1. Department of Economics Addis Abeba University
The Political Economy of Foreign Direct Investment (FDI) & External Finance (Debt) in the Ethiopian Economy
Alemayehu Geda
Department of Economics
Addis Abeba University
or and
July 30th , Mekelle University
(Conference on Political Economy of Ethiopia)
Mekelle, Ethiopia

2. Content Introduction FDI inflows in Ethiopia
Africa’s FDI Position in the Global FDI inflows
Emerging Economies FDI inflows in Africa
FDI inflows in Ethiopia
General Pattern
Distribution by sector
Emerging Economies FDI/Investment in Ethiopia
China
India
Turkey
Emerging Economies other Financing Schemes in Ethiopia
China, India and Turkey
Role of FDI/Foreign Credit in Ethiopia
Some policy Issues and the way Forward

3. I. Introduction

4. Introduction
There is a revival of FDI flows to Africa both from traditional and non-traditional partners in the last decade.
This could be taken as an indicator of the improving investment climate, the less riskiness of investing in Africa as well as the high return to investment in the continent.
Notwithstanding this, Africa’s share of world foreign direct investment (FDI) flows is extremely low.

5. Introduction…cont’d
It evolved from an annual inflow of US$ 1.9 billion in to US$ 54 billion in 2014
This represents a mere 4.4 % of the global flows
about 10% of flows to the developing countries in 2014 (see Figure 1 below).
South Africa, Egypt and Nigeria are the top 3 FDI destinations in Africa
The top three sectors FDI concentrates in the continent are
Service ( 48%),
Primary(31 %) and
Manufacturing (21%)

6. Africa’s FDI Position

7. FDI from the Emerging South (China, India and Turkey)
FDI flows from these emerging economies to Africa although growing very fast, is not that big in terms of relative magnitude
Even the much talked about Chinese FDI share (about FDI stock of 17.7 billion in 2010) is also rather small being about 3.2% of Africa's US$ 554 billion total stock of FDI in
It is also a mere 3.4% of the total FDI flows to Africa between

8. FDI from the Emerging South…cont’d
In addition, the level of FDI from BRICX such as China and India is not only very small but also located in a meaningful way in a few countries.
In general, during , the combined emerging economies share in FDI flows to Africa was about 6.5%
the Chinese share being about half at 3.5%; India follows in the second place by 1.8%).
The average inflow from China to Africa during is about US$ 2 billion. developed countries are still the dominant partners of Africa in terms of both FDI flows and stocks

9. Table 1 FDI Flows from Emerging South (BRICX) to Africa ( in millions of US$ , 200-2010)

10. Figure 2: BRICX FDI Flows to Africa (African Average, 2005-2010, $56 billion per annum)

11. II. FDI and Other Financing Inflows in Ethiopia

12. FDI Inflows to Ethiopia
In 2014, Ethiopia emerged as the 8th-largest recipient of FDI projects in Africa, up from 14th position in 2013
FDI inflows to the country were at a mere US$3.9 million in 1970
representing a very negligible share in global investment flows.
This figure has substantially increased to US$953 million in 2013
although its share in the global FDI flows is still decimal.

13. FDI Inflows to Ethiopia…….cont’d
FDI increased from a period’s average of 5.9 million US$ during the ‘Derg’ regime to around 270 US$ in the EPRDF regime (Fig 3 below).
Alebiet the ups and downs (due to the global financial crises in 2008, war with Eritrea from , among other things), net FDI inflows reached nearly 1.2 bln US$ in 2014.
This may be of mainly due to the various liberalization policies, better economic performance , incentives and fairly stable country that characterize the current period

14. Figure 3: Total FDI Inflows to Ethiopia

15. FDI Inflows to Ethiopia…….cont’d
Total FDI flows as percentage of Gross fixed capital formation was around 0.7 % in 1990
This figure has reached around 7 % in 2014, albeit the ups and downs over the years [Notice it is not that big!]
FDI in by sector (see table 2 below)
Manufacturing leads the list(with 70.6 % share of Total FDI inflow)
Service (10.7%)
Agriculture(8.7%)
See figures 4 and 5 below

16. FDI Inflows to Ethiopia…….cont’d

17. FDI Inflows to Ethiopia……
FDI Inflows to Ethiopia…….cont’d Table 2: Summary of operational projects by sectors from
Sector
No of Projects
Capital in Billions of Birr
% Share in Total FDI inflow
Agriculture
275
11.2
10.7%
Manufacturing
925
74.1
70.6%
Service
1,023
19.6
18.7%
(Source: EIC 2014)

18. FDI from the Emerging South Economies in Ethiopia
The three most important emerging economies in the FDI inflows to Ethiopia are
China
India
And Turkey
According UNCTAD (2015), FDI flow from China to Ethiopia increased from just about a 1mln $ in2003 to an annual amount of US$122 mln in 2012 (see figure 5 below).
[China $122 mln only!?? Quasi-FDI?)

