By Jason McLure | Bloomberg

Addis Ababa, Ethiopia — Power outages, shortages of foreign exchange and limits on bank lending resulted in Ethiopia’s business climate deteriorating over the past four months, the chairman of the country’s largest business association said.

The Horn of Africa nation’s manufacturing industry has probably contracted during the past year and profit at banks and insurance companies has been hampered by inflation and government restrictions on lending, said Eyessus Work Zafu, president of the Addis Ababa Chamber of Commerce and Sectoral Association.

“The private sector definitely is in a very sad state,” Work Zafu, said in an interview today at his office in the capital, Addis Ababa. “Manufacturing is already on its knees. Small as it may be I would say it would have shrunk because of the power outages.”

Manufacturing accounts for about 5 percent of Ethiopia’s output, according to the World Bank.

Supply shortages led the state-run Ethiopian Electric Power Co. to begin blackouts in February and since June, the utility has provided power to customers only every second day. At the same time, Ethiopia’s central bank has been rationing foreign exchange in an effort to defend its currency, the birr. The resulting shortage of foreign currency has cause delays in imports of raw materials and consumer goods.

The government of Prime Minister Meles Zenawi has also capped lending and increased reserve requirements for banks in an effort to slow inflation, which peaked at 64.2 percent in July 2008. Consumer prices declined by 3.7 percent last month, the country’s Central Statistical Agency said Aug. 11.

Tax Collections

A government initiative in the past year to collect more tax from the business community has also hurt growth of the country’s private industry, Work Zafu said.

While government and business leaders had initially believed the global financial crisis would have little impact on Ethiopia’s “relatively isolated” economy, “experience has shown that we were not entirely correct in that,” he said.

Remittances from Ethiopians living abroad and aid from foreign donors has been affected by the economic crisis, he said.

Ethiopia’s economy may be strengthened if the government negotiates a financing deal with the IMF, Work Zafu said. The IMF and Meles’ government are currently discussing a package to help the country cope with the global economic crisis.

A deal would improve Ethiopia’s foreign currency reserves and encourage other international lenders to provide financing to the country, Work Zafu said.

The IMF projected Ethiopia’s economy would grow by 6.5 percent or less in the fiscal year ending July 7, 2009.