When will Ethiopia economy attracks foreign investors?

By IndepthAfrica
In Article
Oct 11th, 2012
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Ethiopia is growing fast, but its mobile and electronic payments infrastructure is weak. Is it time for a more liberal approach to foreign investment?

Ethiopia appears to be doing something right.  One of the world’s five fastest growing economies in 2010, it’s expected to reach 7 percent growth this year and next, and the government hopes for double digit growth in the medium term.

Ethiopia’s growth is surprising for a country lacking the natural resource bonanza driving many of Africa’s high performers. Stranger still, the revolution in mobile money, ICT and electronic payments revolution has played little role. Mobile penetration is very low against the regional average. Internet connections are slow and unreliable even by African standards, and content is censored.

A frosty investment climate is one of the reasons. Foreign investment in financial services is prohibited (but domestic, non-state providers exist). Financial services are concentrated in a few towns. Addis Ababa, the capital, accounts for nearly 40 percent of total branches of commercial banks. The country scores low on financial sophistication, technological readiness and innovation according to the African Development Bank, ranking 3.05 out of 7 compared to the continental average of 3.68.

In telecommunications, state-owned Ethiopian Telecommunication Corporation dominates mobile, internet and telephone landscapes. ETC has had to outsource some of its services to France Télécom – perhaps signalling the dawn of a less hostile posture, as growth picks up and public expectations change. If this prompts a more liberal approach to areas like electronic payments, it could see Ethiopia’s performance shoot up further.

“When we look at the most successful electronic payment systems, they are those that are open, completely open, and the government sets standards for how different entities can participate,” says Elizabeth Buse, Visa’s group president for Asia-Pacific, Central Europe, the Middle East and Africa, the company’s fastest growing geographies. The acquisition of phone payment company Fundamo last year was a marker of its tech-savvy Africa expansion plans.

“Given its large population, given the great potential, Ethiopia would benefit from an open approach to electronic payment systems. Foreign investments and partnerships can help drive economic growth and deliver significant benefits to the Ethiopian people,” says Buse.

Mobile advocates point out that a 10 percent increase in mobile penetration contributes as much as 1.2 percent to GDP. “The combination of mobile and electronic payments compounds that” says Bill Gajda, Visa’s head of mobile product. Might the government’s posture to foreign investment in finance and communications change over time?

“There are a lot of different models being explored, and what we see – and I think Ethiopia won’t be an exception – is that over time, these models open up,” says Gajda. “Closed systems tend to not achieve the scale they want to, there isn’t the level of customer adoption, of direct foreign investment they are looking for, and they evolve over time to where they do bring in companies”.

In banking, there are signs of a thaw. Ecobank have said publicly they want a license in Ethiopia, suggesting the authorities may be planning to open up, according to Paul Wallace, Africa editor at The Banker. And perhaps Ethiopia’s plans to woo back the diaspora lend strength to arguments in favour of greater competitiveness in electronic payments. Many would be returning from Western countries and will want to bring their plastic back too.

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