Ethiopia is the oldest independent country, with the second largest population and the fastest growing economy as it has low economic base. The current political and economic reforms and normalizing relations with its neighboring countries are positive conditions for economic development. Financial reforms are expected to enhance domestic resource mobilization if applied on time. However, in recent times economic growth has slowed down due to political and social unrest that had been prompted and encouraged by the TPLF junta in the past.
On the supply side, industry and services sectors continued to lead economic growth. Industry has been driven by construction, notably by industrial parks and infrastructure investments. Structural transformation has been underway but it needed to accelerate. While agricultural share in the GDP has fallen, the sector still employed a large portion of the workforce. Manufacturing accounted for a small share of the GDP. On the demand side, private consumption and domestic investment used to be the primary drivers of growth, but domestic investment has lately been low due to disinvestment caused by the TPLF junta.
Earlier monetary policy has been tight, but inflation remained in double digits in the last few years because of advances by Central Bank, CB, to finance the huge fiscal deficit created by the TPLF mismanagement of the economy. High inflation has contributed to the depreciation of the Birr despite its devaluation necessitating a gradual shift to competitive exchange rate. Tax reforms boosted revenue mobilization, but deficit financing through the CB fueled inflation and reduced the effectiveness of the monetary policy. Also, the TPLF operation in the black market had deliberately undervalued the Birr. A huge amount of local and foreign currencies had been at its disposal while it was fully in charge of the Ethiopian economy.
The current government has tried to undertake economic reform program with the objective of restructuring the economy which had been misguided by the TPLF. The economic outlook has been positive and real GDP growth has been projected to stabilize. Growth has been expected to be enhanced by the Homegrown Economic Reform Program (HERP), which sought to address macroeconomic imbalances and unlock structural and sectoral bottlenecks. It invoked the preconditions of improving governance of state-owned enterprises and strengthening institutional capacities. It took measures to open key sectors to competition notably transport, logistics, manufacturing, and telecoms, which would encourage private investment.
Transport investments and ongoing logistics reforms, including measures to improve connectivity, will produce efficiency gains in trade and manufacturing. Ethiopia’s public-private partnership framework will diversify the country’s development finance sources, improve sustainability and enhance growth-generating infrastructure investments. Ongoing financial reforms, particularly the development of a capital market will improve domestic resources mobilization, which had been seriously hampered in the past by the ruling TPLF junta.
Ethiopia suffers from trade deficit which is caused by, among others, overdependence on “unprocessed” agricultural exports. Unstable electricity supply, low access to credit, shortage of foreign exchange, weakness in raw material supply chains, and shortage of skilled labor, have all hindered business growth. They also affected production capacity utilization for manufacturing firms. Inefficient trade logistics have also slowed the development of competitive manufacturing sector. Also, intermittent interregional conflicts, which had been prompted by the TPLF junta, have impeded socioeconomic progress in Ethiopia.
There were some reasons identified as obstacles to economic development in Ethiopia. The major one was the authoritarian regime of the TPLF that stifled democratic rule subduing the people to abject poverty, without any political, social and economic rights. But, in the past three years the country seems to be increasingly amenable to democratic processes, despite some political conflicts “inherited” from the TPLF regime that had impeded economic progress. The steps taken towards national security and political reconciliation, such as lifting of the state of emergency, releasing political prisoners, and reforming tough laws on anti-terrorism, media and civil society are considered positive by observers of the political, economic and social developments in the country.
Ethiopia has embarked on a “policy” of compromise with neighboring countries for peaceful coexistence. Despite the attempt of the TPLF to disrupt the peaceful coexistence, the country has been trying to settle its border disputes and achieve normalization of relations with them. To this effect, it has received new political and financial support from a number of bilateral and multilateral donors. But, some of these donors have reflected their extra-economic “prejudices” in recent years. The new policy is also well received by the Ethiopian diaspora which is a reliable contributor to the economic development of the country through substantial remittances using both official and unofficial channels, with the latter one declining.
The other factor influencing the socioeconomic development of Ethiopia is its youthful potential. About three fourths of its population is under the age of thirty and nearly half of it under fifteen. It is reported that enrolment in higher education has increased tremendously with an increase in the number of public institutions. The government has also given emphasis to science and technology. Technology and knowledge-based industries have the potential to thrive due to the cost advantages and the availability of human capital in Ethiopia. If the youth acquires the relevant skills, it would be the preferred human capital to boost the economy.
