Ethiopia’s Developmental State Model Runs Out of Steam



Ever since 2005, the role of the state in the economy has grown in an effort to fend off market failures. This was not just the wrong panacea, but given corruption and unprofessionalism, the endeavour has been glaringly unsuccessful, writes Abdulmena Mohammed (abham2010@yahoo.co.uk), a financial expert with 15 years of experience.


Defending the new fiscal year’s federal budget before parliament, Prime Minister Abiy Ahmed (PhD) revealed that there would not be any new projects by state-owned enterprises (SOEs) until the corporate governance and financial status of existing projects are reviewed. This is a serious step next to the recent announcement to fully or partially privatise major SOEs in the service sector.

The government has not officially admitted a policy shift. We can, however, infer from the above measures that the government is pausing for thought as the developmental state model that Ethiopia has pursued over the past decade seems to run out of steam. The weak performance of many of the SOEs, chiefly those established in the past decade, proves this fact.

Examining what led us into this situation is crucial to come up with ways of addressing them.

The past 27 years  can be marked into two distinct periods from the vantage point of the government’s role in the economy. Between 1994 and 2005, it was engaged in massive privatisation, unwilling to set up new SOEs, preoccupied with agricultural development and infrastructure expansion. Many of the SOEs had been managed by professionals.

What is remarkably different after the 2005-contested election was the change in the role of the state in the economic sphere. To derive legitimacy from economic growth, the ruling party promulgated the developmental state model as its guiding ideology. The model is based on the premise that as there are serious market failures in developing economies, state intervention is crucial to rectifying them. Market failure exists because of capital intensive, high risk, low return and long-term investment ventures that put off private investors.

The trouble with Ethiopian policymakers is that they have the incorrect perception that state intervention is the panacea for every market failure.

One policy instrument of the developmental state model (DSM) is the creation of SOEs. The government established a large number of corporations with subsidiaries in metals, engineering, chemical, sugar, retail, agricultural inputs and industrial parks.

The intervention went as far as engaging in retail business with the intention of modernising the retail sector and reducing inflation. In 2015, the Ministry of Public Enterprises (MoPE) was established to bring many of them under one umbrella.

What is breath taking has been the pace of creation of SOEs. Without prudent studies regarding the availability of finance, markets, technical and managerial capacity and foreign currencies, the government moved forward with the establishment of SOEs.

Despite the model helping to bring considerable economic growth, its application has resulted in multi-faceted problems. Many of the SOEs, created using this economic underpinning, are riddled with corruption, waste and inefficiencies. They are socked with debts, and their financial viability is questionable.

For instance, Alle Bejimla, an enterprise established with much hoopla, has gone into obscurity without achieving any of its targets. Corruption cases swirled around it and neglect and under-capitalisation dragged down its growth.

Sugar and fertiliser projects are likewise stuck in the mire due to repeated project extensions and enormous debt build-ups. Metals & Engineering Corporation (MeTEC), the military-industrial complex of SOEs, created with the great hope of enhancing technological capabilities, has been repeatedly blamed for corruption, huge waste and delayed projects.

The loss-making Ethiopian Electric Power is saddled with enormous debt and is exposed to multiple financial risks due to the massive expansion of its operations. Ethio-Djibouti Railway, constructed for over four billion dollars, and chiefly financed by Chinese loans, is expected to bring in 100 million dollars a year from freight and passenger transport. Its intake after management fees of 57 million dollars a year hardly covers the interest cost of the project.

Aggressive state intervention in the economy required huge financial resources from the government coffers and the banking sector. Commercial Bank of Ethiopia (CBE) expanded at an unprecedented scale to mobilise funds, and private banks followed suit to remain competitive and to comply with the National Bank of Ethiopia’s (NBE) rules.

Deposits of the banking sector have grown by eight fold in a decade. Despite the share of private bank branches doubling from 33.4pc, their share of deposits have remained pretty much the same, at 35pc. The book for loans, advances and corporate bonds in the sector also grew by 11 fold.

What is striking is that the share of loans, advances and corporate bonds of public enterprises soared from 18.2pc in 2007/08 to 52pc almost a decade later. A huge chunk of private bank deposits has also been channelled to the Development Bank of Ethiopia (DBE), so that it would lend them at generous terms mainly to the agricultural and manufacturing sectors.

The proliferation and bloating of SOEs has increased the credit exposure of state banks. At the end of 2017, 44pc of the total credit of the state banks was given to a single borrower. Close to half of the loans disbursed by state banks in the second quarter of the past fiscal year went to a single borrower as well. Imprudent lending for agricultural and industrial development by DBE has caused soaring non-performing loans (NPL).

The level of indebtedness of SOEs is staggering. By the end of September of last year, they owed 251 billion Br and 269 billion Br to foreign and domestic lenders, respectively. The expansion of SOEs has also created a huge appetite for foreign countries to export their capital goods, spare parts and other services.

Repayment of capital and interest on foreign loans also caused enormous strain on the precarious balance of payment. The total debt servicing of government guaranteed and non-guaranteed debts of state-owned enterprise soared by 120pc to 987.3 million dollars in the four years leading up to 2016/17.

When the number of entities owned by the state increases at an alarming rate, they required qualified human resources. Unfortunately, the government drew human resources for running them chiefly from the vast sea of party members, who were lightly screened for their capability and professionalism. In employment, when party membership and loyalty become everything, and meritocracy is side-lined, accountability surely gets compromised.

In the political environment of a single-party monopoly, which lacks accountability and transparency, launching a highly interventionist economic policy with unrealistic ambitions and poor deliberation resulted in the massive accumulation of wealth in the hands of the state. It opened the floodgate to corruption, waste, inefficiencies and enormous debt build-ups. It overstretched resources and brought a lack of focus.

Privatization is a good step if it is undertaken in an orderly, transparent and accountable manner. If it is preceded by the liberalisation of the monopolised industries and establishment of effective regulatory frameworks, it will be fruitful.

Abiy’s administration needs to come up with detailed ideas of what the role of the state in the economy should be from the perspective of creating SOEs. This requires answering where, how and when to intervene.

State intervention should only be considered when there is a genuine market failure and options such as incentivising the private sector, and public-private partnerships (PPs) have not borne fruit. SOEs thrive when there are clear targets, accountable and transparent systems, rewards are aligned with performance and professionalism is fostered.

The idea of state intervention is not a license to stifle the private sector. It is a means to rectify genuine market failures. Once these are corrected, the private sector can and should take over.



By Abdulmena Mohammed (abham2010@yahoo.co.uk)
Abdulmena Mohammed (abham2010@yahoo.co.uk), a financial expert with 15 years of experience.

Published on Jul 28,2018 [ Vol 19 ,No 952]


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