1. Introduction

In May, 2001 the Ethiopian Government started the so called "Anti-corruption" campaign. Under the disguise of fighting corruption the campaign was inaugurated by arresting key rivals of the Prime Minister in the leadership of the ruling party as well as the top managements of the major sources of income of the Government and the commanding heights of the Ethiopian Economy.  In addition to ex-Defense Minister Seeye Abraha, among the jailed senior Executives were:

 

-                     The Board Chairman and the General Manager of the Ethiopian Privatization Agency;

 

-                     The Executives and senior management of the biggest bank, the Commercial Bank of Ethiopia - about 40;

 

-                     The General Manager of Wonji/ Shoa Sugar Factory;

 

-                     The General Manager of Metahara Sugar Factory;

 

-                     The General Manager and the Commercial Manager of the Sugar Industry Support Center, and

 

-                     About 12 prominent business people (customers of CBE).

 

Despite the now proven fact that the campaign was a political witch hunt against political rivals of the Prime Minister, the imprisonment of these top Executives and business people has continued to date.  The campaign has not only victimized these productive and innocent citizens but also caused the miserable economy to suffer multi-faceted consequences.

 

 

Among other things:

 

-         Deep financial sector crisis (although it is undeclared);

 

-         Dismally low level of both domestic and FDI;

 

-         Stalled Privatization with all its consequences;

 

-         Deterioration in the Performance of Victim Institutions;

 

-         Capital Flight;

 

-         Mistrust and sour business- government relationship;

 

-         Foregone employment, tax and interest income;

 

-         Flight and arrest of Professionals; and

 

-         Death of decision making in the civil service and public enterprises;

are the distinctive features characterizing the Ethiopian Economy since the beginning of the campaign.

 

Although, this now infamous campaign has caused serious damages in other areas like the loss of political credibility and loss of confidence in the rule of law, this report covers the impact of the campaign on the Ethiopian economy in terms of the above parameters and segments of the economy. And finally it culminates by giving a brief concluding remark and appeals.

 

 

 

2. The Financial Sector Crisis

The Ethiopian Financial Sector which was one of the targets of the campaign was severely affected by it.  This is clearly demonstrated by performance of both the government and private banks.

 

As a background, it should be noted that Ethiopia with only seven Commercial Banks (one government and six private) and two specialized banks (both government-owned) is one of the least banked (if not the least) countries in the world.  According to NBE's 2^nd Quarter Bulletin of 2003/2004, with its 339 bank branches all over the country has a population of 204,000 per bank branch.

 

Following the government's unwarranted mass arrest of the Commercial Bank of Ethiopia's Management and about 12 of the Bank's prominent customers in the name of suspicion for corruption the fragile banking sector of Ethiopia has been severely hit.

 

The government's move had created a shock on the part of both lenders (bankers) and borrowers (business people).  The immediate reaction of the customers of CBE (the bank that was controlling over 70% of the commercial lending and 80% of the deposits) was:

 

·                    Some of the prominent customers who had loans with CBE used every means to repay it back prematurely and left the bank;

 

·                    Those who couldn't pay their CBE loans from own sources arranged for the transfer of loans to the private banks and left the CBE;

 

·                    Borrowers whose application for loan at the CBE was on process at the beginning of the campaign instantly withdrew their application for bank loans not only at CBE but with other banks as well;

·                    Business Organizations which then had a plan for expansion or to start new projects through bank loans totally discontinued or postponed their plan indefinitely; and

 

·                    Some others with limited financial need had to resort back to the traditional means of financing "equob" and/or usury. (reversing the monetization process and taking the road to demonetization).

 

Over the following three years (since 2001) the effect of the campaign on the banking sector was far-reaching and damaging to the Ethiopian economy.

 

Credit crunch stifled the economy, investment both domestic and foreign.

As bank borrowing started to freeze NBE (in early 2002) tried to intervene by way of reducing the interest rate on deposits from a minimum of 6% to 3% and on loans from a minimum of 10.5 to 7.5% with the objective of reducing the banks' interest expenses on deposits and attracting the panicking borrowers by means of low interest on bank loans.

