The successive Ethiopian governments during the last 70 years have tried their level best to improve the nation’s economy and alleviate poverty. In the imperial era though some light industries were mushrooming, the nation’s economy was characterized by feudalism and the majority of peasants were land less and subjugated to stay in operation and exploitation. Since 1950s, the regime prepared and implemented the five years development plan which paved the way for the flourishing of both foreign and local private investment.
Small and medium size manufacturing industries were flourished, large scale irrigation farms in the Awash valley which produced sugar cane adjacent to the sugar factories created job opportunities to thousands. In the north western Ethiopia, oil seeds such as Nigger, linseed and sesame were produced both by rain fed farm and irrigation and exported to the foreign market. Private financial institutions were also flourished and significant economic growth was registered.
After the down fall of the imperial regime, the ascendance of the Derg regime to power changed the centuries old economic landscape and land was nationalized. Feudalism was abolished by law and declared socialism as the nation’s economic principle. However, the nationalization of private manufacturing industries, transport and financial sectors hampered the economic growth and the continued civil war in the northern part of the country left the economy to grow negatively.
The coming to power of the EPRDF regime in 1991 brought a paradigm shift in the nation’s economic landscape and introduced a partial free market economy which invited government interference in selected areas. Its policy shift from socialism to developmental state brought support from the western and eastern countries including the World Bank and International Monetary Fund. The economic reform through liberalization and privatization of some public owned enterprises was continued. The measures that have been taken enabled the country to attract foreign investment and experienced high infrastructural development in its history in terms of roads, rail ways, air ports, dry ports, and hydropower dams, provision of clean water and health facilities.
The current government since it took power in 2018 strongly committed to advance the economic development through introducing new homegrown economic reform program which comprises sustaining economic growth; creating job opportunities for the growing population and setting the foundation for prosperity. All require correcting macroeconomic imbalances and rebalancing the sources of growth; from demand-driven to supply-driven, from debt financing to saving and equity financing, and from public sector-led to private sector-led.
Reform objectives ensure macro-economic stability to sustain the rapid economic growth; rebalance the public and private sectors’ role in the economy unlocking new and existing growth potentials.
This in turn required launching a comprehensive and well-coordinated economic reform agenda, encompassing macro-financial measures to stabilize the macro-economy and arrest financial sector vulnerabilities; structural reforms to alleviate business constraints to create an enabling environment for private sector investment; and sectorial policies to address sector-specific institutional and market failure. The reform agenda is built on various macro-financial reforms that are previously launched.
Most notable among the already launched reforms include lifting the limit on Diaspora foreign currency accounts; adjusting the exchange rate at which commercial banks surrender foreign exchange to the NBE; raising the interest rate on NBE bills from 3% to 5% ; allowing foreign exchange transactions in industrial parks, reducing the budget deficit, adjusting electricity and fuel prices towards cost reflective levels to reduce fiscal burden, profiling external debt to lessen the burden of immediate debt service obligations implementing doing business reforms to reduce bureaucratic red tape, efforts to open the logistic and telecommunication sectors to domestic and foreign investors and fully and partially privatize State Owned Enterprises (SOEs).
These macro-financial reforms are steps in the right direction, yet are insufficient to address macroeconomic imbalances and ensure sustainable growth. The current reform program augments these macro-financial measures by adding depth and breadth.
The macro-financial reforms are complemented with broad structural and sectorial reforms to unleash the potential of the private sector in sectors such as agriculture, manufacturing, mining, tourism, and ICT. These structural and sectorial reforms will enhance the productivity growth and job creation.
Macro-financial stability and availability of finance (both local and foreign currencies) are the foundations for economic growth and job creation. Stable monetary and financial systems allow savers to deposit their financial assets in the financial system with confidence, provide investors the predictability and finance they need to invest in long-term projects, and enable consumers to smooth their income and consumption.
In this context, the economic reform program aims to correct macroeconomic imbalances and ensure macro-financial stability through stepping up the ongoing efforts to improve public sector finances, easing foreign currency controls and correcting the exchange rate misalignment, modernizing the monetary policy framework, strengthening the financial system, and developing capital markets.
Successful macro-economic reform requires coordination and synchronization among foreign currency, monetary, fiscal, financial, and capital market reforms. To balance the urgent need for addressing macroeconomic imbalances with the need to minimize potential economic costs of rapid (‘shock therapy’ type) reforms, the home-grown economic reform program will be rolled over in the course of the next three years with careful calibration of the pacing, sequencing, and timing of specific reform measures. Public investment on infrastructure and human capital will continue to address remaining gaps towards reaching a middle-income economy level becoming food self sufficient thereby ensuring economic sovereignty.
The financing model for public investments will pursue a sustainable means to ensure debt sustainability, and avoid inflationary pressures and the crowding out of the private sector’s access to critical financial resources such as credit and foreign currency. Controlling the budget deficit and streamlining public sector capital spending will be among the key reform measures. Strengthening public sector finances entails measures to maintain the general government deficit as well as enhance the finances of SOEs.
To maintain macroeconomic stability, important efforts would be needed to raise government revenue through tax policy and tax administration reforms, review of subsidies, further prioritization of public projects, and strengthening these measures will be built on the earlier strides in managing the budget deficit, SOE reforms and privatization, and maintaining and consolidating the achievements made so far. Fiscal policy will focus on supporting high quality growth and ensuring debt sustainability through revenue mobilization and improving efficiency of public spending.
Recently, Indian Ambassador, Anil Kumar said that the economic reforms that are being taken by the Government of Ethiopia will make a deep impact in the economic and investment landscape of the country.
In an exclusive interview with the local media the ambassador commended the leadership of Prime Minister Abiy Ahmed (PhD) for taking many revolutionary steps as the recent macroeconomic reform being one of those steps.
“The various economic reforms which are taken by the Prime Minister are going to make a deep impact in the economic and investment landscape of Ethiopia, one of the pillars of the Horn of Africa and the largest economy not only in Africa but among the world,” he elaborated.
The growth rate and the potential available to this country are certainly going to be unlocked, Ambassador Kumar said, adding that “This country is going to be an extremely favorable destination for investments across the world, including from India.”
According to him, the country has identified five important pillars for its transformation, agriculture, manufacturing, ICT, mining, and tourism; and these are all the sectors where India has core competence. Indian investors would certainly like to come to Ethiopia and explore these landscapes, he pointed out.
Moreover, Ethiopia and India share a longstanding friendly relationship marked by robust cultural, economic and trade exchanges. Ambassador Kumar stated that the membership of Ethiopia in the BRICS gives it a much closer opportunity for a much closer interaction with the BRICS member countries.
“If we see the economic landscape, the commercial landscape and the human capital of Ethiopia, this can bring a synergy into the new developing world order. Most of the BRICS members, or all of the BRICS members, are developing countries.
“We the BRICS members are trying to create a new ecosystem where we cooperate with each other, where we interact with each other freely, and where we create a system where the financing requirements are met within the limits of our capabilities,” the ambassador said.
“As BRICS members, we feel that Ethiopia brings value to the BRICS bloc. It comes with a lot of conventional knowledge, wisdom, and represents a large part of Africa and the sentiments of Africa. We are seeing Ethiopia, as a valuable partner for not only India, but also for the BRICS countries,” he underscored.
BY ABEBE WOLDEGIORGIS
The Ethiopian Herald September 8/2024
