Ethiopia’s digital economy is blooming, but needs investment
Governments across Africa are rapidly developing digital strategies to boost their economies. The Ethiopian government also opened its telecom sector in 2021, welcoming competition for greater technological innovation. It has focused on modernising its digital retail payment sector and is already recording some progress in this area. But if Ethiopia wants to realise its broader development vision, it will need to attract and mobilise investment in digital infrastructure, increase access to affordable finance for small and medium-sized enterprises (SMEs) and coordinate with public and private actors.
Laying the foundations of a sustainable digital economy
Guided by the country’s development plan for 2021-2030, Ethiopia launched its digital transformation strategy 2025 in 2020. The strategy includes five priorities: implementation of a digital ID, digital payments, e-governance, e-commerce and cybersecurity. It is complemented by more specific strategies, such as the National Financial Inclusion Strategy and the National Bank of Ethiopia’s National Digital Payments Strategy, which aim to transform the payment ecosystem and support the building of a cash-lite and financially inclusive economy.
The government is making more progress in some policy areas than in others. While it has finished a pilot for the digital ID and prioritised the interoperability of digital payment services, it is facing challenges in its efforts to reform startup and investment laws. It still needs to draft standalone strategies for e-governance and cybersecurity. Delays in some of these areas could be due to a lack of strong political support for some legislation.
Telecom and mobile coverage have drastically improved in the country thanks to reductions in charges on fixed broadband and internet services, but the use of the internet for economic activities remains limited regardless. Modernising digital payments systems can help boost annual GDP by 3% points in emerging countries – and in Ethiopia specifically, the digital economy could contribute up to 39% percent of the country’s GDP by 2025.
In 2021, the ICT sector contributed 2% to the country’s GDP, which falls below the regional average. To promote the growth of the ICT sector, the Ethiopian parliament adopted a proclamation on e-transactions in 2020 to permit, regulate and monitor e-commerce. A year ago, there were nearly 570 businesses in the e-commerce and e-services ecosystem, yet these are small and don’t have meaningful revenue generation capacity. Ethiopia’s Job Creation Commission also drafted the Startup Act (which would be accompanied by an innovation fund) to facilitate the growth of highly innovative businesses and start-ups by connecting them with investors, but this act has not yet seen the light of day.
To incentivise businesses to adopt digital (payment) systems, the government plans to develop around 200 e-services across ministries. The Ministry of Foreign Affairs and Ethiopia’s Accounting Auditing Board have signed agreements with Ethio Telecom to enable customers to pay for online government services through the Telebirr digital payment services. And since July 2022, the Addis Ababa and Dire Dawa tax authorities have integrated their payment systems with Telebirr. However, stronger coordination between public and private stakeholders will be key to successfully digitalise the different ministries and make sure that digital development goes beyond Addis Ababa.
The Ethiopian government has focused on setting the policy and regulatory environment for the country’s digitalisation, but it needs to introduce more ‘disruptive’ technologies to scale up the digital economy, and ensure reliable and affordable network coverage, and good quality telecom service.
The private sector needs more access to finance
The government expects the private sector to play a fundamental role in Ethiopia’s digital transformation by helping reduce the burden on public funds in hard and soft infrastructure. But SMEs in the ICT sector do not have access to finance to scale up their businesses, and face other regulatory hurdles.
Thanks to the recent regulatory and financial reforms in the banking system (foreign banks, for instance, will be allowed to operate in the country), banks have been able to increase their deposit and their overall competitiveness. Regardless, there are few banks that provide affordable finance for SMEs, in part because banks don’t target this borrower segment as it is too risky and less profitable than established corporations.
For instance, the Oromia Cooperative Bank and Kifya became the first to launch uncollateralised digital lending through the Michu platform in 2021, to provide access to credit for SMEs. Telebirr has also set up three financial services that provide low-cost credit and savings to its customers. Electronic payment platforms such as Arifpay are in discussion with banks to help them increase access to finance for SMEs. This will be essential to allow SMEs to benefit from the opportunities offered by recently launched interoperability between existing digital wallets, mobile and internet banking systems run by banks, micro finance institutions, e-money issuers and the growing fintech sector.
