Data for the first quarter of FY (July-September, 2018) point to steady growth momentum, following a deceleration in FY 2017, reported Focus Economics on Ethiopia Economic Outlook, recently. The report reasoned out that tax revenue rose solidly in the quarter, outpacing expenditure growth and thus reducing the government’s financing deficits. Moreover, the number of investment projects has increased notably in annual terms in the same period.
On the contrary, as to the report, there was also credible challenge. “In less positive news, exports fell markedly and, in late February, the Central Bank Governor warned that shrinking export revenues are causing FX shortages, curbing economic activity and restraining debt repayment. The trade deficit nevertheless narrowed as imports plunged at an even faster pace.” Bloomberg, on its part, went through Prime Minister Abiy Ahmed’s speech on imbalanced economy that needs corrective actions.
He said on his speech that the Ethiopian economy isn’t generating enough to pay off loans the State took to finance the Horn of African nation’s ambitious infrastructure and development programs. As of the Prime Minster, government investment in projects such as Africa’s biggest hydro-electric dam, sugar projects and a series of industrial parks across the nation have yet to earn sufficient foreign currency. He told this to lawmakers here in Addis.
he has also provided an information that Ethiopia has rescheduled 60 percent of its loan repayments from 10 to 30 years Bloomberg continued on its report in an appreciation tone that Abiy has made rapid changes to Ethiopia’s once carefully controlled political and economic space since becoming Prime Minister in April, with the nation’s ruling politburo announcing plans to open up state-owned industries from telecoms to sugar and power generation to foreign investors.
Emphasizing the need for corrective measures, the PM warned that stagflation may occur if no corrective measures are taken as Ethiopia’s export-import ratio stands at 1:5. Slowing spending can be one way out of the problem. To this end, the government has reduced expenditure on capital-intensive projects such as roads, which has slowed expansion rates in one of the world’s fastestgrowing economies. As a result, the rate of inflation has dropped, Abiy said.
It came in at 10.4 percent in December, from 13.6 percent a year earlier, according to Central Statistical Agency’s data. Much delays in some projects requirethe nation pay unnecessary sacrifice. Among these is Grand Ethiopian Renaissance Dam which was initially estimated at 80 billion Birr, could rise by about 60 percent as completion is now only expected in four years, as to the Prime Minister. Some state-owned enterprises are highly debited.
For instance, stateowned Ethiopian Electric Power Corporation, which Abiy said would be privatized, holds more than 300 billion Birr ($10.6 billion) of debt, equals to 99 percent of its capital, meaning that should the state-owned company be sold off, the nation would get only 1 percent shareholding, Abiy said. “If we don’t work on what we have started, Ethio Telecom will be useless,” Abiy said, referring to the telecom monopoly that’s among state enterprises to be liberalized. Among encouraging measures taken, following the coming to power of Abiy, is restoring peace between Ethiopia and Eritrea.
This has resulted in willing of some nations and international organizations to support the situation. The European Union for instance, wants to support infrastructure between Ethiopia and Eritrea, while the World Bank is willing to fund the development of Eritrean Ports, Abiy said. According to industry experts, a wave of economic reforms in Ethiopia, since Prime Minister Abiy Ahmed has come to Office nearly a year ago, has sparked hope among social businesses struggling to grow under the East African nation’s heavily regulated economy.
Since April, Abiy’s government has announced shake-ups across industries, including plans to open-up the once closely guarded telecommunications and power monopolies. Ethiopia has also loosened government control of the economy by opening its logistics sector to foreign finance and finalizing reforms in its underdeveloped mining and oil sectors to encourage more foreign investors.
Matthew Davis, CEO of Renew Strategies, an impact investment firm which finances Ethiopian social startups, said there was untapped potential with a market of 100-million peoplemany of whom needed products and services that social firms could meet. “The challenges in Ethiopia are big, but the opportunities are also big. Ethiopia is the second largest population in Africa … and now it’s slowly opening up,” Davis told delegates at the Sankalp Africa Forum, an event in Nairobi bringing together investors, social businesses and policymakers.
“We are still waiting for things to change, but we’ve all seen what’s happened over the last year with the new Prime Minister who is very progressive, and we are very excited about that.” Businesses, designed both to earn profit and help people in need, have mushroomed in Ethiopia in recent years, with women and young people playing a prominent role as social entrepreneurs. There are over 50,000 companies in Ethiopia pioneering solutions aimed at improving services from water and sanitation to health, education and housing for the country’s most needy, according to a survey by the British Council.
Yet they are struggling to scale up and expand- largely due to a lack of access to finance, said the report. “Almost 40% of the social enterprises surveyed have not received any form of external funding or financing, either from non-repayable or repayable capital,” said Wubet Girma, Deputy Director of the British Council in Ethiopia. She said the limited supply of capital was the top financial constraint, cited by more than a quarter of the firms surveyed. But recent reforms signaled a friendlier environment for foreign investors interested in financing social enterprises, she added.
World Bank Publication June 11, 2018, on Ethiopia Economic Update, related the World Bank Group’s observation. The Bank in its publication entitled “the latest Economic Update, The Inescapable Manufacturing Services Nexus: Exploring the Potential of Distribution Services”, identifies key challenges in Ethiopia’s economy and proposes some recommendations to help unleash the country’s economic prospective.
As the country still stands at the beginning of structural transformation, tapping into the potential of the service sector, such as telecom, utilities and finance, could help Ethiopia to reach its industrial goals. The analysis explores the sustainability of Ethiopia’s economic model based on domestic demand, especially public investment. The report also forecasts that Ethiopia’s growth will remain stable, but projects will slow down to a more sustainable growth rate of 9.6% in fiscal year 2018 (July 2017 to July 2018).