Economists point out that Ethiopia has large untapped markets that would attract foreign direct investment. It is, therefore, believed that privatization of state-owned enterprises could spur economic growth and development. It is also revealed that the country is one of the least connected countries in the world, with a low but growing internet penetration, with mobile phone penetration increasing tremendously. In the past, the Ethiopian government had resisted liberalizing key sectors to foreign and local investors for a long time, but now it is offering stakes in key sectors to global investors.
Local challenges around mobility, agriculture, infrastructure and healthcare for a country of Ethiopia’s size could be turned into a series of opportunities by the start-up movement. It is revealed that sustaining a strong Ethiopian economy will require the existence of a local start-up ecosystem. Such an environment, where entities such as universities, large companies, service providers, research and funding organizations come together to allow local entrepreneurs to get off the ground and to scale up, will be vital.
An important piece of the start-up opportunity in Ethiopia is the existence of entrepreneurial role models who create and manage their enterprises. These entrepreneurs establish firms that may provide jobs. They create value chains from production to marketing their products locally and globally. However, structural challenges remain for Ethiopian entrepreneurs. They face obstacles including low internet penetration, poor connectivity and low access to finance. They can, however, be optimistic as the government plans to unlock heavily regulated sectors, including banking and telecoms.
Because of its strategic position in the Horn of Africa, Ethiopia is increasingly becoming a center of political and economic struggles both at home and abroad. Locally, its economic progress is viciously stifled by domestic political opponents such as the TPLF junta who had aspired to grab power without the approval of the people through ballots. They had chosen bullets to subdue local people along ethnic, tribal, clan and family lines to fulfill their evil aspiration of snatching power by force. They had failed to realize that they were equally entitled to power through democratic elections. Despite political difficulties, the country has a potential to meet its aspirations of growth and development.
Externally, the Western countries and those two riparian countries along the lower Nile/Abbay River fear that Ethiopia’s ability to develop its water resources would turn it into an economic power which would be too strong to contend with. They would block all its developmental work along the river. They would interfere in Ethiopia’s local affairs, identifying and helping local power mongers to fight a losing battle within their country for the benefit of evil neighbors. Ethiopia’s natural resources are immense that could also benefit other African countries too.
Approximately two-thirds of the total land area of Ethiopia is potentially suitable for agriculture. Only a tenth of it is currently under cultivation; the largest use of the land is for traditional livestock grazing. Studies show that securing food and a livelihood is inextricably linked to the exploitation of land, water and natural resources in rural Ethiopia. Land is widely used for cultivation and grazing, while the forest is a source of fuel wood and construction materials. Large parts of the woodlands are increasingly shifting to cultivation, growth of livestock, expansion of agriculture, and fuel wood that supply food and construction materials to the economy.
There are industrial and peri-urban plantations established and operated by the government and community woodlots. Biomass fuel provides most of the total energy supply of the country, including energy supplies from woody biomass, crop residue and dung. Only a “small” percent of the population is connected to an electric grid mostly concentrated in urban areas. The demand for fuel wood to meet basic household needs far exceeded the supply. As a result, crop residue and dung are increasingly being used to meet rural household “energy” needs. Deforestation also increases surface run-off and reduces infiltration and water storage in the soils for human use for a more extended period. It often leads to flooding which is damaging to irrigation schemes. Deforestation is also associated with the loss of flora and fauna and loss of biological diversity. Such loss of resource potential should be reversed.
Ethiopia has a vast resource potential that could be harnessed for economic development and poverty reduction. Reforms undertaken by the current government are expected to promote domestic and external resource mobilization if applied in time. In the past, economic growth has slowed down due to political and social unrest prompted and encouraged by the TPLF junta, before and after it has been driven out of power. Assisted by its Western masters, it attempted to regain political power through a war of aggression against the poor people of Ethiopia. The government is responding to such aggression with the full support of the Ethiopian people, which heralded absolute freedom from economic neocolonialism.
BY GETACHEW MINAS
The Ethiopian Herald 28 October 2021
