Review – Ethiopia’s Digital Economy Report

CEPHEUS Capital and USAID’s CATALYZE Ethiopia: Market Systems for Growth (MS4G) Programme have published a report on the Ethiopian Digital Economy.

The 75-page report looks at the digital economy extensively reviewing the different sectors, companies operating, selected success stories, funding scene, and regulatory environment. In addition, the report looked at current market size and estimation, major activity indicators, and market outlook up to 2025.

Along with other industry players, Shega has contributed its part to the report. As CEPHEUS officially distributes the report, we are sharing the summary of the report directly taken from the report and attaching the link to the actual report for a detailed read.

Background and Context:

A review of the Ethiopian digital economy landscape reveals close to 570 businesses offering a wide range of digital finance, eCommerce, transport, sector-tech, and ecosystem services. We find that most companies operating in the digital space are still largely sub-scale in nature and that very few ‘digital disruptors’ have emerged so far with widespread market acceptance, a large customer base, and meaningful revenue generation.

This should change very soon, however, as major sector reforms are addressing numerous past constraints—poor network connectivity, high telecom costs, restrictive regulations, limited funding, skills shortages—while broader policy conditions are now much more conducive for the emergence of truly disruptive Ethiopian companies using digital platforms to transform traditional ways of doing business in agriculture, industry, transport, and other services.

In this context, we take stock of the current state of Ethiopia’s digital economy, identify key themes and trends, assess the impact of recent ‘game-changers’ in this field (new policies, new entrants, new products), and offer our views on both the overall outlook and sector-specific prospects.

Service offerings:

Several notable features stand out in Ethiopia’s current digital economy landscape:

(1) The finance, ride-hailing, e-classifieds, and media segments have been comparatively more successful at building large digital user bases and ensuring monetization;

(2) conventional e-commerce, delivery services, and those focused on agricultural, health, and education-related offerings have been slow to gain traction;

(3) public sector entities and e-government services turn out to be among some of the economy’s most successful ‘digital disruptors’, often with private partnerships, and;

(4) B2C business models tend to attract the most entrants though these present is more demanding operational and execution challenges in the local context. Current service offerings are also marked by high geographical concentration, a narrow set of technology types, and still limited levels of forex generation.

Activity Indicators and Stand-out Cases:

Despite the common view that ‘Ethiopia has virtually no digital economy to speak of’, we find some impressive digital use cases are already firmly in place.

For example, banks are handling around half a million customer transactions via digital channels every day and Birr 260bn (~8% GDP) on an annual basis; CBE has for the first time this year seen more of its customer transactions (62%) taking place via digital channels rather than at bank counters; ‘micro-credits’ in the form of airtime advances by Ethio Telecom are providing 2.2 million users with Birr 1.1bn in loans each month; Ethiopian Airlines is seeing half of its ticket purchases in Ethiopia now carried out by customers using its mobile app and/or website; the ride-hailing industry is providing an estimated 90,000 rides on a daily basis; the largest e-classified firms are processing thousands of paid on-line posts monthly; and some leading Ethiopian digital media brands and/or social media users are attracting and monetizing user bases that have grown to over a million active subscribers and/or 25 million views on a monthly basis.

The recently launched telebirr mobile money service has registered over three million customers over just a few weeks and—if well executed—is on the verge of transforming person-to-person transfers, merchant payments, and potentially ‘micro-credit’. In other areas, the scope of digitally enabled local product offerings now includes group savings, insurance, crowd funding, ‘gig’ platforms, music/video streaming, dating services, and online betting. Across multiple fields, companies with expanding customer bases and high revenue potential are emerging, and 30 such businesses are profiled in this report.

Cross-country standing:

Despite the recent progress, the scale and scope of Ethiopia’s digital disruptors remains quite limited when seen from a crosscountry perspective. Companies in other country contexts have shown massmarket adoption by providing exemplary solutions to some well-known consumer ‘pain points’ and/or business bottlenecks.

In the Ethiopian context, this would mean, among other things, offering simplified solutions for making payments (P2P, P2B, P2G, G2P); addressing inefficient/costly food value chains; improving weak information bases faced by buyers and sellers of goods/services (jobs, homes, personal goods, industrial items); enhancing localized offerings for services (education, entertainment); and solving bureaucratic aspects of government services (utilities, IDs, permits).

Funding environment:

Only around $40mn in funding has been provided by equity investors in the digital economy space, and an additional $20mn provided by donors. Average funding size has been very limited and Ethiopia’s share of global flows remain trivial. We expect funding resources to expand substantially in the coming years, to as much as a quarter billion dollars over the coming years, as four distinct pools of funders—government funds, foreign investors, donors, and local funders—take a much more active role

Policy Issues and Regulatory outlook:

While a wide range of regulatory obstacles held back growth in digital economy in the past, many industry players now describe the policy environment as the best it has ever been. Recent/upcoming reforms are addressing the nation’s overarching digital strategy, e-transactions, e-commerce, and commercial/investment laws. Still, some sector-specific constraints remain while broader macro challenges (fx access/convertibility) also pose obstacles that merit attention and action if the true potential of Ethiopia’s ‘digital disruptors’ is to be realized.

Market size—current level and near-term outlook:

We estimate Birr 350bn in gross transaction value (equivalent to 10% of GDP) and Birr 5bn in net revenue for Ethiopia’s main set of digital economy companies as of 2020. By our calculations, the size of digitally transacted economic activity will show a nine-fold increase by 2025, reaching just above Birr 3 trillion or 39% of GDP. The largest revenue pools will likely remain within digital finance and telecom services, followed by marketplace platforms, transportation, and digital media. Several companiesin the digital finance, ride-hailing, and digital media space could see Birr 1bn valuations in a few years’ time, by our estimates. If seen as a stand-alone company and using current valuation metrics of comparable cases, telebirr is likely to be Ethiopia’s first ‘digital disruptor’ to reach dollar unicorn status (with a $1bn-plus valuation) well before 2025.

Overview and Conclusions:

The digital economy space in Ethiopia is clearly entering a “liftoff phase” thanks to a mix of both macro and ecosystem drivers (fast growth, rapid urbanization, growing internet penetration, improving networks, and better data affordability), improved public policies, and rising numbers of private entrants and funders.

Widespread digitization across the economy’s key sectors should yield benefits of macroeconomic significance by removing long-standing payment problems, by reducing high transaction and trading/intermediation costs, by activating previously unused or underutilized labor/other resources, by boosting sales volumes/channels for both small and large businesses alike, and by raising foreign exchange earnings potential.

Maximizing all these gains will not be automatic, however, and as highlighted by many in the sector both the private and public sectors— including entrepreneurs, investors, and policymakers—have a vital role to play in each of their respective domains. Most notably, for the Ethiopian context, we see the most urgent priorities in:

(1) making further progress on still remaining digital infrastructure, affordability, and policy constraints;

(2) addressing the mismatch between Ethiopia’s biggest GDP components (agriculture, construction, wholesale/retail trade) and the current set of digital service offerings (mainly in finance, transport, and personal services/entertainment);

(3) channeling fin-tech offerings (the largest digital economy sub-segment for the foreseeable future) much more heavily towards credit offerings rather than just payment solutions;

(4) orienting digital enterprises towards activities that capture and further boost the sector’s vast foreign exchange potential; and

(5) ensuring that the public sector’s dominant role in key digital sub-segments (telecom, finance) is subjected to competitive conditions and advanced in ways that create open platforms and partnerships for private enterprises in those same activities or in closely related sectors.

Download the report here.