21 June 2018

Ethiopia: Cautious Selection of Private Sector Actors

The domestic private sector has limited capacity to buy stakes in public enterprises which the government has recently decided to fully or partially privatize. Hence, experts are advising that greater care has to be given in selecting healthy potential foreign investors and systematically protecting capital out flows.

The recent decision to sell some shares of the public owned corporations to the private sector will ensure economic fairness, efficiency as foreign companies will come with new management styles, technology and hard currency.

In the banking sector, for instance, the total assets of the Commercial Bank of Ethiopia (CBE) hit close to half trillion Birr and its capital reached 40 billion by the end of 2016/17. On the contrary the country's annual national budget is some 346.39 billion Birr.

This giant public financial enterprise has earned 32 billion Birr in revenue and a gross profit of 14.6 billion Birr on the reported period.

This amount of capital could have also been accumulated in sectors such as agriculture and industry or any other means of production as the role of bank is to distribute money not to hold capital, says Fassil Tassew Lecturer of Economics at Unity University.

This has to be invested in innovation, discovery and technological advancements to ensure the constitutionally enshrined aspirations of creating a single political and economic community and economic justice, Fassil says.

Thus, the decision to privatize full or partial share of the state owned companies such as banks, telecom service provider and Ethiopian Airlines as well is a right move despite its delay, Fassil says.

Fassil, who is also fiscal policy specialist, adds that the private sector is naturally the front runner in a competitive market and it has the capacity to provide services efficiently in its struggle to maximize profit.

The role of banks is to facilitate the flow of money. However, the current software in use in the banking system has to take local contexts into consideration and services should be efficient and active 24/7, according to Fassil. This will enable domestic companies to become competitive enough.

Then it is logical to assume that the giant western corporations would win the bid for buying stakes in the country's public owned companies. But what the government has to do is creating enabling environment for domestic companies through incentives and the principle of shared accountability to the entry risk, Abraha Akelom, Student of Political Economy at Mekelle University notes.

The risks should be shared by the private and public sectors, he stresses.

The private sector is more efficient than the public as for both Fassil and Abraha but before that the fiscal and monetary policies have to be reviewed in a way that gives highest value for Birr at the first step before any other hard currency.

Nothing is cheap and free in the universe of economics, Fassil says adding the term cheap labor has also be corrected in conformity with the competitive nature of economic force.

The responsibility of the state should be creating an enabling environment so that everything has to be decided by the market, Fassil adds.

The economic terms in the tax collection system in Ethiopia is narrow; this leads the private sectors to provide substandard goods and services which then weaken the private sector.

At this time in point, there are no domestic private companies that can win the bid to run the telecom and airlines sectors, says Civil Service University Lecturer of Development Economics, Kidanemariam Gidey.

He also adds that the government seems to prefer foreign companies as it has been facing shortages of foreign currency to finance major mega projects and ease the debt burden.

Therefore, the foreign companies potentially have the chance to come out victorious in the privatization process. This will bring new management systems, technology and hard currency and will definitely increase efficiency and productivity, according to Kidanemariam.

However, Kidanemariam recommends that the privatization process should be done carefully particularly in selecting healthy investors, protecting capital out flows and encouraging domestic companies to having shared capital to be competent in the market, if possible.

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