According to official statistics, with growth rate of 10.9% during fiscal year 2017, the Horn of African nation was one of the world’s fastest growing economies, with an average annual gross domestic product (GDP) growth rate of 10.3% during the 10 fiscal years ending June 2016. To maintain this growth momentum, the report recommends that Ethiopia makes policy adjustments to crowdin the private sector and strengthen its economic competitiveness.
The sustainability of the Ethiopian economic growth model poses some important risks in light of continued foreign exchange shortages and limited room for external borrowing, the report says. While measures were taken to address persistent Birr overvaluation, the report highlights continued challenges, such as large external imbalances, rising debt and weak competitiveness may constrain the development of manufacturing and the creation of jobs.
This calls for a shift toward a more export-led model, the report notes, where the private sector can play a greater role in economic growth, export diversification and employment. The analysis and value chain case studies confirm that a dynamic services sector is needed for manufacturing and agroprocessing to thrive. “Manufacturing and agro-processing cannot be competitive without accessing good quality and wide-ranging inputs from the services sectors,” said Mathew Verghis, World Bank Practice Manager, for the Macroeconomic and Fiscal Management Global Practice.
“Eliminating obstacles to services including distribution channels would help link rural producers to markets for inputs and reduce post-harvest and storage losses.” As Ethiopia lags behind its SubSaharan African neighbors in the service sector, the report highlights the need for the country to catch up by removing trade barriers, reforming regulations and moving toward integrating its services markets. For example, the report says that Ethiopia’s distribution services tend to operate in a heavily regulated environment, which can prevent competition and innovation.
One noted example is Ethiopia’s Investment Code, which the report says, prohibits foreign investment in distribution. Considering the weak regulatory enforcement capability of the Ethiopian government, the report suggests using nonstrategic sectors, such as distribution services, as a good entry point into a more comprehensive services reform strategy that is linked with national development plans. “The reforms advocated cannot be treated in isolation,” said Carolyn Turk, World Bank Country Director for Ethiopia, Sudan and South Sudan.
“Reforms need to be part of an interconnected chain of value addition, from production to final consumption. They will achieve the most impact if they improve access to inputs and financial services for smallholder farmers and fast-track their transition away from subsistence agriculture as they access more high-value markets.” Ethiopia’s economy is forecast to expand 8.5 percent in the July 2018-June 2019 period, from 7.5 percent in the previous fiscal year, the International Monetary Fund said few months ago.
In its first assessment since Prime Minister Abiy Ahmed took office in April, the IMF said Ethiopia was benefiting from easing uncertainty and improved domestic and foreign investment. Abiy has signed a peace deal with neighbour Eritrea, lifted a state of emergency and promised to partially open up the government-dominated economy by attracting foreign capital to the state telecoms company and airline. “Growth is expected to step up in 2018/9 … supported by stronger confidence as the uncertainty of the previous year recedes, and the availability of domestic and foreign direct investment improves,” Julio Escolano, Head of an IMF team that visited Ethiopia to make the assessment, said in a statement.
“The authorities’ strategy to shift the engine of economic activity to private sector development while the public sector consolidates is appropriate to maintain strong growth.” Dr. Lemma Gudisa, Academic Vice President at Ethiopian Civil Service University on his part said that the contribution of the Prime Minister and his new government can be viewed from short and long term perspectives. From the short-term perspectives, as of Dr. Lemma, it can be attributed to his firm stand at least in stopping corruption and embezzlement which we Ethiopians hadn’t expected to happen in this short period of time.
For example, he tried to stop land grabbing which is base for agriculture and agricultural products. This act would be important for the whole functioning of economic system in general and for rescuing farmers’ evacuation from their land. The other very significant contribution he has brought to the economy is bringing to justice those who were embezzling this country using for themselves the resources and taxes paid.
They were thought to be untouchable by the law. The efforts being made to control contraband and tax evasion will also have their own role in improving the economic justice and reducing the budget deficits of the government. Concerning the donation and financial support gained from different countries and international organizations and elongation of loan pay back, Dr. Lemma said that it fills the gap occurred in the government’s treasury and can be taken as a short term cure.
From the long-term perspectives, he is laying bases for economic growth and development as well as stabilizing the economy. For example, as to him, the negotiations and collaborations he is making with donors, development partners and countries are promising in attracting investment for our future development and growth. “Economic growth might be achieved but economic development is unthinkable by having policies that facilitate the evacuation of poor farmers from their land and widening the gap between the poor and the rich, for example.
Rather, it would be facilitating poverty. Therefore, if this country is to eradicate poverty and achieve sustainable economic development, policies such as privatization and land-ownership need to be revised. The recent promise from Dr Abiy and his government to revise the major economic policies of the country is hopefully expected to include the revision of such policies. This can be viewed as another important contribution of the Prime Minister, from the long-term perspectives”.
According to Dr. Lemma the other very important focus area for sustainable economic growth and development, along with the revisions of economic policies, is ensuring peace and security as well as political stability. In this regard, the efforts made and being made by Dr. Abiy and his supporters are quite remarkable. The internal and external negotiations and diplomacy with opposing political parties, Diasporas, neighboring countries such as Eritrea, Egypt and the like will have both economic and political importance.
The achievements of the Prime Minister in the past one year are promising and appreciable. Since the outcomes of his efforts are for all of us, we all have to stand behind Dr. Abiy and his governance aiming at achieving sustainable growth and lasting peace, he stressed.
The Ethiopian Herald, April 2/2019
BY BACHA ZEWDIE
