NAIROBI: Few countries in Africa boast a history as rich as Ethiopia’s. Egypt with its pyramids comes close, but that is about it.
The nation once called Abyssinia produced kings and queens whose legacy stretches all the way back to biblical times; its might and riches were legendary.
But the Ethiopia of modern times is different.
Its hot-blooded communist revolutionaries, led by the autocrat Mengistu Haile Mariam, seized power from Emperor Haile Selassie and officially pronounced Ethiopia a socialist state in 1975.
The country adopted a Marxist economic system that saw all its state corporations nationalised, and large-scale agricultural lands taken over by the government.
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The private sector was quashed, and the country’s markets were closed entirely from neighbouring capitalist countries such as Kenya.
But the lack of trade opportunities with its neighbours and inefficiencies in managing the state-controlled economy saw Ethiopia tumble like a wounded giant into the 1990s and early 2000s.
In 1990, Ethiopia had a gross national product of $6 billion (Sh607.8 billion at current exchange rates). Its citizens earned an average annual income of about $120 (Sh12,175), one of the lowest per capita incomes of any country in the world.
Weighed down by economic problems, such as falling productivity, soaring inflation, growing dependence on foreign aid and loans, high unemployment, and a deteriorating balance of payments, a deep social crisis saw the socialist ruling class change the country’s economic model.
It adopted a more open system that now encourages foreign investment and trade.
On April 5 this year, the Ethiopian parliament passed landmark legislation that eases restrictions on foreign financial institutions.
The move has been termed a watershed moment in Ethiopia’s unfolding economic recovery story.
Now foreign financial firms can operate in Ethiopia with minimal government control.
Ethiopia’s parliament made the concession largely to be allowed to join the African Trade Insurance Agency (ATI) after signing of a treaty with the continental body.
ATI CEO George Otieno said the pan-African insurer will set up base in Ethiopia as soon as administrative procedures are completed by the Ethiopian government.
“In general, membership to ATI will help Ethiopia attract much-needed trade and investments,” Mr Otieno said.
“In 2015, we supported $1.7 billion [Sh172 billion] worth of insured trade and investments within our member countries, and since inception in 2001, we’ve supported $21.5 billion [Sh2.2 trillion] worth of investments and trade. We are very proud of this achievement.”
With the way cleared by ATI, Kenyan companies have begun to troop into Ethiopia, hoping to tap into its population of 96 million.
When Co-operative Bank held its AGM in May, CEO Gideon Muriuki said his bank intends to concentrate on setting up shop in Ethiopia.
“Ethiopia has a population of more than 90 million ... things have changed and the new regime is inviting investors, especially banks, to help with financing the numerous infrastructural projects it is undertaking. We intend to take advantage of these new developments and be the first there,” Dr Muriuki said.
Shareholders of the bank rapturously backed their CEO, who promised that Co-op Bank would venture into Ethiopia through a partnership with its co-operative movement, a deal similar to the lender’s South Sudan business, where the government has a stake.
Analysts, however, warn that less than 15 per cent of Ethiopians have access to a bank account. And despite the new regulations, the government still controls most banks with an iron fist.
When contacted by Business Beat, Muriuki said despite these challenges, Co-op’s plan to partner with the co-operative movement in Ethiopia will prove sustainable in the long run.
Kenya Commercial Bank (KCB) CEO Joshua Oigara said his bank has already entered the Ethiopian market.
“KCB has already set up a representative office there,” he told Business Beat.
Mr Oigara said Ethiopia has steadily registered remarkable economic growth, averaging about 10 per cent over the past five years, which is promising to any lender that wants to grow as the region expands.
But penetrating Ethiopia will not be easy.
Ethiopia’s largest bank, the Commercial Bank of Ethiopia, for example, is a formidable competitor. It is well run and deeply capitalised.It has more than 1,000 branches, 12 million deposit accounts holding over Sh1 trillion in deposits, total capital of Sh61 billion and a Sh1.7 trillion asset base — nearly equivalent to the top five Kenyan banks combined.
But it is not just banks that are finding themselves drawn to Ethiopia.
Construction firms looking for a piece of the country’s mega-infrastructure projects are also on the move, as are horticultural companies, which want to tap into the huge flower sector in Ethiopia.
And in some of these moves, Kenya is losing out to Ethiopia.
In a dramatic turn in December last year, for instance, Nairobi Securities Exchange-listed oil and gas logistics firm Atlas Development announced it was winding down its Kenyan operations to concentrate on its Ethiopian business.
Atlas acquired Ethiopian firm East Africa Packaging Holdings Ltd (EAPH), which makes glass bottles. Atlas Logistics CEO Carl Esprey’s reasons for leaving Kenya included the country’s tough business environment, with low oil prices and clients holding bad debts.
American manufacturer Dow Chemicals is another company that has scaled down operations in Kenya to concentrate on Ethiopia.
Ross McLean, the manufacturer’s head in sub-Saharan Africa, said in a May interview with Business Beat that the Ethiopian market is turning out to be more promising than Kenya’s.
Dow has been in Ethiopia for the last two years, manufacturing herbicides for Ethiopia’s huge flower farms.
“When we set up camp here in Nairobi, we thought Kenya was the ultimate destination in this region. But after making a foray into Ethiopia, we have experienced a sleeping giant that is rising,” Mr Mclean said.
“Ethiopia is unique because it is among the fastest-growing economies in the world. The government there is very deliberate in powering manufacturing. Given its socialist history, it is now focusing on an industrialisation programme that will diversify its economy and give it a more capitalist outlook.”
PineBridge East Africa Chief Investment Officer Nicholas Malaki, however, warned Kenyan firms against getting into Ethiopia blindly.
“The April 5 legislation relaxing restrictions on foreign financial institutions does not mean Ethiopia has suddenly become open to all forms of foreign investors. Sectors such as agriculture and hospitality are still very much restricted. I advise financial institutions to go there first before anyone else follows,” he said.
Mr Malaki said the opportunities for banks are in plenty as Ethiopia’s government is badly in need of capital and is keen to liberalise the financial sector to attract more players.
They intend to go the Kenyan way and introduce agency banking and mobile transactions to increase the portion of its population that is banked.
“A few years ago, Kenya also had very few people with access to bank accounts. However, after banking restrictions were lifted, many people have accessed accounts and credit. The same thing is happening in Ethiopia, and Kenyan banks can benefit,” Malaki said.
However, he said insurance firms should consider holding off getting into Ethiopia as product penetration is low. The ratio of life insurance to total premiums in Ethiopia is 6 per cent, way below the average ratio in sub-Saharan Africa of 32 per cent, according to the Africa Insurance Organisation.
And as the scramble for Ethiopia’s market takes shape, the question of whether its huge population will turn into a viable market has yet to be answered.
The lack of a vibrant middle class where, as the World Bank reports, per capita income now stands at $550 (Sh55,778) — substantially lower than the regional average of $762 (Sh77,210) per year — may complicate businesses’ dreams.