Ethiopia has played a remarkable role in advancing Africa’s infrastructure development, which is crucial for economic growth. The public and private investments required to support economic growth have to be sufficient enough to improve the living standards of Africans, including Ethiopians. The flow of investment is crucial in developing a network of physical infrastructure assets over time. These include roads, railways, airports, ports, etc. and social infrastructure, including schools, hospitals, etc.
However, continental capital stock has been shown to contribute towards higher productivity growth and living standards. However, Africa’s total capital stock may have experienced insufficient inflow of capital over the past few decades. In some parts of Africa, capital stock accumulation has not been sufficient over the past three decades. Studies indicate that capital stock in Africa has been falling behind other regions of the world. However, Ethiopia has been making efforts to advance African infrastructure development, which is the basis for raising capital stock.
A country’s capital stock is its initial capital plus the annual increase in public and private investment. Experts define capital stock as the total of public, private and public-private partnership (PPP). According to experts, the real value of Africa’s accumulated capital stock did rise on a steady basis but remains severely low. Historically, Africa’s total capital stock had been higher than that of China in 1960, but the latter one steadily climbed to surpass the former within thirty years. By 2018, China’s total capital stock had escalated to approximately six times the level in Africa.
However, Africa’s capital stock accumulation has been slow over the past three decades. This reveals that Africa’s public sector has been facing constraints. African countries, including Ethiopia, have been grappling with formidable challenges stemming from soaring debt repayment obligations. Recently, several countries across the continent have been borrowing to fund infrastructure projects. They have also been fulfilling their budgetary needs stemming from successive economic crises.
These crises have led to an increase in debt accumulation that has raised debt-to-GDP (Gross Domestic Product) ratios. This indicates that the rate of increase in debt by African countries is continuously rising. Some African countries have surpassed internationally recognized limits for sustainable debt levels. According to data from the International Monetary Fund (IMF), the debt-to-GDP ratio in sub-Saharan Africa has increased from 23% in 2008 to 57% in 2022, and it is expected to stay at that level until 2029.
Economists suggest that this in turn raises the risk of debt distress, making it harder to finance most needed infrastructure development in Africa, including Ethiopia. The World Bank (WB) has indicated that there were eight African countries in “debt distress,” or unable to meet their repayment requirements. Also, fifteen African countries were already at high risk of debt distress, with another fourteen at moderate risk. Complicating the fiscal challenges, compared to other regions of the world, Africa is struggling with relatively low mobilization of revenue.
It is further indicated that lower tax-to-GDP ratio calls for tax restructuring in Africa. In other words, the tax collection is either inefficient or small compared to the gross domestic product of the African countries, including Ethiopia. Studies indicate that while the average tax-to-GDP ratio in 2020 stood at 36.1% in advanced economies, 34.3% in European emerging markets, and 28.6% in Latin America, Africa lagged with an average tax-to-GDP ratio of only 15.6%. This combination of rising debt levels and insufficient revenue mobilization in Africa, including Ethiopia, severely limits the fiscal collection in African governments. This situation limits the capacity of government spending on investment. This limits spending, particularly on critical infrastructure projects thereby impeding the economic growth and development prospects of Africa. It is, therefore, necessary to take continental initiatives to support infrastructure development through the AU and other multilateral institutions.
Ethiopian has been encouraging AU member states to allocate fund for the development of infrastructure in the continent. Priority has been given to the continental framework for infrastructure that plays a pivotal economic role across Africa. Despite AU member states contribution of fund for financing, there has been a need to access funding from international sources and the private sector.
However, the contribution of the private sector has been small compared to the total investment requirement in Africa. This indicated the untapped potential of the private sector for investment in the continent. Thus, the financing strategy should aim to enhance private sector participation by reducing potential risks.
African governments, including Ethiopia, adjusted relevant regulations for building capacity for investors. The governments support for private investment and consumption increase demand for infrastructure. The growing middle class and the increasing household consumption expenditure in Africa indicate opportunities for infrastructure, roads, railways, airports, etc. development.
