BY TEKLEBIRHAN GEBREMICHAEL
A tale of two economic forecasts
The Ethiopian government says the country’s GDP grew by between 6-7 percent in 2020 and the momentum will continue in 2021. The IMF says that is far too optimistic given the impact of Covid-19, locust invasions, internal conflicts and the resulting disruption in production and humanitarian crises. So, IMF estimates a GDP growth rate of only 1.9 percent in 2020 and stagnation (zero growth) in 2021.
Who do I believe? It does not matter what I believe, but let us first just for a moment visualize the things that happened over the last three years or so that, one way or another, did affect negatively economic activity and therefore GDP growth.
The most prominent factors have been social unrest, Covid-19, locust invasions, internal conflicts, foreign invasion and poor economic management.
These economic shocks have damaged production facilities and infrastructure and unharvested crops, have displaced workers and generally people, have thwarted new investments including FDI and have disrupted regular production and trade.
Hence, in the context of the disruption of regular production and distribution and of investment, there is no rational basis to assume any degree of economic growth, particularly when the scope of the damage (for instance in Oromia, Tigray, Beninishangul, Diredawa and Harar, Gambella, Amhara, etc.) is taken into account.
Looking at some of the macroeconomic variables, it is interesting to note that prices during the Christmas holiday were pretty stable and that is partly accounted for by the disappearance of demand from the wide TPLF money networks. Otherwise, the disruption in production and distribution and investment would have implied a sharper increase in prices of goods and services.
But that does not however mean that prices now are affordable for fixed income earners and pensioners. Quite on the contrary, my own pension, which used to last me for 16 days is now enough for only 10 days’ living expenses! There is no adjustment for inflation or inflation indexation for pension in Ethiopia, and nobody seems to care since Meles Zenawie said, of course while he was still alive, that “giving pensioners more money is like pouring water on a stone to make it grow.”
Now back to macroeconomic variables. Inflation is still high! GDP growth has stopped! The Birr/USD exchange rate is floating up towards the 55 birr mark on the black market! Investment has stagnated. FDI is drying up! Foreign exchange is as scarce as ever; the trade imbalance is widening; so is the fiscal deficit (although this is said to be a top state secret). So, in short, Ethiopia’s macroeconomic picture is quite bleak. Hence, IMF’s economic forecasts seem to be more credible although even these projections may well be on the high side and therefore quite optimistic. Well, who does not need a healthy dose of optimism?!
Internal and external debt of the government
First, the figures as officially reported in “Reporter” newspaper, Amharic,Jan,3, 2021 as follows:
Total internal and external debt ——-2.01 trillion Birr or Of which: (54.7 bn USD)
External debt — – – – – – – ————– 28.99 bn USD or (1.06 trillion birr)
Internal debt – – – – – ————- – —- – 25.7 bn USD or (945 billion Birr)
Total internal and external debt of which:
Federal — —– —- — 30.6 bn USD
Govt development agencies 24.0 bn USD
The conversions into USD are made at the rate of about 36.6 birr per USD. The current black market rate is over 54 birr for USD. The total internal and external debt of the government (including that of government development agencies) is reported to be 50.8 percent of GDP, which implies a GDP at current prices of about 4 trillion birr, which was reported to be no more than 3 trillion birr only about a year ago! Where did the one trillion birr GDP increase come from? It could not be a rise in real output. So, the usual culprit is inflation, which suggests that the whole economy has inflated like a massive balloon!
Of 945 billion birr internal debt, which is unlikely to be repaid any time soon, 525 billion birr was extended by the Commercial Bank of Ethiopia in the shape of “directed credit”, a notorious euphemism for bank loans granted on order from the higher–ups without any kind of standard credit risk analysis.
It is a sad commentary on the state banking system in Ethiopia that those same people who unprofessionally and obsequiously carried out the order from TPLF bigwigs have now transformed themselves into despicable turncoats serving the new government!
Of course, the most concerning part of the government’s internal and external debt is the relatively huge 29 bln USD external debt. Non-repayable domestic debt can be written off or shunted to a government special account that may vanish in due course of time (by the way, that is exactly what is being done with 525 bln debt owed to the beleaguered Commercial Bank of Ethiopia).
However, it should be remembered that it has already fed into domestic inflation, which is causing so much economic suffering to the general public, particularly to fixed income earners including pensioners and government employees.
With regard to the external debt burden, it is now about ten times the country’s annual merchandise export earnings of around 3 bln USD. This figure has remained more or less stagnant over several years, indicating the improper use of external debt as regards the objective of increasing the exportable share of GDP over time.
What did we do with all the government debt?
The 11 percent annual GDP growth rate propagated particularly by the pre–reform TPLF/EPRDF government had given credence to the assumption of external and internal debt at levels unprecedented in Ethiopia’s economic history. However, many economists, except those hired to do the government’s bidding, had long doubted the veracity of such a high rate of GDP growth when the economic realities on the ground in terms of the living standards of the vast majority of the people would not warrant such a claim.
Now there seems to be sufficient evidence to demonstrate that the whole thing was a hoax. If it was not so, the 2 trillion birr total government debt would have produced 500 billion birr worth of GDP per year at current prices for about 20 years, which definitely would have raised the people’s living standards considerably.
Unfortunately, that has not been so. Most of the total internal debt of 945 billion birr is now deemed to be non-repayable, which implies that it was not productively utilized. Instead it fed into overall inflation through pathways including corruption, direct embezzlement, wastage through inefficiency, cost overruns and unproductive investments.
Unlike the internal debt, the external debt must be repaid with interest. The average maturity of the external debt is reported to be about 15 years, which is quite generous but it can cause a serious constraint if the debt has not been utilized in such a way as to generate net foreign exchange through exports or import substitution.
The debt service/merchandise exports ratio has often reached as high as over 50 percent although anything over 20 percent is considered to be quite risky.
The consequences of bad economic management
The people of Ethiopia, at any rate the vast majority of them, have suffered horrendous economic hardships largely because of economic and, one might as well add, political mismanagement. The youth are largely underfed and therefore stunted.
They are poorly educated and trained. As a result, they have been unfairly characterized as having a short memory by the government itself, implying that their attention
The Ethiopian Herald January 26/2021
