Ethiopia's Private Investment Landscape: An In-depth Analysis

In the vast landscape of economic growth and development, private investment stands as a pivotal pillar. It not only fuels economic expansion but also fosters innovation, creates employment, and enhances productivity. Ethiopia, a nation with a rich history and immense potential, has been witnessing a transformation phase in its private investment dynamics. This article delves deep into the intricacies of private investment in Ethiopia, particularly during the third quarter of 2022/23.

Before diving into the specifics, it's essential to understand the role of private investment in an economy. Private investment, in essence, refers to the allocation of resources by private firms or individuals in projects that yield returns in the future. These investments can range from infrastructure projects to technology startups, manufacturing units, and more.

In the context of Ethiopia, private investment plays a dual role:

• Economic Catalyst With its ability to infuse capital, create jobs, and introduce advanced technologies, private investment acts as a catalyst for economic growth.

• Diversification: As Ethiopia seeks to diversify its economy beyond agriculture, private investment in various sectors becomes crucial.

The third quarter of 2022/23 brought forth several noteworthy trends in Ethiopia's private investment landscape:

• 1. **Sectoral Distribution:** The distribution of private investment across different sectors provides insights into which areas are attracting the most attention. For instance, sectors like manufacturing, technology, and services might have seen varying levels of investment, reflecting the nation's evolving economic priorities.

• 2. **Regional Distribution:** Ethiopia, with its diverse regions, offers a plethora of opportunities for investors. The regional distribution of private investment can shed light on which areas are emerging as investment hubs and which ones require more attention.

• 3. **Foreign vs. Domestic Investment:** The balance between foreign and domestic investment is a crucial indicator of an economy's health. While foreign investment brings in international capital and expertise, domestic investment reflects the confidence of local entrepreneurs and businesses in the nation's future.

Every investment landscape comes with its set of challenges and opportunities. In Ethiopia, while the potential for growth is immense, certain challenges might have deterred or slowed down private investment:

• Regulatory Hurdles:** Complex regulatory frameworks can sometimes act as barriers for investors.

• Infrastructure Gaps:** For seamless operations, businesses require robust infrastructure, be it roads, electricity, or digital connectivity.

• Access to Finance:** Especially for local entrepreneurs, accessing finance at reasonable rates can be a challenge.

On the flip side, the opportunities are vast:

• Untapped Markets:** Several sectors in Ethiopia remain under explored, offering a goldmine of opportunities for investors.

• Government Initiatives: The Ethiopian government has been proactive in launching initiatives to attract private investment, be it through incentives, tax breaks, or special economic zones.

The buying rate of the Birr was noted to have depreciated by 6.9 percent, settling at Birr 53.8329/USD. The selling rate followed suit, depreciating by 6.8 percent to Birr 54.9131/USD when compared to the same quarter of the previous year.

The table below provides a snapshot of the foreign exchange purchased and sold by various Forex Bureaux of Commercial Banks during the third quarter of 2022/23.

The US dollar showcased mixed performance against major currencies. Annually, it strengthened against the Japanese Yen by 14.9 percent, Pound Sterling by 12.4 percent, Euro by 4.4 percent, SDR by 4.0 percent, and Swiss Franc by 0.1 percent. On a quarterly basis, the USD depreciated against the Euro (5.3 percent), Swiss Franc (4.3 percent), SDR (2.7 percent), and Japanese Yen (1.5 percent). However, it appreciated against the Pound Sterling by 1.6 percent.

Annually, the Birr depreciated by 6.7 percent against the USD, 6.6 percent against the Swiss Franc, 2.4 percent against the SDR, and 2.0 percent against the Euro. Conversely, it appreciated by 6.3 percent against the Japanese Yen and 3.5 percent against the Pound Sterling. On a quarterly basis, the Birr saw depreciation against several major currencies, including the Japanese Yen (8.2 percent), Euro (6.6 percent), Swiss Franc (5.6 percent), USD (1.2 percent), Pound Sterling (4.9 percent), and SDR (4.0 percent).

During the third quarter of FY2022/23, the Real Effective Exchange Rate Index (REERI) appreciated by 10.3 percent. This was primarily due to high domestic inflation coupled with the appreciation of the Birr exchange rate against Ethiopia’s main trading partners’ currencies. The Nominal Effective Exchange Rate Index (NEERI) also appreciated, marking a 20.0 percent increase. This was attributed to the significant weakening of Ethiopia’s trading partners’ currencies against the US dollar, especially the Sudanese Pound, Turkish Lira, Egyptian Pound, and Japanese Yen.

The volume of transactions in the interbank forex market saw a considerable increase during the third quarter of 2022/23. The total volume of transactions reached USD 1,065.4 million, marking a 7.7 percent increase from the previous quarter and a 5.1 percent rise from the same quarter in the previous fiscal year.

Forex Bureaux, which play a pivotal role in the Ethiopian forex market, also witnessed a surge in activity. The total volume of transactions reached USD 46.3 million, a 16.5 percent increase from the previous quarter. This growth can be attributed to the increased demand for foreign currency for various sectors, including tourism and trade.

Inflation remains a critical factor influencing private investment decisions. During the third quarter, the annual headline inflation rate stood at 20.8 percent, driven primarily by food inflation, which was pegged at 25.1 percent. Non-food inflation was relatively lower at 15.9 percent.

The weighted average deposit interest rate was 7.0 percent, while the lending rate stood at 15.1 percent. The gap between the two rates indicates the profitability margin for the banking sector and also influences borrowing decisions for private investors.

The banking system's liquidity position improved during the quarter, with excess reserves amounting to Birr 24.6 billion. This is a positive sign for private investors as it indicates the banks' ability to lend and support investment activities.

During the third quarter of 2022/23, Ethiopia witnessed a significant shift in its investment landscape. The number of investment projects and the associated capital showcased notable dynamics that are worth exploring in detail.

In this quarter, 9 investment projects became operational. These projects collectively represented an investment capital of Birr 132.6 million.

When compared to the same quarter of the previous year, both the number of investment projects and the investment capital depicted a decline. The number of projects decreased by a staggering 79.1 percent, while the investment capital saw a drop of 68.5 percent.

A comparison with the preceding quarter reveals that the number of investment projects and the associated capital slowed down by 43.8 percent and 95.4 percent, respectively. This indicates a significant contraction in the investment activities within a short span.

The third quarter of 2022/23 brought forth some challenges in the private investment domain in Ethiopia. The sharp decline in the number of operational projects and the associated capital, both on a yearly and quarterly basis, underscores the need for a deeper analysis of the factors influencing these dynamics. As we move forward, understanding the reasons behind these shifts and the sectors most affected will be crucial for policymakers and investors. In the upcoming parts, we will delve deeper into the sectors that attracted the most investments and the role of external factors in shaping the investment landscape.