 

The data from NBE for the years 2001-2003 however reveals that the intervention was in vain (a failure).  Reduction on lending interest rate couldn't convince the scared borrowers to come back not only to the CBE but to other banks as well as they were not sure the Government will not take similar harsh measures on borrowers of the other government and private banks as well.

 

As a result, however important was borrowing for the business people, neither the borrowers were willing to ask for bank loans nor the Managers of CBE who succeeded the imprisoned officials got the courage to approve loans.

 

The result was, while the economy was feeling the hunger for cash little loans were granted.  At best the loans granted by the previous management are being renewed. This caused the build up of excess reserve on the part of Commercial Banks.  NBE's 4^th Quarter bulletin of 2002/2003 and 2^nd Quarter bulletin of 2003/2004 show that the growth of annual excess reserved hiked up 62.9% and 40.1% for the 4^th quarter of 2001/2002 and 2002/2003 respectively.

 

The 2003/2004 quarterly bulletin of NBE indicated that over 88% of the excess reserve was held by the CBE.  It is interesting to see that the CBE, whose executives are being penalized for lending to the business community, has learned from its past mistakes and therefore its new executives who succeeded those in jail will never feel comfortable to approve new loans.  This is why the bank's books show that outstanding balance of economic loans, excluding treasury bills and government bonds in 2001 (shortly before the campaign), was birr 10.5 billion and three years after in June 2004 the balance was squeezed to a total outstanding of Birr 8.3 billion.  This is about 21% decline on the overall loan portfolio of the bank.  Compared with the bank's annual planned growth of 10% the unfavorable gap becomes over 53% over the last three years.

 

This gradual shrinking of loans of the CBE, the bank that is with the highest amount of the Nation's money idle, and yet mounting year after year demonstrates that the Bank is, for the most part engaged in collecting the money lent during the years prior to 2001.

 

The NBE's 2002/2003 4^th Quarter bulletin (page 18) tries to reflect this reality as follows:

 

"On annual basis, bank deposits hiked by about 42 percent as a result of persistent build up of excess reserves which can partly be explained by weak credit demand of the private sector coupled with the fear of Commercial Banks from contracting new non-performing loans.  This has also resulted in a 30 percent growth in reserve money."

 

Although the above statement reflects on the fact that deposit (one of the lowest in the world) is yet building up and credit is sliding down, the real reason, the panic that has been created against borrowers and banks is not mentioned.  It is understandable that the NBE cannot be expected to condemn the government's action however destructive the latter's act might have been.

 

The Central Bank in the bulletin mentioned above discussing the build up of excess deposits and its effect on the economy had expressed its concern as follows:

 

"Excess reserves (actual reserves minus reserve requirement) of Commercial Banks picked up 5.8 percent on Quarterly basis and by 40.1% (in 2003) vis-à-vis end of December 2002 level to reach birr 2,822.2 million.  About 88 percent of the excess reserve was held by CBE.  Thus continued existence of large excess reserves in the banking system poses a challenge to the development of the banking industry and the economy at large.  It has also impact on the development of the inter bank money market and effectiveness of the monetary instruments used.  Cognizant of this fact, the NBE has taken several measures, including sale of Government securities through fortnightly auction, to mitigate the challenge."

 

In a more recent development of the financial sector, reflecting the seriousness of the problem, Reporter, the Amharic weekly newspaper of October 7, 2004.  (Tikimt 7, 1997 E.C.) on the front page headlines:

 

"17 Billion Birr Accumulates in the Government and Private Banks" and goes on stating that:

 

·                    Out of the 17 billion 98% or 16.67 billion of the excess accumulation of money belongs to the Commercial Bank of Ethiopia, (CBE);

 

·                    the accumulation is the result of no borrowers coming to the CBE, which is responsible for 98% of the accumulation;

 

·                    the reason why borrower are not asking for loan from the CBE is due to the erosion of trust between the Bank and borrowers per anonymous expert's opinion;

 

·                    World Bank experts who recently attended a meeting in Addis Ababa commented that making idle 25% of the country's financial resources is harmful for the economy;

 

·                    Ethiopian banks are incurring interest expense on idle money from which they should have earned interest income and contributed to their profitability; and

 

·                    The fact that the Government has retreated from the recently issued directive i.e. to finance organizations engaged in export business as high as 70% through bank loan for 30% equity has been replaced by requirement of 30% deposit (cash) in advance.  This means contribution in kind is not accepted anymore in the latter schema and has seriously dithered the lending of funds (birr 1.5 billion) earmarked for exporting investors.  Data indicates only 1/3 of it was utilized.

