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Addis Fortune (Addis Ababa)

Ethiopia: Power Shortfall Bogs Down Economy

Haftamu Tafere

10 June 2008

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Addis Ababa — Despite a gap of a few percentage points, both the government and analysts from the IMF agreed that Ethiopia is to register yet another impressive growth in its GDP. But that is long before the economy began to suffer from the loss of electric power twice a week. How much of an impact will loss of productivity have on the GDP? Haftamu Tafere, Special to Fortune, has looked into the issue.

Ethiopia's growth rate over the years and its Gross Domestic Product (GDP) has surprised both its proponents and critics. International, and therefore mostly unbiased, information has reported impressive figures, at par with, and sometime even greater than most developing countries.

Take, for instance, the latest regional economic outlook by the International Monetary Fund (IMF): Ethiopia's real GDP growth for 2007 was an impressive 11.4pc, much higher than not only the five-year average of 3.4pc from 1997 to 2002, but also the sub-Saharan average of 6.6pc. If there were countries registered above Ethiopia's growth - such as Angola (21.1pc) and Equatorial Guinea (12.4pc) - they are oil-exporting economies, and benefit from the booming global prices on oil.

The forecast for the current fiscal year is positive too, although there is a gap between the over 10pc growth in GDP made by the government and that of 8.4pc by the IMF.

But this forecast might come to naught if the present trend of cuts in electricity flow is interrupted further. Consumers were warned over the public media that the cuts, of 15 hours a day, twice a week; would continue until the end of June, when the rainy season is due to begin. It is then hoped that the low volume of the water in the various reservoirs around the country will have reached an acceptable level for the turbines to work to full capacity.

This worrying trend, if it is allowed to continue, will have dire consequences for the country and its economy. The eroding effects are already being felt in the two most important sectors of the economy - the service and manufacturing industries; and it is possible to quantify, and thereby accurately assess, the full impact in monetary terms.

While it is true that all sectors have suffered because of what are euphemistically called power interruptions, but are no more than power cuts in the real world; it is these two segments of the economy that rely heavily on reliable power supply for sustained growth and even higher production goals and achievements. The question that remains is this: can the government stick to its predictions of a double-digit annual growth rate in spite of these losses?

The figures give their own, unwavering response.

The Devil is in the Details

Coincidentally, figures disclosed by the National Bank of Ethiopia (NBE) on electric consumption for the fourth quarter of the fiscal year 2006/2007 and the three quarters of 2007/2008 match each other. This makes it that much easier to compute the actual loss for the last quarter.

Meheret Debebe, general manager of EEPCo, disclosed that in that period, there had been 1.7 billion dollars worth of production from both the industry and service sectors. This was from a total of 573 million KWh (kilowatts per hour) of power consumption generated by his company, an estimated 69pc of the aggregate power generated by EEPCo to the industry sector, again according to Meheret. This can be broken down further to give the hourly electricity utilised by both the industry and service sectors: 265,277 KWh.

It is assumed that not all industries work or produce at the same rate: so a mean is taken from those that work all-out 24 hours a day, and those that work for just eight hours a day.

Dividing the value generated by the industries in total, by the power consumption, gives the hourly value. Each kilowatt per hour of energy equates to three dollars of productivity, the value, in dollars of the yield. Thus, the hourly cost of electricity, and from there, the loss, is estimated to reach 230,400,000 dollars.

It is estimated that the final reporting quarter of this budget year (the final four months of the Ethiopian year, ending in September, 2008) will result in a massive drop in GDP. Surveys taken in the first quarter listed shortages of raw materials and the low demand for goods as the main reasons for lower capacity of manufacturing (36pc and 14pc respectively).

In the same time period, respondents gave the inadequate supply of power and water as being only three per cent of the reasons for below capacity expectations. The figures for the last quarter will tell their own story.

It is only a few years since the advent of bottled water on shop shelves in Addis Abeba. They have become ubiquitous since their introduction, so much so that the presence of water coolers in corridors and in offices in typical American or European organisations has become a non-subject. But lately, what talk there is around the coolers centres on the absence of bottled water. It surprises no one that the scarcity can be traced to one major cause: the lack of a continuous power supply.

Two of the more than six separate companies that offer bottle water at shops can be given as prime examples. Highland Springs, one of the first to have established itself in this market, produces up to 100,000 bottles a day. Its production of 700,000 bottles a week at full gallop was cut back to just 620,000 bottles: the difference for the company between despair and massive losses in revenue. This was forced on it because its machines lay idle twice a week because of the cut in power of up to 15 hours in a working day.

Similarly, Abyssinia, another major brand of bottled water was forced to cut back on its production by almost half, when its production was reduced to just 20,000 bottles - from 40,000 at its peak capacity.

These are, indeed, types of industries that have a 69pc share of electric consumption, according to Mehret Debebe, general manager of the Ethiopian Electric Power Corporation (EEPCo), a state owned utility monopoly. Residential units use the remaining 31pc.

Sadly, reliable, or even up-to-date figures for the consumption of electricity for this final quarter are not at hand; figures have to be based on previous quarters, assuming constant use. Taking this for granted, the cost of the cut back, in dollar terms, would reach 230.4 million dollars, which is calculated to be 1.7pc of the GDP for the 2006/2007 fiscal year.

For the government, it means that its calculation of a growth of over 10pc for fiscal 2007/2008 will have been derailed by the 1.7pc decline in GDP because of the power cuts by EEPCo.

EEPCo, it has to be said, cannot be held responsible, or be expected to control the amount of rainfall for each season. Further, power rationing and favouring sectors that have a major role in production, as has been suggested, might, in the short term, lessen some of the burden and impact on both the service and manufacturing industries.

But, whatever the measure, and as long as that measure is just a stop-gap; the economy will, at all times be held hostage by these utilities until such time that the supply of both power and water are made more efficient and reliable for all users at all times.

The government has to take proper and urgent, remedial action to stop the deterioration of the country's economy.

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