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Chinese Premier Li Keqiang, third from right, and Ethiopia's then-Prime Minister Hailemariam Desalegn, second from left, attend a signing ceremony at the Great Hall of the People in Beijing in 2017. Photo: AP

Politico | Ethiopia plays Europe off China in bid to boost investment

  • Effort to attract European money is part of prime minister’s push to modernise economy and reduce debt, analysts say
  • ‘Without China, not much would happen around here,’ says an Ethiopian food seller

This story is published in a content partnership with POLITICO. It was originally reported by Simon Marks on on February 3, 2020.

For the past four years, Welibuw Buzenehe watched as China built a new national sports stadium in the heart of the Ethiopian capital.

Located deep in Addis Ababa’s commercial centre, the soon-to-be-finished structure towers some 40 metres (131 feet) above the ground and will have a capacity of 62,000 people.

“China is building this city from the ground up,” said Welibuw, a local food seller in the area around the stadium. “Without China, not much would happen around here.”

The roughly US$160 million construction project is one of many highly visible, Beijing-backed mega-projects – from hydropower dams to skyscrapers – that have helped make China Ethiopia’s largest trading partner.

But recently, efforts by Ethiopia’s firebrand prime minister, Abiy Ahmed, to modernise the economy, privatise state-owned companies and reduce the country’s debt burden are shifting the power dynamics in the country.

Abiy, analysts say, is positioning the country to leverage competition between the West and China to attract even greater investment – and reduce the country’s dependence on Beijing.

Ethiopian Prime Minister Abiy Ahmed. Photo: AFP
In December, Ethiopia received a US$9 billion injection of financial aid from Western donors, the International Monetary Fund and the World Bank. The influx of cash could upend 15 years of Chinese dominance and spark unprecedented interest from Europe and America, investors, economists and political analysts say.

“The granting of this money sees the West countering China in a very tangible way, in one of the more politically and economically important and consequential countries in Africa,” said Zemedeneh Negatu, an Ethiopian-American investor and global chairman of the Fairfax Africa Fund.

“Western governments, led by the US, appear to like what Prime Minister Abiy is trying to achieve and they want to help him move forward with his reforms.”

New potential

For Europe and America, Ethiopia – one of Africa’s fastest growing economies and the continent’s second most populous country after Nigeria – has become too big of a prize to ignore.

The IMF’s disbursement was the first time in over a decade it lent money to Ethiopia. The amount – US$2.9 billion – also represents one of the highest levels of financial assistance that can be provided under the organisation’s lending rules.

Observers chalk up the body’s decision to approve the cash to the leadership of Ethiopia’s prime minister, who – despite criticism that he has not done enough to quell deadly fighting between Ethiopia’s ethnic groups – is seeking to embark the country on a new path.

A core part of Abiy’s agenda is an effort to overhaul the country’s economic model of heavy state investment, which economists widely agree has run out of steam.

How did the likes of Ethiopia and Iran escape colonisation by Europeans?

As part of that push, the prime minister has surrounded himself with a tightly knit group of young, liberal-minded technocrats with international experience to raise private capital and privatise key sectors such as the telecommunications market.

“A key objective of the government’s economic reform agenda is to sustain Ethiopia’s growth by tackling emerging fiscal and current account deficits,” said Mamo Mihretu, Ethiopia’s chief trade negotiator and a senior adviser to the prime minister.

Abiy’s efforts have not gone unnoticed. In October, he won the Nobel Peace Prize for his efforts to end Ethiopia’s long-running war with Eritrea and to bring greater political and economic freedoms to a country that had suffered for decades under oppressive regimes.

The award appears to have gone a long way toward lionising his image on the world stage. Despite hundreds dying in ethnic clashes and anti-government protests demanding more autonomy from the state since he came to power in April 2018, Abiy has become the exemplar of a modern Africa full of economic potential.

The reforms are creating “opportunities for Western businesses to invest in Ethiopia,” even as they are altering Ethiopia’s relationship with China, said Abdulmena Mohammed Hamza, an economist specialising in banking at the Edinburgh Business School.

A changing relationship

Over the course of the last decade, Ethiopia has become increasingly dependent on Chinese investment.

The Export-Import Bank of China put up US$2.9 billion of the US$3.4 billion railway project connecting Ethiopia to Djibouti, providing the landlocked country access to ports. Chinese funds were also instrumental in the construction of Ethiopia’s first six-lane highway – a US$800 million project – the metro system, and several skyscrapers dotting Addis Ababa’s skyline.

Beijing also accounts for nearly half of Ethiopia’s external debt and has lent at least US$13.7 billion to Ethiopia between 2000 and 2018, data compiled by Johns Hopkins University School of Advanced International Studies shows.

But finance ministry figures show that Beijing has begun to taper the amount it lends to Ethiopia in recent years – from US$1.47 billion in the 12 months from July 2014 to US$630 million in 2017.

A train runs on the Ethiopia-Djibouti railway near Addis Ababa. Photo: Xinhua

Diplomats and observers of Ethiopia’s economy say that Beijing has grown frustrated after major investments such as the Djibouti railway line failed to generate sufficient revenues.

China’s partial retreat has thrown into relief Ethiopia’s indebtedness to Beijing. Observers say upending that equation is perhaps the greatest motivation for Ethiopia’s opening up to the West.

Speaking at a conference in Addis Ababa in December, Abiy went as far as to say the terms of Chinese loans had damaged the Ethiopian economy.

“There are some that say we are adding more debt to the country’s already high debt. But borrowing from the IMF and the World Bank is like borrowing from one’s mother,” Abiy said.

On board the Chinese-built Ethiopia to Djibouti train, a lesson in compromise

“What hurt Ethiopia is borrowing from other companies or some countries. For instance, Ethiopia borrowed to build a railway but was asked to repay the debt before the completion of the construction,” he added, referring to the Chinese-backed railway line to Djibouti.

European and American companies are hoping to make the most of the moment.

In December, Abiy received European Commission President Ursula von der Leyen, who laid out plans to forge a new relationship with Africa beyond just development aid and strategies to prevent the flow of migrants into Europe.

European Commission President Ursula von der Leyen. Photo: Xinhua

The previous month, Adam Boehler, the CEO of America’s International Development Finance Corporation, the investment branch of the US government, said Washington is “prepared to make multibillion-dollar investments in Ethiopia”.

Such high-profile visits, analysts say, shows that Western economies have finally arrived at the table alongside China, the Gulf states and Russia, which have all been manoeuvring for influence in Ethiopia since its economy started to boom about a decade ago. One of the most visible pledges came in 2018 through a US$3 billion package of aid and investment from the United Arab Emirates.

“It would be a gross simplification to say that Ethiopia will no longer seek Chinese overseas development finance. China and Ethiopia continue to enjoy robust trade and investment relations,” said Mamo, the prime minister’s senior adviser.

Chinese workers pose at the inauguration site of the train linking Addis Ababa to Djibouti in 2016. Photo: AFP

But, he continued, “financing from the World Bank and the IMF has an additional attraction of being concessional, long term and predictable without unduly distressing the public debt burden.”

Irmgard Erasmus, a senior financial economist at NKC African Economics, a research company, said China had been very flexible with Ethiopia in accommodating Addis Ababa’s hard currency liquidity challenges and restructuring their loans.

But, he added, “the Asian giant’s decision to start closing the funding taps came at the same time as some positive developments in the Ethiopian political space, which allowed Ethiopia to pivot to multilaterals as they are more willing to engage.”