Bloomberg News

IMF Advises Ethiopian Government to Increase Loans for Business

June 07, 2013

June 7 (Bloomberg) -- Ethiopia’s government should make more credit available to private businesses to boost employment and build on its economic gains, the International Monetary Fund said.

While the Horn of Africa nation’s state-led development model has improved lives and expanded the economy, public enterprises that are involved in building more houses, dams and factories are starving banks of loans, Ethiopia Representative Jan Mikkelsen told reporters in the capital, Addis Ababa.

“The private sector is struggling to get credit for its projects and that’s a problem for economic growth and job creation,” he said on June 5.

Economic growth in Ethiopia, Africa’s second-most populous nation, is expected to slow to 6.5 percent in the 12 months to July 7, the end of Ethiopia’s fiscal year, and next year, according to the Washington-based lender. Annual growth averaged 7.7 percent in the previous three years, it said. In the last fiscal year, 68 percent of non-government loans went to state-owned enterprises and that ratio increased to 81 percent in the nine months to February, Mikkelsen said.

The state monopolizes commercial aviation, telecommunications, power and shipping and has majority stakes in other industries including banking, sugar and defense.

Ethiopia’s “capital constrained” economy cannot meet all credit demands, State Minister of Finance Abraham Tekeste said. Loans are available for companies in priority areas including export-oriented manufacturing and agriculture, he said.

Productive Credit

“Availing more credit to business by cutting investments in crucial infrastructure and skill development is not going to be very helpful for productive private sector development,” he said from Addis Ababa.

Urban youth unemployment in Ethiopia, estimated at about 25 percent, may become a problem unless more private businesses grow and create employment, according to Mikkelsen.

“It’s hard to imagine that they can all find employment in the public sector,” he said. “The creation of sufficient employment opportunities is the big challenge going forward for Ethiopia.”

Ethiopia’s banking industry is dominated by the state-owned Commercial Bank of Ethiopia, whose assets are about 70 percent of the industry total. An April 2011 measure compelling banks to buy government bonds equivalent to 27 percent of total loans disbursed raised 12.6 billion birr ($674 million) to invest in infrastructure projects in its first 16 months, according to Access Capital.

Loan Shortages

Private industry has suffered from the shortage of loans and foreign exchange, said Eyessuswork Zafu, the former president of the Chamber of Commerce and Sectoral Associations.

“In the past two to three years, we’ve moved in a very serious direction toward the crowding out of the private sector,” he said in a June 5 interview in the capital.

While Ethiopia has begun to attract foreign investment, a volatile regulatory environment is crimping local businesses, said Eyessuswork, who is also chairman of The United Insurance Co., an Addis Ababa-based business.

The government is trying to increase the amount of credit for industry by boosting “domestic resource mobilization” and promoting foreign investment, Abraham said.

To contact the reporter on this story: William Davison in Addis Ababa at wdavison3@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net


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