World Bank Urges Ethiopia to Diversify Public Investments

The World Bank advises that Ethiopia should look for new ways to finance public infrastructure projects, according to Reuters. Public spending grew the economy over 10 percent for the 2014/15 fiscal year, but the government carried a heavy debt burden in the process. The World Bank suggests increasing taxes, boosting domestic savings, and involving the private sector as viable alternatives.Ethiopia has come a long way in getting over its image of a poverty-stricken land full of starving children, rising to become one of the most prominent emerging markets in Africa. Because of public investments, the East African nation's 10-percent expansion proved one of the fastest growth rates in Africa, but the World Bank believes that the country cannot sustain its current trajectory.

The government has put pressure on banks to invest 27 percent of their portfolio ratios in infrastructure bonds. State spending has proven successful, but bank and government investments leave little room for business owners to raise capital and contribute to the economy. Restriction of the private sector also constitutes a serious problem.

The state can mandate where businesses and foreign investors can start companies, placing a greater strain on start-ups. Such regulations could spell the downfall of Ethiopia because of its status as a vital emerging market that needs free flow of capital and investment to keep the economy moving. Moreover, rigid policies stifle job creation while preventing more people from gaining access to opportunities that will lift them out of poverty.

The World Bank notes that poverty dropped 33 percent since 2000 because of greater development in Ethiopia.  However, the country needs to do more to raise living standards, such as lifting migration constraints for urban residents and encouraging entrepreneurship. Electric outages still occur around the country, and the presence of shanty towns remain commonplace.

The government needs outside advice to enhance development, but the business community remains reluctant to voice criticism because of authoritarian governance. Ethiopia does not serve as a totalitarian state, but leaders face criticism for lacking democratic values and violating the rights of workers.

Authorities have yet to acknowledge their failings, but they have issued various proposals for the future. For example, authorities stated that they intend to alleviate pressure on banks to invest in state bonds, but have given no further details.

Ethiopia also has long-term endeavors, such as increasing the savings rate from 22 to 30 percent by 2020 and raising taxes from 12 percent of GDP to 18 percent in five years. Another notable reform measure would be the creation of a financial market. To date, Ethiopia has no financial market, and authorities show no sign of creating one thus far.

Source: economywatch.com