 

Fortune, the weekly English newspaper on the other hand, on its issue of October 24 entitled "Sitting on a Cash Mountain" has made similar remarks as regards the excess accumulation of deposits.

 

"These banks have accumulated huge amounts of liquidity estimated to have reached the staggering figure of 13 billion birr.  According to some estimates the liquidity volume is as high as 25% of the GDP.  It is stashed away in their vaults while hungry borrowers are prevented from putting their hands on the mountain of cash simply because of unpredictable shifts in policies and directives. ...

 

According to some estimates, the Commercial Bank of Ethiopian owns 98% of the 13 billion Birr idle in the banks' vaults.

 

The contradiction between the accumulation of a large amount of idle money in the banks, on the one hand, and the growing demand for loans from potential borrowers on the other, might be the main absurdity of the financial sector at present.  There are a number of factors that have militated against the emergence of an efficient banking systems that could have become a catalyst for higher private sector growth.

 

The state controlled bank was plugged into administrative chaos following the arrest of senior bank officials on charges of alleged corruption back in 2001.  Since then, the various officials who came at the Head of State Banks chose a "hands off" policy particularly when it concerned endorsing loans.

 

The former officials were allegedly jailed for making bad decisions that contributed to the accumulation of bad or non-performing loans.  As a result the new ones are apparently over cautions."

 

The weekly newspaper went on elaborating the consequences of the Government's Anti-corruption Campaign on the borrowing-lending process as depicted here under:

 

"A crisis of confidence set in since then and attempts to restructure or modernize the Banks' Management have failed on many occasions.  This further accentuated the intimidating environment prevailing in these banks.  This has, in turn, led to mis-trust between lenders and borrowers and to the impasse that has resulted in the accumulation of a huge amount of illiquid money.

 

What most analysts and critics of the financial sector consider all the more absurd is, however, the issuance of more constraining directives by the Central Bank that have made it virtually impossible to turn illiquid money into liquid assets."

 

The above statements are clear manifestation of the problems and the gravity of the problems the Ethiopian Economy is entangled with.  The newspaper also tries to state some remarks regarding the availability of alternatives:

 

"Since Ethiopia does not have intermediaries such as financial markets, it is very difficult to make these financial assets more liquid.  There is no way investors in Ethiopia could readily sell their holdings in government securities, stock and bonds and turn their holdings into liquid assets.   Lending against collateral has become a thing of the past due to the rise of non performing loans and this has left potential borrowers without alternatives ..."

 

In concluding its remarks the paper wrapped up by stating:

 

"Until such a time, the banks are sitting on a mountain of cash that has no more value than the paper it is printed on."

 

In conclusion, the above statements from the newspaper are clear articulation of where the Ethiopian financial sector is.  Whether the excess money is birr 13 billion Birr 17 billion at this point in time the financial sector is in deep sheet because of the Government's own making.  However, reluctant the Government may be to declare it, the financial sector is in a deep state of crisis.  The NBE is trying to solve the excess cash by selling treasury bills and the loan by issuing more inhibiting directive both of which are wrong as they contribute to the problem rather than to the solution.  This is lazy banking which is not good neither for the banks nor for the country.

 

The hiking up of excess deposit has forced the Government via the NBE to sell Treasury bills and bonds with a view to support the Government bank i.e. the CBE.  According to NBE's 2003/2004 2^nd Quarter Report, out of CBE's birr 23.38 billion deposit birr 10.4 billion or 43.7% is held on       T-bills and government bonds.  In deed, while this credit crunch and excess deposits (paradox) are the result of the governments un thought of action and meddling on the biggest bank (CBE with 70-80% market share in the country), the NBE is trying to treat the symptoms by selling T-bills and government bonds.  Of course, only the government not the NBE can treat (if at all it could be treated) the cause by officially admitting the mess and genuinely committing itself to fundamental solutions. Otherwise it is a foolish on the part of NBE or the government to attempt to replace the customer (market) which has been pushed away by the government's action by way of selling T-bills and G-bond. In deed this amounts to cheating oneself unless the government is trying to meet its insatiable appetite (budget deficient) from bank borrowing at the same time.  After all the primary purpose of banks is not to trade Government bonds and T-bills.

