It is almost four months since Ethiopia has revealed its Home-grown Economic Reform Agenda. While introducing the reform plan, Ethiopia announced it would need 10 billion USD from both domestic and international development partners.
Explaining the reform agenda as pro-job, pro-growth, and pro-inclusivity pathway to prosperity, Prime Minister Abiy had requested development partners to support Ethiopia’s effort of unlocking its potentials of “economic miracle.”
That is because the reform agenda cannot be successful with Ethiopia’s efforts alone. And Abiy’s call prompted international donors and development partners’ financial support interventions.
Until this time, the embezzlement that was rampant among government officials over the past years had made international financial institutions to be reluctant to lend hands to Ethiopia. If there was one, it was only IMF that provided loan for Ethiopia. And its loans and grants do not come so easily for obvious reasons.
But as the situation testified in Ethiopia, IMF was not the sole funder. Almost immediately after the IMF’s announcement, the World Bank (WB) and Saudi Development Fund (SDF) have followed the step in responding to Ethiopia’s request.
While supporting the reform agenda whole-heartedly, people are expressing concerns as to conditions were set by world funding agencies and as to how the funds would be utilized.
Last month, when the IMF Board approved a three-year financing package of 2.9 billion USD to support Ethiopia’s transformative Home-grown Economic Reform Agenda, Prime Minister Abiy Ahmed described it as: “as unprecedented 700 percent of Ethiopia’s quota.”
The good thing is that IMF itself said that its financial program was aimed at supporting the government’s own Reform Program. That is to say the program is not imposed by the international heavy weights as was the case in the past or elsewhere.
But even then, some people doubt that if there was no policy import at all. As people in the West say there is no free lunch in this world. The most convincing argument held by some local economists is that the financing was made possible because the government, having understood their interests, had already fulfilled their basic demands for financial eligibility.
That looks perfect. Because, the IMF Agreement on the financing package with Ethiopia came after its staff team led by Ms. Sonali Jain-Chandra visited Addis Ababa from October 29 to November 8, 2019.
At the conclusion of her visit, Jain-Chandra said that the Ethiopian government and the IMF staff team had reached preliminary agreement, subject to approval by the Fund’s Executive Board, on policies that could constitute the basis for Ethiopia’s new program supported by the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements.
“The Fund-supported program would consist of five main pillars: (1) durably address the foreign exchange shortage and transition to a more flexible exchange rate regime; (2) strengthen oversight and management of state-owned enterprises to contain debt vulnerabilities; (3) strengthen domestic revenue mobilization and expenditure efficiency to create space for adequate poverty-reducing and essential infrastructure spending; (4) reform the financial sector to support private investment and modernize the monetary policy framework; and (5) strengthen the supervisory framework and financial safety nets,” Jain-Chandra said in a statement released on December11.
In the meantime, the World Bank has also made a 3 billion USD pledge of additional reform financing almost immediately after the announcement of IMF. World Bank is a bank, after all. But, additional funding had still continued pouring to the country. Various development partners have already pledged well over 3 billion USD to meet the 10 billion USD.
On the bilateral front, countries like UAE and Saudi Arabia have pledged to support the reforms. Even then Prime Minister Abiy was expecting more additional resources from United Nations agencies and EIB.
Prime Minister Abiy claims that all the supports reaffirm donors’ commitment in establishing partnership to transform Ethiopia to a prosperous and peaceful nation.
In fact, astounding reform measures being taken by the reformist government in general have been hailed by the international community since day one Abiy came into power. Since then it has been toiling in taking a number of short-term solutions so as to heal the long-time ailing economy that has greatly contributed for great upheaval in political power.
Among the short term measures introduced by the government to settle the inherited macro-economic and fiscal imbalances are the efforts to improve business and investment climate of the country, mainly through a high-level national committee headed by the Prime Minister himself. The committee has among others managed to remove several hassles that were hampering the flow of investment and business to the country. With the measures taken so far, many Ethiopians including the prime minister expect that the country’s world rank will significantly improve from the 115th in terms of Ease of Doing Business.
Another fundamental step taken by the government is the opening up of the economy to the private sector. The measures introduced in this regard were firmly based on the belief that Ethiopia’s future economic growth require vibrant private sector.
Then came the Home-grown Economic Reform agenda, which was set after months of relentless consultation of chief economists, which Abiy labelled them as the “best minds the nation have.”
The reform agenda was said to be a well-coordinated response and blue print to propel economic progress; a bridge to prosperity, enabling the nation become a middle-income economy in a few years’ time.
The reform which drew the WB and IMF fund alone to constitute about 60 percent of total finance needed. Be that as it may, local economists and analysts tend to advise the government to be cautionary in undertaking the reform program.
Receiving finance at this time helps the country in reducing debt pressure which increases economic activity and helps the country to import the necessary input for industries and other sectors. If the finance is used properly, it can make a big difference in changing the economy.
Many local economists suggest that unless the nation invests the loan and grant in key priority areas and thereby increase foreign currency earnings, the debt burden of the nation may exceed to the higher level. Unless it is managed properly, it may cause another burden which can spiral the country into danger, says an economics professor.
The professor cites the failure of the 10 billion Birr revolving youth fund – which was setup to create jobs for young people across the country. He also refers to reports of huge capital flight amounting nearly to one billion USD experienced over the past three decades. The various bilateral and multilateral funds were improperly utilized or embezzled putting the country in credit burden. All advise the government to make no financial leakages; invest in key priority areas which enable the country to return the loan faster.
In short, the loan and financial assistance can have positive and negative impacts depending on its utilization. If the country utilizes the loan wisely, it would be a blessing. As a capital, it would have positive impact in increasing the flow of investment and creating more jobs. And the country will be able to produce exported products that have immense contribution to increase foreign currency gains.
The financial supports by themselves do not solve the problem. The government has to focus in bringing structural transformation to the economy, particularly, and controlling domestic economic issues like inflation, boosting productivity, and creating jobs, among others are needed.
Moreover the government has to strictly follow up its financial execution. Otherwise, the loan would do nothing but elevate the debt burden.
The Ethiopian Herald Friday 3 January 2020
BY STAFF REPORTER