19. Fig 5: China’s FDI to Ethiopia(Flow)

20. 1. China’s FDI In Ethiopia
On the other hand the stock of China’s FDI in Ethiopia reached over US$ 600 in (figure 6 next).
This is half of the total FDI flow to the country in 2014
NB: the total FDI flow from all sources to Ethiopia is $1.2 bln in 2014
Chinese FDI in Ethiopia is motivated (world bank 2012)
by the desire to take advantage of the current state of the economy and potential (eg population)
the incentive provided by the governments of China and Ethiopia
Country stability, the idea of using Ethiopia as a strategic launching pad for Chinese expansion in the rest of Africa are also found to be important motivations for Chinese FDI in Ethiopia

21. Fig 6: China’s FDI to Ethiopia(Stock)

22. China’s FDI..….cont’d
Chinese investment in Ethiopia takes two modalities: joint venture [limited] & wholly Chinese owned
According to Ethiopia MoT(2013),between Chinese investors get a license for 938 projects with a registered capital of ETB 42 Bln(USD 2.4bln)?[Cf to 0.6bln stock of FDI from China].
These investment projects have created 67,672 Permanent employments and 79,883 Temporary employments(see table 3 below).
most of the investment projects (57%) focus on the Manufacturing sector, followed by Real estate, Machinery and Equipment Rental and Consultancy Service (15%)(see figure 7 below).

23. Table 3:Summary of Licensed Chinese Investment Projects by Sector Since Aug.1998-Mar. 2012

24. Figure 7: Number of Chinese Investment projects by Sector (Since August 27,1998 - March 15, 2012)

25. India’s Investment in Ethiopia
According to International center for trade and sustainable development (ICTSD)(2014)India is currently one of the most significant foreign investors in the world
Indian firms are active in sectors such as agriculture, floriculture, cotton and textiles, plastics, and health care.

26. India’s Investment in Ethiopia
Indian firms are engaged in manufacturing as well as in a variety of services, including engineering, consultancy, ICT, water management and education services in Ethiopia
Since 1998 till the first quarter of 2014, India has invested more than USD 1.5 billion in the primary sector, (Cf to India’s FDI stock of 6 mln in 2012)
of which approximately 97 percent has been directed towards the growing of crops: fruit, vegetables, flowers, and beverage crops.
The nextl , a bout 1%, was in animal farming.
Mining and quarrying, the third larges, attracted USD 7.3 million

27. India’s Investment in Ethiopia…Cont
In contrast to investments in the primary sector, India’s investment to the secondary sector were more diversified
significant investments in a variety of industries including leather tanning, textiles, chemicals, furniture, food and beverages, paper products and metal products.
It created permanent (26,613) and temporary employees (24,140)
Employment creation is more evenly distributed b/n permanent and temporary more evenly in non-agriculture than the primary/Agrl sector (nxt graph).

28. Figure8: Indian Investment and Employment (1998-2014): Agriculture, Manufacturing and Services

29. Turkish Investment in Ethiopia
Turkish is currently one of the most significant foreign investors in Ethiopia
According to News sources (ENA), by 2014, the stock of Turkish Investment in the country exceeds $ 3 bln, with 341 firms? (Compare this to FDI of around 1 mln in2012 (UNCTAD 2016) and 36 mln Stock here in 2012)
Over 50,000 jobs , cumulative, have been created by this (2014)
$1.7bn for the Awash Woldia/Hara Gebeya railway project with Yapi Merkezi, a company based in Turkey. [Gov’t of Ethiopia financing]

30. Table 4: Total Employment Opportunity created by Operational FDI Projects (General, EIA)
year
Number of Projects
Employment(both Permanent and Temporary)
2002 20
5130
2003 92
15652
2004
166
30225
2005
201
19894
2006
210
33075
2007
273
220769
2008
288
70840
2009
245
132029
2010
184
21374
2011
135
18555
2012
154
8172
2013 94
9908