 

In summary the Anti-corruption Campaign that targeted, among other things, at the financial sector has had a far-reaching consequence on the financial sector in particular and the entire Ethiopian Economy in general.  The fatal effects of putting bankers and prominent borrowers of the CBE in jail include:

 

·                    While the NBE is amassing tens of billions of birr of excess deposit of the Commercial Banks paradoxically the Ethiopian economy is suffering from credit crunch.  This is fettering growth and expansion of the economy across all sectors which in turn has caused depression on demand and employment;

 

·                    The Culture of banking (depositing at and borrowing from banks), which was developed through hard effort of 6 decades, is regressing back to the traditional ways of financing (Ekub and Usury) as many bank customers are developing phobia against bank borrowing following the arrest of bankers and borrowers of CBE.  This wound may not heal for a long time to come even if the government takes corrective measures (which it seems to be too adamant to do so to date).

 

·                    Borrowers are earning negative real interest rate on their savings deposits due to low interest on deposits and relatively higher inflation.  This discourages the depositors' propensity to save even though the saving rate of Ethiopia is one of the lowest if not the lowest in the world.

 

·                    The capacity of Ethiopian banks to mobilize resources and to expand their branch network which has been at miserable stage already was severely reduced;

 

·                    Banks are not able to generate enough interest income to cover their interest expense on deposits, reserve for non-performing loans, pay attractive dividend to shareholders to encourage further privates investment on the banking industry;

 

·                    Both foreign and domestic investors are discouraged by the new state of conditions of the banking industry in Ethiopia; and

 

·                    Rationing of foreign exchange has recently been introduced by banks.  Signaling the other dimension of the financial crisis the country is in;

 

to mention just a few.

 

Adding insult to injury, the National Bank of Ethiopia (NBE) is on the way of drafting a new proclamation on defaulting bank loans categorizing it as a criminal act, which is draconian type.  The moment this proclamation is issued, the project of destroying the banking system and its benefits to the Ethiopian Economy will be effectively concluded.  For now, the banking systems and the business community are in the process of disconnection.

 

3. Dismally Low Level of Investment

Investment, the engine for growth and the only hope for the Ethiopian economy was in a dismal condition from the outset.  This is true for both domestic and foreign investments.  But following the aimless campaign it went further from bad to worse.

 

According to data from the Ethiopian Investment Commission: Statistics on Investments in Ethiopia (May 2004) domestic and foreign investment was in a big shock from 2001 onwards.  This is depicted on the table below:

 

Number of Projects Approved

 

	1990(97/98)	1991(98/99)	1992(99/00)	1993(00/01)	1994(01/02)	1995(02/03)
Domestic	816	674	561	635	756	1127
Foreign	81	30	54	45	35	84

Source: Ethiopian Investment Commission

 

Number of Projects Made Operational

 

	1990(97/98)	1991(98/99	1992(99/00)	1993(00/01)	1994(01/02)	1995(02/03)
Domestic	278	301	309	53	171	152
Foreign	12	12	18	9	6	9

Source: Ethiopian Investment Commission

The above tables indicate that investment both domestic and foreign show abrupt decline from 2000/2001 onwards. Regarding domestic projects that have been made operational the number of projects dropped from 309 (1999/2000) to only 53 or 17% in 2000/01.  Although it grew to 171 and 152 in the years 2001/2002 and 2002/2003 respectively in the subsequent years, the total number of projects from 2000/2001 - 2002/2003 (three years) was 376 compared to the three years before (1997/98 - 1999/2000) which was 888.  Therefore, during the post campaign years, domestic investment of projects that were made operational was diminished to only 42% of the three years before.  Normally, growth would have been expected not such a sharp decline.

