Ethiopia’s boom runs into limits on finance

from the Financial Times..

June 9 2013, By Katrina Manson in Addis Ababa

Three banks rejected Tekeste Berhan Habtu for a loan to help build his 11-storey office block. Undeterred, the 59-year-old Ethiopian businessman ploughed in cash from his own software and logistics businesses. “I went to the banks but they ration people,” says Mr Tekeste, whose $1.6m real estate venture is nearing completion after three years of work.

His experience is indicative of constraints on the private sector in a country that has been one of Africa’s fastest growing economies, but whose government has chosen to eschew the neo-liberal western orthodoxies adopted by other African countries in favour of a more tightly controlled development model.


“The whole concept is similar to South Korea, Taiwan,” says prime minister Hailemariam Desalegn. But while the World Bank says Africa’s second most populous country after Nigeria has averaged growth of 10.6 per cent in the seven years to 2011, double the continental average, signs are growing that Ethiopia’s public investment-led boom is running up against its limits.


State restrictions on private credit exacerbate the situation. Each time a bank lends money to the private sector, it is required to lend an additional 27 per cent of the value of that loan to the government for its own development plans, draining banks of their capital.


Foreign investors are peering in, hoping that the government will have a change of heart and loosen up. Walmart is trying to negotiate entry into the retail sector; regional and pan-African banks are ready to enter the country’s closed banking sector; and, for telephone operators, Ethiopia represents one of the last great opportunities – both investors (and the government) say licencing could net $3bn.

Meanwhile, savvy private equity groups are taking advantage of the gaps in financing. “The fact that the banking system is often unable to provide sufficient capital … is a meaningful opportunity for us – we end up becoming in some cases the only alternative,” says Gabriel Schulze, a US investor who has raised more than $50m for his Ethiopia fund, the first in the country.

The return of a well-educated diaspora – with greater access to protected sectors including retail – is also supporting growth. Ababu Minda, president of Ethiopia’s diaspora association, says tens of thousands have come back, lured by a 2002 incentives package including tax waivers….

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