The government needs to increase the capacity of SMEs to drive technological innovation, including by attracting foreign direct investment in the financial sector to develop risk-sharing and credit guarantee schemes.
Ethiopia cannot digitalise alone
How successful Ethiopia will be in securing direct investment to increase access to finance for SMEs in the ICT sector will depend on its digital diplomacy. Both local and international funding for digital infrastructure and the wider digital economy is very limited – with only $40 million provided by equity investors and $20 million by donors as of 2021.
“How successful Ethiopia will be in securing direct investment to increase access to finance for SMEs in the ICT sector will depend on its digital diplomacy.”
The Ethiopian government has secured funding for its digitalisation from the African Development Bank, the World Bank, the European Investment Bank and private foundations like Mastercard. It is also engaging with different technological powers – the US, the EU, China, India, the UAE and Korea – to grow its ICT sector, as part of a broad strategy to avoid dependency on one single investor. But the war in northern Ethiopia has drastically constrained the investment environment and discouraged foreign direct investment, and affected the speed of and support for the implementation of key strategies. However, the government should also look at partners that can bring cohesion and help connect the different foundational infrastructures.
The Ethiopian government also signed an agreement with Chinese e-commerce giant Alibaba Group to allow Ethiopian SMEs to access the Chinese digital market, and it is in discussion with the UAE on supporting Ethiopia’s digital strategy and exchanges on digital services. But in terms of investment for digital infrastructure, Ethiopia relies on China.
The EU’s support for digitalisation in Ethiopia is not very large. Its short list of projects includes a Team Europe initiative on digitalisation that covers basic digital services and access to finance for SMEs in the agriculture sector. But most projects are still in the conceptual phase.
Under the Neighbourhood, Development and International Cooperation Instrument (NDICI), the EU has earmarked €1 billion for Ethiopia for the 2021-2027 period. But with the start of the conflict between the Ethiopian government and the Tigray People’s Liberation Front (TPLF) in November 2020, funding under the multi-annual indicative programme (MIP) for Ethiopia and discussions with the government on digital projects were halted. This might change with the implementation of the recent peace agreement.
The EU is collaborating with the UN Capital Development Fund (UNCDF) and the Organisation of African, Caribbean and Pacific States (OACPS) to increase the economic resilience of African, Caribbean and Pacific countries by improving the regulatory environment for digital financial services, supporting the digital ecosystem and providing capacity building. In 2021, they launched a Working Group on Digital Financial Services in Ethiopia to provide a platform for collaboration among industry players. But apart from the launch event, the project has not generated any results yet. Two years after the MIP consultations, it is unclear which EU proposals will be developed further.
The EU has not positioned itself in Ethiopia's digital ecosystem yet. Its ability to communicate its added value as a digital actor and follow through on its plans have been limited at a crucial time – one in which new players are rapidly entering the digital market. Ethiopia is digitising fast and increasing its growing influence on digital governance and innovation with a potential to be a key partner in digital co-creation. The EU needs to continue discussions with different digital stakeholders in Ethiopia and strengthen ties to find shared interests and priorities.
“The EU’s ability to communicate its added value as a digital actor in Ethiopia and follow through on its plans have been limited at a crucial time – one in which new players are rapidly entering the digital market.”
Slowly shifting from strategy to implementation
The Ethiopian government has put in place ambitious strategies to digitalise its economy, focusing on a conducive regulatory environment for businesses and technological innovation. The economic and digital reforms have already resulted in new market players and a growing banking sector. However, Ethiopia needs to improve access to finance for SMEs to digitalise and scale their business model. This will increase their productivity, contribute to innovation and lead to economic transformation.
To do this, Ethiopia needs to invest in a well-coordinated digital diplomacy that can attract the investment and technical support needed at various levels and sectors. International partners supporting Ethiopia should find complementarity between their approaches, and define clearly their added value. For the EU, this might mean resuming discussions with different digital actors, to reestablish shared interests in the digital economy.
The views are those of the author and not necessarily those of ECDPM.