Ethiopia’s liberalisation offensive, opening up the state controlled Ethio telecom and Ethiopian Airlines to private investors, has taken many by surprise. Caught between a watershed political transition and a foreign currency crunch, opinion remains divided as to whether the move primarily signals a policy shift to relatively fast-pedalled liberalisation under the new administration, or is intended to serve as a way out of the stranglehold of foreign currency scarcity.
It is easy to see where hopes that it will play the latter role are hinging on.
A consortium led by Italian firm Enel Green Power (EGP) is expected to invest about $120 million in the construction of a 100 Mw solar plant in Metehara, Central Ethiopia, having been awarded the contract in October 2017. Due for completion in 2019, the project is expected to sell power to the state-owned electricity producer, Ethiopian Electric Power, within the framework of a two-decade long Power Purchase Agreement. Understandably, such private sector participation is viewed as a pivotal amplification channel for the inflow of hard currency into the economy.
Ethiopia’s foreign currency woes, however, run deeper than the narrow optic of liberalisation would suggest. In October 2017 the National Bank of Ethiopia (the country’s central bank) not only hiked interest rates, but, more importantly, devalued the Birr by 15.5 per cent to exchange at 27.3 units to the dollar. This shock policy adjustment came at a time when, by and large, the monetary environment was becoming a lot more accommodative of dovish signals in sub-Saharan Africa, with central banks beginning to unwind the tightening cycle that had prevailed for the better part of 2014 – 2016. If there was a canary in the coalmine with regard to the headwinds the economy was confronting, run-away inflation and a foreign currency crunch, that was it.