 

As regards foreign investments approved, the years 2000/2001 and 2001/2002 showed consecutive decrease from 54 to 45 and from 45 to 35 respectively.  Even at the 3^rd year 2002/2003, although the number of foreign investment projects showed a significant increase (84) that was only nearly the level it was in 1997/1998 (81).  This shows that the effect of the shock of 2000/01 and 2001/02 is still visible and active in 2003/04.  This would have been different under a normal growth trend.

 

The number of foreign projects that were made operational during the same period shows a clear gap between the last and the preceding three years.  The total number of projects during the first three years (1997-2000) was 42 while that of the last three years (2001-2003) i.e. post campaign was only 24 or 57% of the former.  Although the above figures may not tell the whole story about how tragic Ethiopian Investment is, it gives a clear indication that it has gone from bad to worse during the latter three years owing to the uncalled for and illegal campaign followed by illegal arrest of the high level civil servants and a  dozen businesspeople.

 

A data from "Ethiopia-An Investment Guide to Ethiopia Opportunities and Conditions" of March 2004 published by UN and ICC (sponsored by the Ethiopian Investment Commission) depicts that Ethiopia's foreign direct investment during year 2001 was 19.6 million US$ not even good enough for establishing one medium sized factory.  This was about 40% of Kenya's, 6.7%, Uganda's and 6% of Tanzania's foreign direct investment of the same year.

 

During 2001 while Ethiopia's FDI showed 40% reduction from the average level of FD Investment of the years 1996-2000 Kenya's grew 500%, Tanzania and Uganda grew at 540% and 750% respectively.  During 2002 the level of FDI grew to US$ 75 million.  Although not as awful as that of the previous year, it was still unacceptable by any standard.  These are all indicators of the impact of the major shock of that year (2001).

 

It is known that Ethiopia was not one of the popular investment destinations in Africa or even in Sub Saharan Africa to begin with.  But the Proclamation on Anti-corruption has made it more unpopular for investment.  The African Business Magazine issue of February 2004 (page 20-21) had issued a list of African countries Ranked by the Economic Freedom of the World Survey.  The list consists of 33 African countries.

 

The article indicates that Ethiopia and some other countries were not included in the survey as they were not part of the previous survey.  The survey used the following criteria.

 

·                    To what extent the government dominates the economy: state expenditure and taxes as a proportion to GDP.

 

·                    Judicial independence; the exclusion of the military from the political process; protection of property rights;

 

·                    Freedom of trade and capital movements;

 

·                    Free money flows, and access to sound money;

 

·                    Regulation of Business, credit and labor.

 

If Ethiopia were to be part of this survey it would have been at the bottom of the list.  From the out set, the Ethiopian Political, economic and regulatory environments were not attractive.  Adding insult to the injury, as a result of the Anti Corruption Proclamation of 2001, many of the above parameters for good investment have been severely eroded as indicated here under.

 

1)                 Execution of the Anti-corruption proclamation has been a real test of how much courts have been independent from the Government.  Judges who tried to be independent have been transferred to civil bench.  Others judges have been told to work against the constitution both in-terms of giving verdict to imprison innocent people and releasing criminals whom the executive wing wouldn't like them to be in jail.  Therefore, the Anti-corruption proclamation has put the independence of the judiciary in jeopardy.

 

2)                 In a country where business people are put in jail simply for alleged "bank lending procedures violation" it is hard to imagine the existence of freedom of trade and movement of capital.

 

3)                 The current business law of Ethiopia is over 4 decades old.  Moreover it was tampered with by the subsequent regimes.  More so now it is threatened by the illegal (unconstitutional) proclamation that gives the government a free hand to interfere on private business any time it feels like it.  It issues time and again inconsistent directives that are not friendly to the business community. A case in point is the Anti-corruption proclamation that denies the right to bail and goes against the constitution which has far-reaching implications on private business management and investment.

 

4)                 Protection of property right has been severally eroded by the so called Anti-corruption proclamations. The proclamation gives the Anti-corruption Commission the right to dispossess suspect's property and put it under the administration of alien third party organizations or boards before the suspect is proven guilty.  By the time the defendant is proven to be innocent at the court of law after years in jail his property which was in the hands of non-stakeholders is doomed.

