World Bank says Ethiopia should diversify infrastructure funding

Ethiopia needs to find new ways to finance infrastructure projects after relying heavily on state-driven investment to build new roads, railways and dams to drive growth in its economy, the World Bank said on Monday.

Huge public investment has been credited with pushing economic growth above 10 percent in the financial year 2014/15, one of the fastest rates of expansion in Africa.

But the state has carried much of the burden of raising financing, while demanding that banks invest the equivalent of 27 percent of the loan portfolio in low-yield state development bonds, leaving little for private business to borrow.

“Continued infrastructure development remains one of Ethiopia’s best strategies to sustain growth, but the current financing model is not sustainable,” the World Bank said in a report.

A $4 billion-hydro-electric dam on the Blue Nile and finishing a programme to build a 5,000 km railway network are among projects Ethiopia aims to complete in the next five years.

After decades of struggling with dilapidated transport networks, the World Bank said Ethiopia’s investment in infrastructure promised high returns. But it said the private sector was being squeezed as the state sucked up financing.

Raising taxes, increased private sector activity and improved public investment management are some of the options Addis Ababa should consider, the World Bank said.

It also said other options included “increasing domestic savings and developing capital markets via a higher real interest rate, greater selectivity and prioritization of investments, securitization of infrastructure assets, and improved pricing, including higher electricity tariffs”.

Ethiopia has no stock exchange or any developed financial capital market.

SAVINGS

There are some signs of reform. Last week, the government indicated it would change its policy demanding banks invest 27 percent of their loan portfolio in state bonds, although it did not give details about the change.

State Minister of Finance and Economic Development Ahmed Shide told Reuters some of the options outlined by the World Bank were in line with the government’s plans.

Ethiopia plans to raise tax revenues to 18 percent of gross domestic product in five years’ time from 12 percent now and wants to lift the savings rate to 30 percent by 2020 from 22 percent now, he said.

“The more savings we mobilise domestically, the more resources are available both for infrastructure investment as well as for private sector engagement and industrialisation,” he said. “The pie will be larger.” (Editing by Edmund Blair and Gareth Jones)