World Bank Recommends Ethiopia Diversify Infrastructure Funding

For those who remember commercials from the 1980s and 90s featuring starving Ethiopian children and asking viewers to contribute in order to buy them food, the explosive growth in Ethiopia may seem nothing short of miraculous. However, that growth and development has continued for a prolonged period, and modern Ethiopia now has fewer issues with starving citizens and more concerns about modernization.

For those who remember commercials from the 1980s and 90s featuring starving Ethiopian children and asking viewers to contribute in order to buy them food, the explosive growth in Ethiopia may seem nothing short of miraculous. However, that growth and development has continued for a prolonged period, and modern Ethiopia now has fewer issues with starving citizens and more concerns about modernization.

Among those needs are ways to finance the development of the nation’s infrastructure. The World Bank has recently assessed the state of infrastructure development in Ethiopia and found that the East African nation needs to find new ways to finance infrastructure projects after years of relying on state-created investment initiatives.

These investment programs helped to build new roads, railways, and dams, driving growth. However, the huge public investment has begun to reach its limits after pushing economic growth above 10 percent for the 2014/15 fiscal year. That has made Ethiopia one of the fastest growing nations in Africa.

Unfortunately, the state has carried much of the burden of these financing methods, while mandating bank investments equivalent to 27 percent of the institution’s loan portfolio in low-yield state development bonds. This has made it difficult for private businesses to borrow, stifling organic free-industry growth.

In a recent report, the World Bank noted that continuing infrastructure development remained one of Ethiopia’s most important strategies for maintaining economic growth. However, the report also noted that the current model is not sustainable.

Ethiopia’s building plans remain as ambitious as ever, with a $4 billion hydroelectric dam, and over 5,000 km of railway construction still on the agenda for the next five years. After decades of dealing with aged and outdated transportation networks, the World Bank said Ethiopia’s investment in infrastructure should pay off with high returns in economic growth.

Nevertheless, it noted that without changing the system, the squeeze that the current funding model is putting on private financing would offset growth.

According to Citizen Digital, the World Bank suggests that Ethiopia should fund its projects by raising taxes, increasing private sector activity, and improving public investment management. Other options include increasing domestic savings, developing capital markets through higher real interest rates and better prioritization of investments, securitizing infrastructure assets, and raising tariffs. Complicating matters somewhat, Ethiopia has no stock exchange or other financial capital market as in more developed nations.