, manufacturing, mining, ICTs, the creative industry, and tourism for job creation, solving forex shortage and improving export performance. The digital Ethiopia strategy puts the role of the private sector as fundamental in harnessing the full potential of digital transformation.

The strategy encourages local investors to invest in the ICT sector. It attracts more international investment through public-private engagement to mitigate the lack of direct access to finance and circumvent the lack of direct access to finance through the incubation of scalable projects. Additionally, the strategy aims to create a supportive ecosystem for ICT start-ups by providing mentorship, networking opportunities, and access to relevant resources.

The strategy describes infrastructure, enabling systems, applications, and an ecosystem as required for a thriving digital economy, allowing for innovation, private sector participation, entrepreneurship, growth, inclusivity, and funding.

Since the embarkation of the digital Ethiopia strategy, several appealing moves have been taken by the government to increase internet penetration and promote the use of technology in various sectors. In this fast-changing endeavour, one cannot help but notice public projects outshining: from Telebirr to CBE mobile payment system, from national digital ID to digitalisation of fuel payment system, government projects and public enterprises are dominating the digital ecosystem.

Recently, the Ministry of Trade and Regional Integration also announced that it is gearing up to digitise the cement trading in the country entirely. This move aims to improve efficiency, reduce corruption, and promote transparency in the cement industry. It hopes the digitisation process will enable real-time monitoring of cement prices and supply, which will help prevent price manipulation and ensure adequate supply for construction projects.

However, home-grown economic reform emphasises liberalisation and strengthening the private sector, and privatisation ambitions still need to be improved. State-owned businesses still operate under a monopoly mentality which poses difficulties for the private sector to fairly compete.

The only excitement for the private sector came from the involvement of Safaricom Ethiopia through its newly established and wholly owned subsidiary, Safaricom M-PESA Mobile Financial Services PLC. Safaricom received the payment instrument issuer license last month from the National Bank of Ethiopia, which enables it to avail Mobile Financial Services (MFS) to its customers under the trademark M-PESA. M-Pesa is Africa’s most successful mobile money service and FinTech platform, offering financial services to millions of unbanked people with limited access to banking services. The company received its license in compliance with the applicable legislation in Ethiopia. Safaricom Telecommunications Ethiopia established the subsidiary with an ETB 50 million initial capital to provide MFS in Ethiopia.

The license issuance occurred following the national payment systems proclamation No. 1282/2022 amendment, replacing the 2011 Act. The amendment opens the arena for foreign investors, unlike the older ones.

It is unclear how the government intends to develop a private-led economy, given that its state-owned businesses are financed with public funds, and the private sector cannot access similar credit arrangements. In a business ecosystem where the state is the biggest customer, trader, and funder, it is difficult to compete with state-owned businesses.

Meanwhile, governments, whether regional or federal, are significant shareholders in private businesses, with the government taking 35Pct of annual income in addition to other forms of taxation.

“This is hindering the growth of small and medium-sized enterprises (SMEs) that have the potential to drive innovation and create jobs,” said Bekalu GebreMariam, establishing a digital firm focusing on logistics and payment platforms.

Bekalu urges the need for regulatory frameworks to be updated to keep up with the rapidly evolving technology landscape and ensure fair competition between private and state-owned entities.

Since start-ups founded by young people dominate the digital and innovative ecosystem, more funding is needed. No matter how important are the platforms they are building, they give up without going much.

He expressed his hope that the new Start-up Act, which is currently awaiting parliamentary approval, will usher in a new era for start-ups improving the participation of the private sector in the whole arena.

Ethiopia introduced competition policy and competition law in the 1960s when the country introduced the Commercial Code and Civil Code of 1960, which criminalised unfair trade practices.

Contrary to Bekalu’s claim, Ephrem, the middle name withheld upon request, digital financial service and cyber security expert, blames technology companies for failing to develop an effective business model regarding social impact. He believes this results from narrow technology output types and their failure to establish an effective business model regarding social implications.

“Most companies are being run with a trading mentality, which is against the nature of the industry they are engaging in,” Ephrem says. “These companies prioritise profit over the sustainability of their products, leading to a lack of innovation in areas that could benefit society and their business as a whole, while the market is untapped.”

Cepheus Capital Ethiopia’s digital economy review classifies Ethiopia’s digital economy landscape, with close to 570 businesses offering a wide range of digital finance into four segments: finance, ride-hailing, classifieds, and media. These four segments are the most successful, followed by e-commerce and delivery services.

E-government services are among the most successful digital disruptors, followed by business-to-consumer (B2C) business models. High geographical concentration, narrow technology types, and limited forex generation mark current service offerings.

According to data from portal.com, a business unit of Oracle Corporation, an American multinational computer technology corporation, which is the third-largest software company in the world, Ethiopia had 20.86 million internet users at the start of 2023, with 16.7Pct internet penetration. The analysis indicates that internet users in Ethiopia increased by 520 thousand (+2.6Pct) between 2022 and 2023, with 6.40 million social media users and 66.80 million cellular mobile connections, equivalent to 53.5Pct of the population.

