The World Bank is now calling for diversification on infrastructure funding in Ethiopia in a bid to finance its infrastructure projects to avoid heavy reliance on the state.
In recent years the country has been carrying much of the burden of raising finance for infrastructure development while at the same time demanding that banks invest the equivalent of 27% of the loan portfolio in low-yield state development bonds, leaving little for private business to borrow.
But in a turn of events Ethiopia says it would change its policy demanding banks invest 27% of their loan portfolio in state bonds.
Although continued infrastructure development remains one of Ethiopia’s best strategies to sustain growth observes the World Bank, the current financing model cannot be sustained.
The Bank says that the private sector was being squeezed to finace infrastructure construction in Ethiopia.
The World Bank now urges Ethiopia to raise taxes, increase private sector activity and improve public investment management as some of the ways of financing its infrastructure construction.
Other options put forward by the Bank includes increasing domestic savings and developing capital markets via a higher real interest rate, greater selectivity and prioritization of investments, securitization of infrastructure assets, and improved pricing, including higher electricity tariffs.
Ethiopian Minister of Finance and Economic Development Ahmed Shide says some of the options proposed by the World Bank were in line with the government’s plans.
The country plans to raise tax earnings to 18 percent of GDP in five years’ time from the current 12% . It also wants to lift the savings rate to 30 percent by 2020 from the current 22%.
Ethiopia has been grappling with dilapidated transport networks over the past decade but investment in infrastructure now promises high returns.
Ethiopia has been grappling with decades of dilapidated transport networks but has been working tirelessly to boost its infrastructure. For instance this year, it launched the first rail network system. The country is also constructing what will be the biggest hydro dam dubbed the Rennaisance Dam. With annual economic growth of 10%, Ethiopia is emerging to be the fastest growing country in Africa.
The world Bank sees diversifying infrastructure funding in Ethiopia as a key to sustain the country’s infrastructure development.