BY GETACHEW MINAS
Ethiopia’s location gives it strategic dominance as a jumping off point in the Horn of Africa, close to the Middle East and its markets. It is landlocked, and has been using neighboring country’s port for the last two decades. According to the WB, with the recent peace with Eritrea, Ethiopia is set to resume accessing the Eritrean ports for its international trade. With a population of about 115 million, Ethiopia is the second most populous country in Africa, and the fastest growing economy in the region. The WB considered the country one of the poorest, with a nominal per capita income of USD 974 in 2020. It has an economic goal of reaching lower-middle-income status by 2025.
Gross Domestic Product (GDP) by sector is estimated to be 35 percent for agriculture, 22 percent for Industry and 43 percent for services in 2020. Inflation (consumer price index) is estimated to be about 20 percent in the same year. The WB pointed out that Ethiopia’s economy experienced strong, broad-based growth averaging 9.8 percent a year for ten years until 2019, when its real GDP growth rebounded to 9 percent. Industry, mainly construction, and services accounted for most of the growth. The bank revealed that agriculture and manufacturing made lower contribution to growth. Private consumption and public investment explain demand-side growth, the latter assuming an increasingly important role.
The bank disclosed that higher economic growth brought with it positive trends in poverty reduction in both urban and rural areas. The share of the population living below the national poverty line has decreased considerably. The government has implemented the second phase of its Growth and Transformation Plan (GTP II) which ended in 2019/20. The plan aimed to continue expanding physical infrastructure through public investments and to transform the country into a manufacturing pivot. The industrial sector is expected to expand in line with the manufacturing strategy and create jobs.
Ethiopia’s main challenges are, as pointed out by WB, sustaining its positive economic growth and accelerating poverty reduction both of which require significant progress in job creation, as well as improved governance. The government is devoting a high share of its budget to pro-poor programs and investments. Large scale donor support will continue to provide a vital contribution in the near-term to finance the cost of pro-poor programs. These programs would help meet “several challenges,” some of which are presented here. First, Ethiopia, like the rest of the world, has been experiencing the unprecedented social and economic impact of the COVID-19 pandemic. The COVID-19 shock is expected to be transitory with potential recovery possible in 2021, but the overall adverse economic impact on Ethiopia will be substantial.
The next challenge the country has been experiencing is locust invasion. Recently, the worst locust invasion in decades has occurred in Ethiopia. This may undermine development gains and threaten the food security and livelihoods of millions of Ethiopians. It demands scientific observation of it occurrence, incidence, manifestation, frequency, prevalence and location. Apart from locust, other pests, vermin, rat, and mice invasion may destroy harvests. These are challenges which peasants confront every harvest season. Post-harvest disruption may occur that threaten the lives of small holding farmers. They may affect the distribution and marketing of agricultural produces.
Another challenge the country is facing is political disruption, which is associated with social unrest. This could negatively impact growth through lower domestic and foreign direct investment, tourism and exports. Investors want peace for their economic operations. They engage in production, distribution and marketing of goods and services which are difficult to perform in the absence of peace. Lack of peace affects economic performance of investors who would be subjected to losses of the means of production. Raw material, power, water, infrastructure and other requirements of productive operations lead to the closing of enterprises and dismissal of workers. This leads to a vicious circle of violence.
Limited competitiveness is another challenge which the economy of a country faces. If an enterprise is rendered non-competitive, it constrains the development of various sectors of the economy, including the manufacturing. When such productive sectors are inhibited from regular operations they are bound to fail in their financial responsibilities, cutting down their production for domestic and external markets. They fail to meet their export obligations thereby affecting the country’s foreign exchange earnings.
Economic challenges tend to appear when the private sector is negatively affected. This would limit the country’s trade competitiveness and resilience to external economic shocks such as shortage of foreign exchange or sudden fall in demand for the country’s exportable items. The government aims to expand the role of the private sector through foreign direct investment (FDI) and industrial parks to make Ethiopia’s growth momentum sustainable. But, FDI requirement is sometimes unpredictable, as foreign investors require majestic treatment, imposing all kinds of favorable treatment at the expense of domestic investors.
The Country Partnership Framework (CPF) was developed after intensive consultations with a wide range of stakeholders to gain a broad-based perspective on the WB performance and development priorities. The partnership framework is a result-based strategy, firmly attached in the government’s GTP-II. It is designed to assist Ethiopia in forging a more inclusive and sustainable growth path. Particularly, it supports a more “spatially inclusive” approach to development, one that influences national programs to provide quality services to all areas.
The CPF is helping to promote structural and economic transformation through increased productivity in rural and urban areas by focusing on basic education, access to markets, and job opportunities for youth. It is also helping to build resilience and inclusiveness, including gender equality, by improving safety nets, investing in productive sectors. It also supports institutional accountability and assists in “combating” corruption by focusing on improving governance and promoting social accountability.
The private sector is expected to be a key contributor to Ethiopia’s future development, and the CPF envisages prominent roles for the international finance institutions, the WBGroup that focuses exclusively on it. The WBG consists of lending operations with funds committed to be complementedby trust funds. The group provides finances for national programs on agriculture, sustainable land management, and basic service delivery including health, education, and water and sanitation, energy, transportation, trade logistics, and financial sectors.
Development policy operation is designed to support critical reforms for power sector sustainability, improving the investment climate, providing for the development of public-private partnerships and developing the financial sector, as well as improving transparency and accountability. This includes funding to support reforms for helping to mitigate impacts of the COVID-19 pandemics.The International Development Association (IDA) also provides advisory services to provide support for evidence-based decision-making and stronger implementation on a wide range of development issues. It is one of the largest providers of official development assistance to Ethiopia.
Ethiopia is a pilot country for harmonization of externally assisted projects and donor division of labor and partners are currently considering how to build on it. The WBG and the UNDP are partners in the Development Assistance Group (DAG), the main forum for donor coordination in Ethiopia. Through DAG there are efforts to make progress on the implementation of commitments, focusing on harmonization. WBG has taken the lead in developing a set of multi-donor programs to reduce transaction costs, aligning support with the country’s decentralized model and guaranteeing of aid.
Poverty has been reduced to some extent, with a decline in the proportion of people living below poverty line. The expansion of physical infrastructure with public investment and the expansion of the industrial sector have created employment opportunities for both the urban and the rural job seekers. Also, the partnership of government and donors has helped to promote structural and economic transformation through increased productivity. This has led to both rural and urban labor productivity focusing on basic social services such as health, education, housing and access to markets.
The partnership has the objective of creating job opportunities for the unemployed youth. It has also helped in building resilience and inclusiveness, including gender equality. This has been possible through improving safety nets and investing in productive sectors. It also supports institutional accountability and assists in “combating” corruption by focusing on improving governance and promoting social accountability. The issue here is that corruption is an evil attached to the hierarchy of power, which may not be challenged with external assistance.
Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The Ethiopian Herald
The Ethiopian Herald 23 April 2021
