The recently launched macroeconomic reform in Ethiopia has been bearing fruits as it has been instrumental in enhancing budget management efficiency and reducing public debt vulnerabilities. Ethiopia’s development financing options will expand via creating a favorable environment to meet its national development financing needs domestically.
Cognizant of this fact, The Ethiopian Herald had a stay with Worku Tellila, an economist graduated from Addis Ababa University, to solicit a piece of information about the recently launched macroeconomic reform merits and shortcomings witnessed in due course of implementing it.
He said, “It is far from clear where the current push to enhance security and economic resilience through economic sanctuary measures and it would be very trying to use it as the basis for a new macroeconomic framework as the reform would have some sorts of repercussions on the high cost of living, for the time being. Policymakers have to well realize that the adjustment process would require modifications in economic structure that would allow changes in market forces to be better understood by economic agents and the entire society who are directly facing the merits and/or demerits attracted by the reform.”
As to him, the strong interest in structural reform therefore reflected, to a considerable extent, and reliance on market forces was seen as the central principle in the economic organization of the country.
The increase in aggregate demand is explained by the fall in the real interest rate, which increases interest-sensitive spending which then has feedback effects on total spending.
The macroeconomic effects of structural reforms that affect markets for goods and services can be examined under two minds. In the first place, in some cases they can alter the effective supply of labor and hence of potential output by encouraging reallocation of resources toward more productive uses. Next, they generally affect parameters in trade relationships, since opportunities for trade are changed.
Unlike macroeconomic policies, structural reform measures are geared towards changing the underlying microeconomic equilibrium of the economy. As such, they require the reallocation of resources among sectors. This process may not be smooth, however, and will usually involve adjustment costs for both labor and capital. On the positive side, structural policies may produce dynamic gains to the economy. For example, increased competition in an industry could raise the long-run rate of technological change, thereby inducing a higher rate of productivity growth over the long run. Similarly, on the economy-wide level, the recent approach on endogenous growth implies that static gains could translate into higher overall growth rates owing to external economies of scale.
A rationale that is often used to justify government intervention is a wish to modify the distribution of income that would result from unfettered functioning of markets. The purpose of this reform would be taken as a viable weapon to support economic reforms that will enable Ethiopia to become a middle-income country within the shortest time possible by maximizing the amount of finance available for development and strengthening capacity in key areas of the economy.
Ethiopia, as a landlocked country of more than 120 million inhabitants in the Horn of Africa, has experienced high levels of economic growth in the past years with an average annual growth rate of 10.8%, twice the average in sub-Saharan Africa.
Through this ambitious reform policy, Ethiopia aims at transforming its economy through market-driven initiatives, while taking advantage of its historical structure and advantages.
This support focuses on strategic dynamics such as the development of Public Private Partnerships and the reform of public enterprises, while helping the transversal implementation of the reforms with different administrative organizations and agencies, such as the Ministry of Finance, the Ministry of Planning, The Capital Markets Authority or the Industrial Parks Development Commission.
The initiative has given particular attention to coordination among partners, stakeholders, government and non-government organizations with a view to fueling the progress of economic growth and production and productivity augmentation thereby pushing the macroeconomic reform into fruition.
As to Worku, the implemented macroeconomic reforms will lead to, among others, increased private investment and progressive liberalization of the sectors of the economy like energy, logistics and telecommunications, emergence sustainable change, particularly in better governance, transparency and accountability of public enterprises, in particular by supporting the structuring of sector offices which have predominantly engaged economic trajectories, investment, manufacturing other related sectors contributing a lot to economic reforms, for example in the field of private sector development or industrial policy.
Ethiopia’s recent macroeconomic reforms, supported by the International Monetary Fund (IMF) and the World Bank, could have profound implications for the country in particular and the region in general. The key reforms include the use of a floating exchange rate system and of interest rates as a policy tool. It is well recognized that the country recently announced its entrance into full-fledged macroeconomic policy implementation.
Worku further elucidated that in Macroeconomic Reform Program Policy, legal reform processes have brought new hope for the economy to transition to a more stable macroeconomic environment particularly if managed and scrupulously followed up.
Following the political change of 2018, the government has been making reforms for the past six years to solve accrued economic structural challenges of the past, and the one which was very recently introduced, would be of paramount importance in further reinvigorating the mission of homegrown economy across the nation.
Debt burden, inflation, unemployment, slow economic structural change, low sector productivity, low performance of development projects and waste of resources are some of the accrued economic structural challenges that need to be well combated to make a difference in all aspects, he added.
Despite the remaining works, efforts to correct macroeconomic imbalances, alleviate debt burden, increase domestic production capacity, expand sources of economic growth, create job opportunities and fix structural bottlenecks have proved successful.
“Over the past years, there have been significant development cooperation and financing efforts and negotiations for the implementation of our Home-Grown Economic Reform program. These negotiations have been conducted with adequate knowledge and wisdom for outcomes that protect Ethiopia’s national interests and improve the lives and livelihoods of our citizens,” he said.
Hence, the macroeconomic reform endeavor which is within the framework of the Home-Grown Economic Reform program and Mid-term Investment and Development Plan (MDIP) is supported by international critical development partners.
Yes, Worku said correcting foreign exchange distortions and solving the structural balance of payments deficit problems, reducing inflation by modernizing the monetary policy framework, and strengthening the inclusiveness, competitiveness, and soundness of the financial sector are among the key goals of the Macroeconomic Reform Program in the country.
The reform will open up the closed Ethiopian economy and enable the country to benefit from the global market, including the African Continental Free Trade Area (AfCFTA), he stated.
The reform is mainly based on the principles of the comprehensive development concepts that are being implemented following the national reform. True, the Ethiopian economy for the private sector was one of the decisions the government passed on the morrow of the national reform.
Noting that activities have been carried out in opening up the economy for the private sector participation, especially during the first Homegrown Economic Reform, he said adding that the macroeconomic reform is not a new invention.
He said, “As learned from the premier, the first Homegrown Economic Reform has registered a lot of achievements by withstanding challenges. Besides, as Ethiopia’s economy that has remained closed among the countries that have large economies in Africa, it has been impossible to sustain the economy following such an obstructed fashion. Hence, the economy should be opened up in order to benefit from the AfCFTA. To do this, the reform will be instrumental in realizing such a rewarding quarry.”
In a nutshell, it is quite important to well comprehend that the reform would be instrumental in helping the nation achieve the goal of economic growth, higher level of GDP and higher level of employment and social security. It would pronounce the forces which determine economic growth of a country and portray the avenue how to reach the highest state of economic growth and sustain it.
The performance of Ethiopian economy has brought reform to the forefront of communication on development economics and sustainable reforms. The main point is since the reform on overall growth has not been that much significant as it was expected under market friendly environment, all the procedures and implementation means have to be streamlined and coordinated to make it a success.
BY MENGESHA AMARE
The Ethiopian Herald October 6/2024