 

5)                 Regulation of credit as cited earlier is one of the severely hit areas of business.  Mention was made about the business people and bankers jailed for allegedly violating internal procedures of a bank which the former are not expected to know and the latter have made the procedures themselves and have the authority to fully execute, interpret and even revise.  The implication of this incident is that the bridge between borrowers and banks is broken.  While banks are suffering from over-liquidity, and business people in critical need of money, the fact that these two parties can not meet and solve their mutual problem is an indicator of nothing but regulatory and policy problems regarding bank borrowing and lending.

 

The sad fact is, while the state of conditions of bank lending is in such a quagmire, there are no other modern ways of solving business financial needs (stock market, capital market, etc.)

 

The above parameters (1-5) are simply mentioned to indicate to what extent the Anti-corruption proclamation has contributed to the further deterioration of the Ethiopian Investment Environment. 

 

It should be noted that the argument here is not that sever measure should not be taken against corruption since corruption itself is one of the worst enemies of investment in particular and economic development in general.  The point here is, while it is absolutely necessary to fight corruption it should not be a cover up for other hidden agenda and when fighting corruption one should aim at the right targets.  In the cases at hand, the Government was aiming at the wrong targets i.e. Privatization Agency, CBE, Sugar Factories & the associated support center, and prominent business people.

 

4. Stalled Privatization

The "market-oriented" policy of 1992 recognizes the leading role of the private sector in the Ethiopian Economy.  It is recalled, in keeping with this policy, that the Ethiopian Privatization was established in 1994 with the ultimate responsibility to transfer the state enterprises into private hands via privatization.

 

It is also recalled that the Government had expressed time and again its commitment to the IMF and the World Bank and other institutions concerned to Privatize the state enterprises at its disposal in an accelerated manner.  To this effect, an ambitious plan with different modalities was established and put into effect in 1995.

 

The Privatization program was pursued until 2000 after which it was stalled.  In the first two years only (1995 and 1996) the EPA Privatized 102 enterprises and in the next four years (1997 - 2000) it privatized 64 state owned enterprises (SOEs).  During the years 2001-2004 that is since the period the government started the Anti-corruption Campaign, the number of SOEs privatized was only 10  (according to "Ethiopia" the investment promotion book of 2004). Data on revenues generated from privatization reveals that, the government has realized US$ 402.2 during 1995-2000.  Out of this US$ 326 was acquired from foreign investments while US$ 76.2 was from domestic buyers.  The 10 SOEs that were privatized during the latter years (2001-2003) fetched only US$ 3 million.  From both figures above one can clearly realize that privatization has frozen from 2001 onwards. This fact is clearly stated in the document "Ethiopia" Investment Guide to Ethiopia Opportunities and conditions page 10, paragraph 5 March 2004 as follows:

 

"As is clear from the foregoing, privatization has stalled.  Several reasons are offered to explain this.  According to EPA, one reason for the slackening pace of privatization is that while the early privatizations were of relatively small enterprises (many of them not much more than shops) many of the enterprises now for sale are relatively large and the capacity of the private sector to absorb them is limited.  In addition, the Government's conditions for privatization, from prices to procedures, have perhaps been too stringent.  The EPA recognizes this and is engaged in a rethinking and restructuring process that will lead to greater flexibility.  A third reason sometimes given by the private sector, is that the Government's Anti-corruption measures, which have led to the imprisonment of some former EPA officials among others, have created an excess of caution on both sides and had a dampening effect on the privatization process, this in turn leading to its stalling."

 

A close examination into the reasons given above by the EPA reveals that the facts (data indicated above) do not support the first two reasons.  Disregarding the number of SOEs privatized, if one takes the proceeds from privatization as a common denominator US$ 402.2 (1995-2000) vs US$ 3 million (2001 - 2003) one can clearly see that less than one percent of revenue (.75%) has been realized during the later three years.

 

As regards the stringency of conditions (policies) for privatization, the Government hasn't introduced changes in policy of privatization between the periods 1995-2000 and 2001-2003.

 

Therefore, the stringency of the policy does not explain why very little progress was made in privatizing the SOEs during the latter years.

