According to the deliberations at the recently held 18th session of parliament, Ethiopia’s macroeconomic indicators show a mixed image of strength in some areas and weakness in others. Inflation continues to progress along the double digit trajectory. Unemployment is continuing to rise due to the job losses caused by the closure of many enterprises and small businesses in the wake of the COVID-19 pandemic. The service sector is most affected by the closures of small businesses and new jobs hard to come by. The hard currency reserve of the country is still low due largely to a sharp fall in income from foreign trade caused by the global pandemic.
On the other hand, Ethiopia’s annual growth rate is estimated to reach 8.5%, which is a slight decrease from last year’s growth figure. The budget for fiscal year 2021 is based on this growth rate which can be characterized as good although independent studies could not confirm it. The budget deficit that was evident two years ago has now given way to a more balanced budget although it has not produced surplus. Ethiopia has now shifted from high indebtedness to low
The 467 billion Birr budget for fiscal year 2021 is largely covered with money secured from domestic sources while less than 30% is expected to be covered with domestic and foreign loans. However, the budget deficit is a far cry from what it used to be when the new reformist government took power two years ago. At that time, the budget deficit was more than 30% of the DGP and that did not entitle the country to secure additional loans from international financial institutions. Now the deficit has been lowered to 21% of the DGP, a level of indebtedness that allows the country to secure additional loans not only to balance its budget but also implement its development projects.
The country was recently shaken by sporadic communal violence but this is expected to have marginal impact on the overall performance of the economy or on its macroeconomic profile.
If we look at the macroeconomic situation from the point of view of sector-based performance, we realize that the industrial sector is perhaps the most hard hit by COVID-19. Although there is no detailed and independent evaluation of the situation the factor that most affected this sector is the sharp fall in exports and consequent earnings from foreign trade. Many manufacturing industries in the sector could not secure the income necessitated for imports of industrial inputs although commercial banks were instructed to facilitate their operations and keep them afloat through a number of supporting measures.
The mineral sub-sector in Ethiopia is believed to be of strategic importance in generating income to the industrial sector in general because of its promising potentials both as hard currency earner and provider of inputs for many manufacturing enterprises. In this time of constraints caused by the pandemic the mineral sub-sector can help save hard currency through import substitution and exports.
According to many estimates ,the tourism and hotel sector is the hardest-hit by COVID-19 followed by air transport and the flower export one. These are by any estimates, the most productive sub-sectors that generated badly needed hard currency to the country in the pre-corona times. While manufacturing industries depending on foreign imports have lost the most those depending on local inputs have suffered relatively less damage.
On the other hand, the economic impact of COVID-19 is less felt in the agricultural sector which is not yet widely affected by the spread of the virus which is so far confined to urban areas. COVID-19 has not yet reached the rural communities in a big and decisive way. Yet, it is going to hit agriculture in a big way unless preventive measures are taken to prevent the spread of the virus. For now agriculture remains the pillar of the economy and the sector most reliable to curb the potentially devastating impact of the pandemic on the economy as a whole.
The situation remains largely intact in the rural areas and in the most important food producing areas of the country. The manpower structure remains largely intact while productivity is not affected in a big way. According to report from the food grain producing areas of the country particularly in Oromia region, the prospect of producing more food grain this year is bright due to the series of measures the regional and federal governments have implemented in order to improve farm productivity.
It is to be recalled that the government both at the federal and regional levels had issued directives for improving farm output through technological improvement. To this end a new directive was issued to allow the importation of modern farm machineries free of taxation. This was intended to help not only the relatively better off farmers but also those who have little income by allowing them to use their plots, livestock, or the little money they have as collateral to borrow money from banks. This is an important incentive to farmers if the policy is used diligently and tangibly even if it takes a longer time to feel its positive impacts.
There are also other positive factors that will help farmers achieve better productivity and improve harvests. Recent climatic or meteorological data indicate that there will be regular, stable and abundant rains this season and the aggregate farm area under the crops is expected to be bigger than last year’s. Growth in farm outputs has obviously positive effects on many economic variables.
A good harvest will allow food prices to fall. This would in turn entail less food imports from abroad. Ethiopia spends millions of dollars on the importation of food grain and mainly wheat from abroad. This year too it has spent millions of dollars to buy wheat. As domestic food grain production increases, there will be less need to import the same amount of food grain. This would lead to less spending on imports and permit the money thus saved to be invested in the sector.
Growth in productivity or volume of output would also permit farmers get better income at household levels and an opportunity to improve their lives. Instead of living from hand to mouse they would have extra income to spend on other necessities of life such as clothing, housing and others. In some cases farmers would be able to save some of their incomes that they would spend on buy improved farm inputs such as fertilizers and modern farm machineries. This would have a positive effect on the young rural population, by giving the incentive to stay on the farm and engage in improved farm activities.
According to experts, COVID-19 is expected to stay with us for a longer time than expected and impact economies of all countries around the world. Its impacts may be more or less felt but it has already impact even the most vigorous economies in the world and continues to do so until a vaccine or effective treatment is discovered sooner rather than later.
According to recent official data, the Ethiopian economy in general will continue to feel the heat of COVID-19 but the outlook is not at all grim. According to Ethiopian PM Abiy Ahmed who spoke at the recently held 18th regular session of parliament, the growth prospect for the Ethiopian economy in 2021 will be one of the best in Africa where only a few countries are successfully dealing with the pandemic. He said that the growth figures for the Ethiopian economy will be released sometime in September.
The Ethiopian economy is so far showing remarkable resilience in the face of a potentially more devastating pandemic. Some of Ethiopia’s flagship companies like Ethiopian Airlines are even serving as source of inspiration to other developing economies across Africa. Ethiopian’s creativity, flexibility and resilience is not only exemplary but also legendary. It has managed to float the bad tides by converting its passenger planes into cargo transporting ones by removing the passengers’ seats in dozens of aircrafts and thus achieved remarkable results without laying off its employees or cutting down their salaries.
Other local companies too are showing remarkable survival skills by converting their previous production lines that were forced to stop due to shortage on inputs, to the production of badly needed consumer goods in the context of the COVID-19 pandemic. Many of them are now producing face masks, hand sanitizers and other materials needed for the battle against the pandemic. The financial sector too is living up to its share of responsibility by helping these enterprises in many ways.
It may indeed be unjust or unrealistic to paint a rosy or exaggeratedly positive picture of the Ethiopian economy at this stage because there are other negative fallouts from COVID-19, such as the growth in poverty, lower income for the majority of low-income population and a general fall in the standard of living of the people. It would also be unrealistic to say that the Ethiopian economy is hopelessly screwed up which is not true. The economic reform measures implemented before the onset of the pandemic might have helped in averting a potential economic catastrophe. Nevertheless, the negative features may sometimes outshine the positive ones, but overall the economy is showing a remarkable resilience in these very bad times.
The Ethiopian Herald July 19,2020
BY MULUGETA GUDETA