In the World Economic Forum’s Global Competitiveness Report of 2019, Ethiopia ranked 137th in ICT adoption and 100th in digital skills among 141 countries, behind Gabon, Zambia, Mauritius, Mali, Lesotho, Botswana, and Uganda.

According to Solomon Kassa, a Tech- expert and a TV personality, the digital financial system in Ethiopia, with figures drawn from the International Telecommunication Union (ITU), Ethio Telecom, the United Nations, the World Bank, GSMA Intelligence, and KEPIOS, accounts for 65.2Pct of the adult national population in the financial services sector, leaving over 40 million people utterly unbanked in 2022.

The use case for advanced digital financial services was depicted in the report by Solomon as having even fewer users overall. The percentage of people who use online banking has remained at 0.4 Pct over the past year, compared to 11.9Pct, 0.03Pct, and 0.6Pct who made digital payments, bought items online, or paid bills online during the same periods.

DFS still needs to be widely used. “Companies should develop a research culture and work towards creating sustainable solutions that can fill the gap and benefit both their businesses and society as a whole,” Ephrem suggested.

Lense Asefa, a senior presales engineer at Deliver ICT and Telecommunication Technology PLC, which resells tech supplies and provides cyber security services, claims that the ecosystem needs to catch up mainly due to a lack of skilled human resources and funding issues.

She further emphasises that the industry requires individuals with a deep understanding of technology and its applications and a strong focus on customer satisfaction.

Agreeing with Ephrem that most establishments dive into the sector with a trading mentality, Lense shares a similar opinion. “Many companies fail to invest in research and development programmes before product development,” she told EBR. “This ultimately hinders the growth and innovation of the ecosystem as a whole.”

The problem of attaining funding for research and development is prevalent, and access to funding is scarce for local technologists. Although the culture of venture capital is showing some progress alongside international donations, the funds that tech firms mobilise are not disclosed.

In recent years, several institutions, including private commercial banks and state-owned ones like the Development Bank of Ethiopia (DBE) and incubators, accelerators, and angel investors, have emerged in a weak business ecosystem. Even though there are a few government- and NGO-supported start-up business generation and incubation schemes in the country, equitability remains an issue when providing opportunities to those who genuinely need them.

As some spend the funds they obtain for personal use, this has led to a lack of trust in the start-up ecosystem and a reluctance among investors to provide funding, leaving others who have the potential to make a positive impact on the economy struggling due to a lack of access to resources and support. This highlights the need for more effective monitoring and evaluation systems to ensure resources are utilised to benefit the business ecosystem.

Additionally, there is a need for increased collaboration between the government, NGOs, and private sector entities to create a more inclusive and supportive environment for aspiring entrepreneurs. Greater transparency and accountability are needed to address the issue in the allocation and use of funds, as well as more rigorous screening processes for potential recipients.

As of Cepheus, the digital economy has received around USD 40 million in funding from equity investors and USD 20 million from donors, with Ethiopia’s share of global flows remaining trivial.

Bersufekad Getachew is a technopreneur who pioneered international remittance, e-ticketing, and e-payment services called CashGo and GuzoGo. He sees industry players’ lag and failure to build an end-to-end solution.

“For instance, while the consumer is onboard for digital transactions, all of the merchants may not be in the system,” he told EBR. “Those absent include wholesalers, retailers, importers, industries, and commodity suppliers.”

He is keen-sighted about the need for a legal framework for merchants and tech firms to create an ecosystem that seamlessly integrates full-fledged digital marketplaces, payment technologies, tax systems, banks, suppliers, and other regulators.

Banks and a few technology companies are playing. They will continue to play a role in FinTech, offering various technology-based financial solutions. However, referring to the electronic fuel-trading project has wholly neglected private commercial banks and DFS providers.

Considering the growth of digital transactions in recent years, the DFS space is experiencing significant growth. The transaction growth from CBE, Telebirr, and Ethswitch is a good indicator. Moreover, the increasing adoption of mobile payments and online banking services is also contributing to the growth of DFS. This trend will continue as more people embrace the convenience and security offered by digital financial services.

Ethiopia is aggressively digitising its economy and payment system. Digitisation continues to deepen rapidly in the years to come due to technological advancements and increasing demand for digital services. However, the government needs to eliminate its regulatory rigidity and biases as the experience of the past couple of years proves how the private sector is being side-lined in the journey. From traffic payments to the settlement of utility bills and distribution of pensions and SafetyNet funds, and now the digital payment system for fuel, the government uses state-owned channels, blocking the avenues for private sector participation and shares in the digital payment platform. The private sector needs to promote its positions and interests more organised. The absence of organised advocacy has contributed to this problem.

Policy reforms and collaboration between stakeholders in the financial sector to scale private tech firms may be needed to address the limitations and difficulties.


11th Year • July 2023 • No. 119 EBR

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