Ethiopia National Development Plans And Financial Markets Strengthening


The Ten-Year Growth Plan (Master Plan)

Ethiopia developed the ten-year development plan (2020/21 – 2029/30) that aims to position the country as the ‘African Beacon of Prosperity’.  This is a successor to the five-year growth and transformation plan-II (GTP II) and it focus on six strategic pillars that include:

  • Private sector leadership in the economy.
  • Equitable participation of women and children
  • Building a climate resilient green economy
  • Undertake institutional transformation
  • Improve productivity and competitiveness
  • Ensure quality growth

The 10-year plan is aligned with global and continental goals such as the sustainable development goals of 2030 and the Africa’s continental Agenda 2063 and it borrows from successes and failures of previous national development plans. For example, the plan acknowledges failures in the financial sector relating to poor appraisal and monitoring of long-term loans being advanced to state owned enterprises creating a significant risk in the banking sector. Additionally, the plan acknowledges that sub-sectors such as insurance have had little to no innovation in new products and accessibility to financial services is still low for a majority of the population.

The plan seeks to prioritize investments in projects that would have an impact on the economy based on their value addition to the GDP. It also seeks to focus on core productive sectors of the economy such as agriculture, manufacturing, mining and petroleum and sees the financial sector as an enabler to achieving its economic growth plans.

Still under the financial sector at the macroeconomic level, the ten-year plan aims at having a foreign exchange rate that is determined by demand and supply forces of the market. This is a significant shift from previous practices whereby exchange rates were controlled by the government. The plan also envisages interest rates controlled by the market in order for the financial industry to support the plan structural reforms and the installation of a digital finance system.

The Homegrown Economic Reform Plan

The homegrown economic reform plan (HGER) was introduced in 2019 and its primary goal is to move the Ethiopian economy from being public sector led to more private sector led. This is to reduce the reliance on inefficient state-owned enterprises and bring Ethiopia’s public debt levels to manageable levels. This three-year Government owned plan had three key focus areas macroeconomic, structural and sectoral reforms with one of the key target sectors being the financial sector. The macro-economic reform plan has identified the financial sector as key with the ultimate objective being financial stability and inclusion and promoting productivity and competitiveness in the sector. More involvement of the private players in the financial sector is seen as a remedy to structural financing challenges as it would encourage savings hence more access to credit for private-sector investment. Reform in this sector will be market oriented in order to promote market-based interest rate and foreign currency exchange rate determination. Under the financial sector the reform agenda aimed at increasing access to capital for the private sector that had previously been crowded out as well as stronger supervision of the sector.

The IMF and AfDB have been critical in providing financial and technical support to the Ethiopian government in order to ensure the success of the HGER. AfDB provided a USD 4 Million grant to support the capacity building of the finance ministry and related government departments in research and policy analysis. On the other hand, IMF through its extended credit facility and extended fund facility approved a loan of USD 3 Billion to support the HGER I program.

Achieving goals under this plan has been difficult with the entry of the Covid-19 pandemic and breakout of war in Northern Ethiopia. Despite these efforts from continental and multilateral partners, disruptions to the HGER that were domestic and external meant that the reform plan was not well implemented with challenges being faced by foreign owned businesses. Companies that took the opportunity to expand into Ethiopia still complain of foreign exchange crunches and government bureaucracy with foreign business complaining of not being able to access critical operational licenses. Additionally, capital control measures were issued in 2022 at the height of the civil war as their was a significant imbalance between the demand and supply of local currency. Local and foreigners were given limits on the amount of foreign currency they could hold and a ban was issued on transactions being completed using foreign currency.

The Homegrown Economic Reform Plan II

The Homegrown Economic Reform Plan II (HGER II) is a successor to the HGER I and will run for a three-year period (2023 – 2025). The plan builds on the reform agenda that HGER I and some of its goals include gradual transition into a liberalized forex market, reducing redundancy of various incentives packages, linking debt strategy to revenue and export goals and implementing banking sector liberalization. The document that is still in draft format does not provide a detailed breakdown of how its ambitious plans will be achieved and it is planned to be succeeded by the HGER III after the three-year period. Negotiations between the IMF and the Ethiopian government are already underway with IMF officials visiting the country towards the end of March 2023 to do technical work on the ground in preparation for a potential IMF-supported program. The renewed strength to see the success of HGER II comes of the end of the civil war that was taking place in the Northern part of the country after a peace accord was signed between the two parties and the African Union acting as a mediator.

Author: David Kageenu