Both the above reasons are, therefore, political cover up (politically correct answers) by the EPA as no one would expect the EPA to expose the real reasons for the stalled privatization program by pointing its finger at the government.  After all the EPA is required to speak for and on behalf of the Government.  The real season that explains it all is the last one i.e. the imprisonment of EPA's board chairman, general manager and a couple of businessmen who bought enterprises from the agency under the disguise of alleged corruption.  Unlike the former reasons, the source of the latter is private business people who are independent.  Thus the integrity of the third reason is unquestionable.

 

According to the National Bank of Ethiopia's Quarterly Bulletins of 2002/2003 (4^th Quarter) and 2003/2004 (2^nd Quarter) the amount planned to be realized from privatization in the years 2002/2003 and 2003/2004 was birr 350 million (US$ 41.2 million) and birr 100 million (US $11.8 million) respectively. The actual amount realized was Birr 13 million (US $ 1.5 million) in 2002/2003 and nil for the year 2003/2004.

 

The fact that privatization has reached a freezing point has significant negative implications on the Ethiopian economy. Again, a simple comparison of Foreign Direct Investment (FDI) on privatization during 1995 -2000 and 2001 -2003 demonstrates it in a crystal clear way.  During the first five years, the economy received proceed of USD 326 million FDI from privatization while during the next three years only a total proceed of USD 3 million was obtained.  Although there is no breakdown of how much of the latter US$ 3 million originated as FDI even if one assumes 100% was FDI, it is less than 1% of what was generated during the first five years.

 

Despite the fact that the Privatization Program was expected to be in high gear starting year 2000, reality proved that the contrary was what happened.  The fact that the authorities of privatization are put into jail and coupled with the imprisonment of Officials of the CBE, the only bank that was supporting the privatization program (Financing) gave the privatization program a big blow so much so that the Government had to almost abort the program and redirect itself to some other alternatives, although without calling it off.

 

As a result of the fact that the privatization scheme has stalled the Government seems to have been forced to change it strategy to joint venture and management contract in lui of privatization.

 

Fortune, the English weekly newspaper on its July 4/2004 issue had an article entitled "Is Privatization Shifting Gear?" which explains the current situation of Privatization in Ethiopia as follows.

 

"... Only half a year away from celebrating its 10^th anniversary, Ethiopia's privatization effort has seen a sale of 223 state enterprises, largely retail stores, during the first phase, while the more complex and larger factories, numbering 113 are still on the auction block. Classic examples are the three breweries that were offered for sale for more than three times with hardly any success in finding any buyer that satisfied the Government's appetite.  In the mean time the Government seems to have lost its fervor for privatizations, in its reluctance, to find a General Manager for the Privatization Agency for over two years could tell any story. "

 

"... This is the case for most of the factories which have been offered for local and foreign investors.  Interest has been running short and eagerness to buy the bid documents has declined.  For instance, among the 23 interested companies that had bought tender documents when the Ethiopian Privatization Agency (EPA) offered four state enterprises last year only one of them, Dummen, came back with a real offer to buy Koka Animal Farm. .... In late April 2004, the Ethiopian Government entered, into joint venture arrangement with Slovakia's lone car and truck tyre manufacturer ... . This move by the government heralds a rather uncelebrated shift of focus from full privatization into the arrangement of Co-owning or running state enterprises.  Tabor Ceramics is one of those companies for which the government is in quest for joint venture partners.... Despite its conclusion with no success, the government is now in hot pursuit of finding similar companies for the state enterprises under its control ... . Looking for joint venture partners will be the kind of job we will for carefully pursue in the next budget year." Girma Birru, Minister of Trade and Industry told Parliament, when presenting this ministry's nine-month performance report."

 

Meanwhile, the organization of the EPA which was independent and accountable to the PM is now reorganized and subordinated to the Public Enterprises Supervising Authority under the Ministry of Trade and Industry. This is indicative of fact that the government's priority has been altered.

 

The devastating failure; though undeclared, of the privatization program has severe consequences on the Ethiopian economy.  Among other things some are listed below.

 

1)                  Revenue that could have been generated to the government is stalled.

 

2)                  Rehabilitation and bringing up the inefficient public enterprises is postponed indefinitely leaving the SOEs to deteriorate further.  Fortune, the weekly English newspaper of July 4/2004 expresses the state of conditions of the SOEs:

 

"Many of the state enterprises find thems