Welcome to Addis Fortune's latest business and economic digest. In this edition, we cover the Addis Abeba City Administration audit findings, the Ethiopian Capital Market Authority setting the stage for a nascent securities exchanges, an investment directive that allows banks to venture into real estate and capital markets, authorities betting on revised electric tariffs to lure investors, and the horticulture sector's wilting profits and ambitious rescue plan.

Mayor Adanech Abebie’s Administration faced an audit report that unveiled a startling picture of financial mismanagement, inefficiencies, and potential corruption within the Addis Abeba City Administration. The City Auditor General's findings, tabled to the city’s councillors last week, uncovered severe flaws, including 41.34 million Birr spent without supporting documents across 31 institutions. The city’s Design & Construction Bureau accounted for 18.76 million Birr of these undocumented expenditures, followed by the Executive Office with 2.65 million Birr and the Public Service & Human Resource Development Bureau with 2.38 million Birr. Last year, Addis Abeba residents paid hundreds of billions of Birr in taxes, covering 96 percent of the city’s target. However, the audit revealed a failure to collect over 33.92 million Birr in taxes, with an additional 3.51 billion Birr in arrears predating the 2022 fiscal year. The fiscal year saw Addis Abeba generate a total revenue of 108.04 billion Birr, surpassing the budgeted figure by 1.8 percent, or approximately 1.95 billion Birr.

 

The National Bank of Ethiopia has allowed commercial banks to acquire equity shares in capital market service providers, with the exclusion of credit rating agencies, subject to prior approval. They can also invest in the real estate sector and hold equity shares in a single insurance company. The shift in the regulatory environment comes from a new directive issued by Central Bank Governor Mamo Mehiretu, which became effective on July 19, 2024. It is a critical component of the Governor's broader agenda to reform the financial sector, targeting risk management and capital market development as well as compelling banks to focus on their core banking functions. The directive limits banks' investment activities, concentrating on the risks associated with their diversified business activities. By setting boundaries on where and how banks can invest, Governor Mamo seeks to prevent potential overexposure to volatile sectors, including the real estate market, and ensure that banks remain focused on traditional banking operations, such as debt financing and interest-free banking. However, the directive also imposes strict prohibitions on certain activities. Banks are explicitly barred from engaging directly in insurance businesses, serving as capital market service providers, engaging in non-banking businesses, or holding equity shares in credit rating agencies.

The Ethiopian Capital Market Authority has introduced a comprehensive directive on licensing, operation, and supervision of securities exchanges, which they hoped would boost prospective investors' confidence and ensure market stability. Licenses are categorised into securities exchange, derivatives, and over-the-counter trading markets, each requiring a separate license. After a complete application is submitted, a 60-day window will determine if an exchange is granted a license to operate one or more types of markets under the Authority's regulation. Licensed exchanges are required to establish a comprehensive risk management framework. Licensed securities exchanges are prohibited from executing orders against their capital or trading on their platforms. The law permits outsourcing certain services to third parties, excluding critical functions, provided the Exchange's accountability, management mandate, risk management, and service quality are not compromised. Recognised as self-regulatory organisations, exchanges must comply with the Authority's requirements.

Ethiopia is set to introduce a revised electric tariff system within the next two months, which will be up to three times higher than current rates for households and could substantially increase costs for commercial and industrial users. The Ethiopian Energy & Petroleum Authority secured approval from the Council of Ministers for proposed amendments designed to align electricity costs with current economic realities. The revised electricity tariffs are part of a broader energy reform plan to attract private investment in the sector. The current low tariffs have deterred private companies from investing in new power generation capacity. The government hopes that higher tariffs will make the sector more attractive to investors and help meet the country's growing energy demand. According to Bahiru Oljira, head of electric competency certification identification at the Authority, the rationale behind the revision follows extensive studies conducted to analyse the cost structure of power generation, transmission, and distribution, particularly in light of rising inflation. He said these calculations factored in pricing efficiency, revenue requirements, operational costs, and the expenses of Ethiopian Electric Power and Electric Power Utility.

Ethiopia's horticulture, a major source of foreign currency and employment, is facing harsh realities that have resulted in potentially hundreds of millions of dollars lost. Investors across the sector are raising concerns, and the government is looking to address them with a new strategy. State Minister Sofia Kassa (PhD) identified shortcomings on both sides, with investors underdeveloping 400 hectars of land in the Oromia, Tigray, and Amhara regional states due to internal conflicts, lack of infrastructure, and insufficient expertise. This underperformance is estimated to have cost the country 14 million dollars. Only 117 cold trucks are currently available for transporting fruits and vegetables, of the 1,317 trucks needed. The shortage is due to factors such as difficulties in importing duty-free vehicles, a recent ban on fuel-powered vehicles, and a lack of rental services. Security concerns, underdeveloped power grids, and poor road conditions are further hindering businesses. A total of 155 hectars of land in the Amhara Regional State could not be transferred to investors in the last six years, which resulted in a potential 138.9 million dollars loss.

That’s all for today. We’ll be back with more updates next week. 
May good luck and fortune always be with you.