31. .
FDI Versus Quasi -FDI

32. Emerging Economies’ other Financing Engagement in Ethiopia –Quasi FDI
In addition to FDI, emerging economies firms are also active in major investmement financing activities of the Gov’t of Ethiopia
China, India and Turkey are important in this aspect
Of all the emerging economies ,the Chinese presence has a considerable importance
To understand Chinese invest engagement, better focus on what I call Chinese Quasi-FDI , not Chinese FDI using the standard/“ traditional" definition

33. Emerging Economies other Financing Engagement in Ethiopia
In the standard definition or approach "FDI is defined as investment that is made to acquire a lasting management interest (usually of 10 percent of voting stock) in an enterprise operating in a country other than that of the investor (defined according to residency), the investor's purpose being an effective voice in the management of the enterprise. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments".

34. China’s Financing in Ethiopia
In addition to such direct investment, Chinese firms are also active in major investment activities of the Gov’t :
Road and rail (low bid/ and aid bundled 10 Chinese firms dominate)
Electricity/power generation (Vendor financing/low bid)
Telecommunication projects (Vendor financing)
We may not take such investment as FDI as such since it is an investment by the gov’t of Ethiopia
However, given that most of these projects wouldn't have been realized without Chinese (other emerging economies) financing and engagement, we may refer to them as Quasi-FDI.

35. China’s Financing …cont’d
According to the China global investment tracer, (2016),Chinese investments and contracts in Ethiopia from 2005 to 2016 is about $17.62billion.
The same source claim from to 2015, Chinese investments and contracts in Ethiopia to a level of $7.39billion./Compare this to FDI of 122mln in2012 (WB) and 600mln Stock here in 2012/
Agriculture: 650 million, Energy: $5.85billion
Real Estate: $1.63billion,Technology $3.2billion,Transport $6.29billion

36. China’s Financing …cont’d
The official figures of FDI greatly understated the actual investment engagement of the Chinese in Ethiopia
as well as in other African countries
Chinese firms are thus dominating big projects in
Telecommunication and Power
Road and Rail Sector.

37. China’s Financing …cont’d
Telecom and Power
One of the biggest Chinese telecom company, ZTE, secured for Ethio telecom a credit (vendor financing) to the tune of 1.5 bln US$ secured from the Chinese Exim bank.
This offer is conditional on ZTE doing the job without bidding.
This credit is perhaps equivalent to the total current worth of the Ethiopian telecom.
This has increased to close $3bln (with addition of about 1.3blin) in the 2nd phase.
Power transmission for GRD ( =US$ 1 bln)

38. China’s Financing …cont’d
Road and Rail Construction
Chinese firms are also dominating both rural and urban road construction in Ethiopia. (over 60% in 2010)
This dominance is partly due to low bid prices and partly owing to the diplomatic and political ties the Chinese government made with the Ethiopian government.
Provision of financing by the Chinese government for its firms in Africa, is another reason for this success.

39. China’s Financing …cont’d
The over 2000km national and about 36Km Addis Ababa railway construction is totally dominated by Chinese firms that brought with them financing.
The railway deal with China is estimated at US$3 billion
(US$2.1 billion for national and about US$0.5 billion light city rails for Addis Ababa).

40. China’s Financing …cont’d
Chinese involvement is not going without complain.
Some of the complains are related to
the quality of the construction undertaking itself;
the remuneration to the local labor
limited opportunities for local unskilled labor and lack of technological transfer
the standard of the Chinese labor (and also products) is by far below the international standard
and the Chinese are also using their connection with top government official- political muscle - to crowd out domestic firms.

41. India’s Financing in Ethiopia
Exim Bank of India has in place 133 Lines of Credit, covering over 71 countries in Africa, Asia, Latin America, Europe and the CIS, with credit commitments of over USD 6.40 billion, available for financing exports from India in 2010.
Exim Bank's LOCs afford a risk-free, non- recourse export financing option to Indian exporters.
This support not only promotes Indian exports but also enabling Indian firms to carry out projects in emerging markets, including those in Africa.

42. India’s Financing in Ethiopia
In line with this the Export-Import Bank of India (Exim Bank) has extended a Line of Credit (LOC) of US$ million to the Government of Ethiopia recently
which is the third tranche of the total credit commitment of US$ 640 million for financing sugar industry rehabilitation in Ethiopia
which was signed on December 1, 2010, by high level representatives of the two parties
Ethiopia has already received a $300m loan from India for a 665km rail line to link the country with neighboring Djibouti.

