Addis Ababa, 29 July 2024 – In a decisive move towards economic modernization, Ethiopia is undertaking a comprehensive set of reforms with robust backing from the World Bank. The global institution has approved a substantial $1.5 billion financial package, consisting of a $1 billion grant and a $500 million credit, under the Ethiopia First Sustainable and Inclusive Growth Development Policy Operation. This package is aimed at facilitating structural changes across multiple sectors of the economy, including the privatization of state-owned enterprises, reforms in Value Added Tax (VAT) policies, adjustments in electricity tariffs, and significant liberalization of the foreign exchange market. These reforms are a core component of Ethiopia’s Home-Grown Economic Reform Plan (HGER 2.0), which seeks to stabilize the macroeconomic environment, enhance private sector participation, and position Ethiopia as a competitive economy on the global stage.
Strategic Privatization of Ethio Telecom: A Landmark Move
At the heart of Ethiopia’s economic transformation is the partial privatization of Ethio Telecom, the state-owned telecommunications giant that has long held a monopoly in the sector. The Ethiopian government plans to divest up to 40% of Ethio Telecom’s shares, marking one of the most significant privatization efforts in the country’s history. This landmark move is anticipated to inject over $2 billion in foreign direct investment (FDI) into the Ethiopian economy.
The decision to partially privatize Ethio Telecom is strategic, aimed at improving efficiency, fostering innovation, and reducing the government’s financial burden. The funds raised from this sale will be earmarked for critical infrastructure projects, particularly in telecommunications, transportation, and energy, which are vital for sustaining Ethiopia’s economic growth and meeting the demands of its rapidly growing population. Moreover, this privatization effort is expected to introduce competition in the telecom sector, leading to better services and lower costs for consumers, ultimately driving broader economic productivity.
VAT Reforms: Enhancing Revenue and Expanding the Tax Base
As part of its broader fiscal reform agenda, the Ethiopian government is implementing significant changes to its Value Added Tax (VAT) system. VAT, a crucial source of government revenue, is currently underperforming due to widespread exemptions and compliance issues. The government, with support from the World Bank, is set to reduce VAT exemptions and strengthen enforcement mechanisms, aiming to broaden the tax base and increase compliance.
These VAT reforms are projected to boost government revenue by 1.5% of GDP, which translates to an additional ETB 60 billion (approximately $1.1 billion) annually. This increase in revenue is critical for financing Ethiopia’s ambitious development projects, including investments in health, education, and infrastructure, while also reducing the country’s reliance on external borrowing. The reforms are designed not only to generate more revenue but also to create a more equitable tax system that supports the nation’s economic growth and development goals.
Electricity Tariff Reforms: Ensuring Financial and Operational Sustainability
The energy sector, a key driver of Ethiopia’s industrialization efforts, is also undergoing substantial reform. The Ethiopian Electric Utility (EEU) and Ethiopian Electric Power (EEP), the state-owned entities responsible for electricity distribution and generation, are implementing tariff adjustments to reflect the true cost of electricity production and distribution. Over the next two years, electricity tariffs are set to increase by an average of 15%, a move that is expected to generate an additional ETB 30 billion (around $550 million) in annual revenue.
This tariff adjustment is essential for improving the financial sustainability of Ethiopia’s energy sector, which has historically been plagued by underpricing and operational inefficiencies. By aligning tariffs with actual costs, the government aims to ensure that the utilities are financially viable and capable of maintaining and expanding the electricity grid. This is particularly important as Ethiopia continues to industrialize, with electricity demand expected to rise sharply. The additional revenue will also help attract private investment into the energy sector, which is crucial for diversifying energy sources, expanding access, and enhancing the reliability of electricity supply across the country.
Foreign Exchange Reforms: Liberalizing the Market and Enhancing Competitiveness
Complementing these structural reforms is a comprehensive overhaul of Ethiopia’s foreign exchange (FX) system, which has been a major bottleneck for businesses and investors. The National Bank of Ethiopia (NBE) has announced a shift to a market-based exchange rate regime, allowing banks and other financial institutions to buy and sell foreign currencies at freely negotiated rates. This reform represents a significant departure from the previous dual exchange rate system, which had created distortions and inefficiencies in the market.
As part of the FX reforms, the NBE has removed the surrender requirement that previously mandated exporters to sell their foreign exchange earnings to the central bank. Exporters are now allowed to retain 50% of their foreign exchange proceeds, up from 40%, providing them with greater flexibility and incentives to reinvest in their businesses. Additionally, the introduction of non-bank foreign exchange bureaus and the removal of import restrictions on 38 product categories will further liberalize the market, making it easier for businesses to access foreign currency and engage in international trade.
These FX reforms are expected to improve the availability of foreign exchange, reduce the black market premium, and enhance the overall competitiveness of the Ethiopian economy. By creating a more efficient and transparent FX market, the government hopes to attract more foreign investment, boost exports, and support sustainable economic growth.
World Bank’s $1.5 Billion Support: A Vote of Confidence in Ethiopia’s Reform Agenda
The World Bank’s $1.5 billion financial package is a clear endorsement of Ethiopia’s ambitious reform agenda. The funds, which will be disbursed in phases, are contingent on the successful implementation of the privatization, VAT, electricity tariff, and foreign exchange reforms. This financial support is not only crucial for maintaining the momentum of these reforms but also for providing the Ethiopian government with the resources needed to navigate the challenges of economic transformation.
The World Bank’s involvement also brings with it technical assistance and policy advice, ensuring that the reforms are implemented effectively and yield the desired outcomes. The global institution’s support underscores the international community’s confidence in Ethiopia’s ability to achieve sustainable and inclusive economic growth through these reforms.
Ethiopia’s economic reform program, supported by the World Bank’s $1.5 billion package, marks a significant turning point in the country’s development trajectory. The strategic privatization of Ethio Telecom, comprehensive VAT reforms, adjustments in electricity tariffs, and liberalization of the foreign exchange market are all designed to generate substantial revenue, attract significant foreign investment, and ensure the long-term sustainability of Ethiopia’s economic growth. While these reforms are ambitious and come with challenges, they are essential for positioning Ethiopia as a competitive and resilient economy in the global marketplace.
Nothing good comes from the WB and IMF other than destrying African economies.These policies the World Bank is enticing Ethiopia to follow through will be the beginning of the destruction of the solid economy ethiopia has enjoyed and massive poverty in Ethiopia and destruction of profitable state enterprises to be purchased by foreign companies . We saw how those policies destroyed our manufacturing in kenya 🇰🇪 leading kenya to be a dumping place.Be ver careful ABBY AHMED. N