In the recent past, private consumption expenditure in Africa has been steadily increasing. This rise in consumption is mainly driven by factors such as population growth, urbanization, and a rise in the middle class. According to the African Development Bank, private consumption expenditure in Africa has been growing continuously. Such growth reveals a substantial expansion in the African as well as the Ethiopian economies.
This rise in private consumption has created a growing demand for improved infrastructure, including transportation networks, energy systems, telecommunications, and water and sanitation facilities. To fulfill this demand requires substantial investments in infrastructure projects. These projects provide opportunities for both domestic and foreign investors. Also, the enhancement of infrastructure can further influence economic growth by reducing transaction costs, improving connectivity, and facilitating trade and investment.
Facilitating the growing private consumption in Africa, including Ethiopia, presents an opportunity to address the infrastructure deficit. It fosters sustainable economic development in the continent. It will also facilitate domestic resources mobilization through private sector financing of investment under the “Program for Infrastructure Development in Africa: PIDA.” This initiative which has been led by the AU seeks to increase sovereign wealth fund and pension fund participation in African infrastructure financing.
By unlocking African institutional savings and attracting international financiers, PIDA initiatives are crucial for accelerating Africa’s infrastructure development. This fosters sustainable economic growth across the continent. It also facilitates projects such as the African “ports race” that have resulted in huge capacity additions at African ports. But, experts believe that this expansion has not led into more efficient and integrated logistics supply-chains across the continent as expected.
The private sector is interested in modern port operations and roads and railways. But, these services have remained fragmented due to lack of finance, poor road networks, inefficient railways, and limited airports capacity. All these have contributed to high logistics costs, hindering industrialization and economic diversification efforts in Africa. Even though there is an increasing integration in certain regions, such as East and Southern Africa, cross-border economic operations remain constrained due to inadequate infrastructure.
Ethiopia has been playing a pivotal role in developing cross-border trade among neighboring countries. It has been engaged in building road and railway networks to foster economic growth and development. Though there is constraint on funding infrastructure development, the private sector capital has become critical for expanding cross-border activity. The private capital investment should be encouraged as it is crucial for enhancing regional economic development. It facilitates efficient movement of goods that promote economic growth across Africa, including Ethiopia.
Though there are positive developments, Africa’s trade and logistics sector faces a number of challenges in the transport sector. Its roads, railways, airports, and seaports have witnessed a formidable cargo and containers handling capacity problems. Experts pointed out that road networks are limited with an uneven distribution and poor quality, especially in sub-Saharan Africa. Railways struggle with shortage of investment, low usage, and technological disparities. These factors limit the efficiency and connectivity of railways.
Also, the aviation sector shows growth potential but faces high costs and safety concerns. It lacks integration due to little attention to development of logistics efficiency. Experts have pointed out that upon arrival at some African ports, logistics bottlenecks make the next transportation of goods an inefficient one that is time consuming and expensive. It requires remedial action by those countries affected by the impacts of inefficient means of transportation on their economies.
The program for infrastructure development in Africa (PIDA), as mentioned earlier, seeks to enhance cross-border trade through improved connectivity. This will be critical for the continental logistics sector to enable it to become a crucial driver of trade, competitiveness, and economic growth. Africa has made significant efforts to attract foreign investors to modernize and expand ports.
In the past few years, Africa’s maritime industry has experienced rapid growth and development in its northern region. In this region, investment in port projects with private sector participation has been growing compared to the previous decade. These investments have facilitated substantial growth in handling port services, with total container throughout Africa rising. Those African countries without ports, such as Ethiopia, have also benefitted from improved services. Ethiopia contributes to the improvement of African infrastructural development. This includes roads, railways, ports, airways, and related services which are critical inputs for economic growth and development.
BY GETACHEW MINAS
THE ETHIOPIAN HERALD SATURDAY 12 APRIL 2025