43. India’s Financing in Ethiopia Cont’d
Indian Exim bank LOC will be used for financing at least 75% of total contract value through sourcing of goods and services from India.
Ethiopia also been the recipient of an earlier Line of Credit of US$ 65 million extended for setting up an Electricity Transmission and Distribution Project in Ethiopia.
In contrast to this the official FDI figure of India to Ethiopia for the period averages less than US$ 1 million (the 2008/09 figure being US$1.5 million).The latest India’s FDI stock being 6 mln by 2012 (UNCTAD 2016)

44. India’s Financing in Ethiopia
This trend is recently (2012) being followed by Turkish in Ethiopia (in rail, about US$1.7billion, as we noted above)
Compare this to FDI of around 1 mln in2012 (UNCTAD 2016) and 36 mln Stock here in 2012)
and Brazilian (in mining and rail) TNCs which are using a similar Chinese/Indian approach of using their Exim bank financing for investment engagement in Africa.

45. III. Role of FDI/ External Financing in Financing Development in Ethiopia and Conclusion

46. Role of FDI in the Ethiopian Economy
Foreign Direct Investment (FDI) plays an important role in the growth process of poor nations (UNCTAD, 2013) by:.
Providing the much needed capital for filling the saving-investment [40% versus 10-22%]
Foreign exchange gaps in these countries, [13bln imports vs 3 bln]
Is important for employment creation (see above),
transfer of technology and managerial knowhow [if we are smart and conscious]
FDI will improve the integration of the host country in the global economy and foster growth.

47. Financing Dev’t & the Role of External Finance

48. External Sector Development & Financing
The external trade is characterized by chronic balance of trade deficit where imports by 2013/14 became nearly four times that of exports.
The trade balance from merchandise trade in 2013/14 registered a deficit of US$ 10.5 billion (19 percent of GDP; BOP over 10% or US$ 3 bln; Danger zone 5%).
This latest figure shows the general picture of the Ethiopian external trade
where export (dominates by coffee, gold and oil seeds) growth is limited and vulnerable to global decline in prices while imports (dominated by capital and semi-finished goods, and fuel) are growing very fast and are not that amenable for reduction.

49. Summary: Major Macro Challenges: Inflation (in %) and Trade Deficit (Percent of GDP), Indebtedness

50. The Implication for Indebtedness the Terms of Our Debt which is Getting Expensive over time

51. Conclusion and Some policy Issues a
Ethiopian economy growth is helped by FDI/financing from traditional and other emerging economies such as from China, India and Turkey - they played both direct and indirect roles in this process.
Apart from direct FDI inflows, other Quasi –FDI inflows are important in the Ethiopian Economy
It is generating employment, helping in market expansion, creating some linkages to the economy by procuring inputs and selling outputs within Ethiopia (and also abroad)

52. Some policy Issues …cont’d
the large-scale infrastructure development through the emerging economies engagement is
expanding the geographical reach of investors,
improving efficiency by providing better logistics,
and inviting newer players in Ethiopian economy.
Despite being a “resource-poor “ nation,
Ethiopia's location in Africa,
its fairly stable environment,
government effectiveness and incentive
are the most important reasons which have attracted foreign investment.

53. Some policy Issues …cont’d
Hence
sustaining the current growth momentum of the economy
and further strengthening the political stability of the country (shared growth)
Improving logistic
are fundamental areas that the government could work to strengthen the country’s position in the FDI flows of the country.
(See detail , nxt slide)

54. Some policy Issues …cont’d
taking sincere steps
to increase transparency, control corruption in short governance (50% of management time consumed by bureaucracy, for Chinese FDI)
improve labour efficiency through training programmes,
and adopt and continuously improve policies to guide investment in strategic sectors while at the same time encouraging joint ventures are important to enhance the role that can be played by FDI in the economy
effective investment promotion (e.g., one-stop-shop service, aftercare, etc.)

55. Some policy Issues …cont’d
In the Medium/long-term, for the sustainable and secured development,
the Ethiopian government should focus more on supporting infrastructure,
streamlining trade logistics/ Minimize logistic costs (eg. Chinese Huijan)
addressing the shortage of skilled human resources and foreign exchange in a sustainable manner
Human capital development to benefit from technology transfer and genuine ownership
Minimize strategic vulnerability (and possible policy conditionality) to significant investors

56. The End
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