The government has set to push forward with the second phase of its home-grown economic reform agenda initiated by encouraging results from the initial phase implemented over the past three years.
Prime Minister Abiy Ahmed (PhD) revealed during a briefing with parliament members on 06 July, 2023 that the next phase of reforms will commence soon. The objective of these reforms is to revive an economy impacted by both domestic and international conflicts. The announcement comes two weeks after the conclusion of consultations with the executive committee of the Development Assistance Group.
State Minister of Finance, Eyob Tekalign (PhD), recently announced that the newly introduced second phase of the home-grown economic development plan to be implemented in the next three years. The forthcoming macroeconomic reform will primarily focus on two aspects: halving the debt-to-GDP ratio and reducing inflation to below 30%. The previous reform agenda, initiated in 2019, aimed to maintain a stable macroeconomic environment, reduce debt burden, and limit inflation to a single digit. Yet, the current situation is far from the intended targets.
The other target of the first reform agenda was to uphold a stable exchange rate. However, achieving this in an environment with relatively high inflation remained challenging for the government. In recent years, the local currency, Birr, has experienced a consistent decline in value against major international currencies; particularly the scarcity of hard currency has driven the black-market value of a dollar to surpass 110 Birr. This substantial premium of over 100% marks a significant impact in the nation’s economic history.
The Prime Minister, however, noted that this is beyond the government’s control. The Reserve Bank’s decision to raise interest rates in the United States of America in order to tackle inflation led to the appreciation of the Dollar in the global currency market, subsequently causing a significant depreciation of the local currency, Birr. According to the National Bank sources, the Ethiopian Birr has depreciated by nearly 40% against the US Dollar since January 2022.
On the other hand, the Minister of Planning and Development, Fitsum Assefa (PhD), recently announced that Ethiopia has registered 6.2% average growth during the last three years annually. She announced this during the Evaluation of the government’s nine months performance and the implementation of the first phase of the homegrown economic reform program, and the preparation of the second phase. The second phase of the homegrown economic reform program will be implemented from 2024 to 2026.
According to the Minster, Ethiopia is the third largest economy in sub-Saharan Africa and its population will create great potential for economic transformation. Fitsum pointed out that, the government has been successful in implementing the first phase of the 10-year perspective development plan during the past three years.
Despite natural and man-made challenges, Ethiopia’s economy is doubled when compared to the average growth rate of 3.1% in sub-Saharan African countries, the Minister said.
Fitsum noted that the home-grown economic reform program has been facing major challenges such as COVD-19, drought, Russia-Ukraine war and the withdrawal of support from development partners. However, she pointed out that due to the measures taken by the government, an average growth of 6.2% has been recorded in the last three years. The Minister further explained that the progress has been made in many areas, especially in agriculture, services and manufacturing.
In the second phase of the home-grown economic reform program, three key pillars that focus on building a stable macro-economy, creating a favorable investment and business environment have been identified. The home-grown economic reform program will also focus mainly on accelerating structural transformation of the economy, enhancing investment and savings, and stabilizing inflation and cost of living.
Tewodros Makonnen (PhD), a country economist at the International Growth Center (IGC) Ethiopia, argues that many of the tasks outlined in the reform agenda have remained incomplete due to the COVID-19 pandemic and internal conflicts in the country. “If these reforms had been fully implemented, the current macroeconomic situation would have been different,” he remarked.
Over the past three years, Ethiopia has seen some improvements in its debt stress status measured by the debt-to-GDP ratio. According to the Prime Minister’s previous report, in June 2021, both external and domestic debt accounted for about 51% of the GDP. By March 31, 2023, this figure had dropped to 38.8%. However, such progress was insufficient to change the country’s debt stress rating from high risk to moderate risk.
In early 2021, the government sought debt restructuring under the Group 20’s Common Framework—a plan targeted at restructuring government debt in low-income countries. However, progress was hindered by a two-year civil war that erupted in November 2020, and ongoing discussions with development partners have yet to reach a conclusive outcome. Sources close to the matter have disclosed that the government is presently seeking approximately three billion Dollar in assistance from the IMF and the World Bank.
The spokesperson of IMF, Julie Kozack explained two months ago that there were clear commitments from development partners and financing assurances from creditors under the G20 common framework to finance any program.
Addressing concerns about inflation, the Prime Minister acknowledged that it remains a significant issue for policymakers and the general public. He described it as “spreading like a pandemic,” despite the government’s extensive efforts to curb it. Three years ago, when the reform was launched, the administration aimed to bring inflation below the single-digit mark. However, the results have fallen short of this target, with some initial improvements observed.
During his most recent appearance before lawmakers, Prime Minister Abiy stressed that limiting the money supply will be a key priority for the government over the next three years. He emphasized that slowing down inflation has been challenging, given the current global environment of rising prices.
According to official reports, the government has allocated close to 100 billion Birr this year to subsidize fertilizer and fuel as part of efforts to stabilize inflation.
Limiting the money supply will be a key priority for the government over the next three years, aimed at tackling inflation. Notably, the budget for the upcoming year shows a mere two percent increase compared to the previous year.
Limiting the money supply also means depending on financial resources mobilized from the economy, mainly in the form of taxes. In the last 11 months, 365 billion Birr was collected from taxes, representing a 20% increase compared to the same period last year. However, according to the Ministry of Finance, the tax income collected falls short of its potential, with the tax-to-GDP ratio declining in recent years from 10.7% to 7.1% last year, and below the sub-Saharan African average of 16%.
But the poor tax performance didn’t outdo the economic growth. According to Eyob, it is growing “phenomenally.” To fully comprehend this, he emphasized the importance of evaluating achievements on a global and regional scale.
Sub-Saharan Africa’s growth was also projected to sharply slow to 3.6% in 2022, before increasing to 3.7% in 2023 and rebounding to 4.2% in 2024. In light of this global trend, Ethiopia’s GDP growth, which is forecasted to remain around six percent in the next two years, is unquestionably exceptional. However, this is not enough for the current administration. As to Eyob, the government has aimed to reach an even higher annual growth rate of 7.1% in the coming years.
Some of his claims such as the expectation of the industry sector growing by 8.2% this year do not align with the reality on the ground. Over the past three years, many large and medium-scale manufacturing industries have either drastically reduced production or completely shut down, mostly due to a scarcity of raw materials caused by foreign currency shortages in the country and conflicts in different parts, including the Northern Ethiopian war.
In 2022, Melaku alebel, the Minister of Industry reported that over 246 industries had halted operations due to the war. The government responded by launching a nationwide campaign called “Ethiopia Tamerit” (roughly translated as “Let Ethiopia Produce”), resulting in the revival of over 160 industries. The industry sector currently makes for 28% of the GDP.
BY ABEBE WOLDEGIRGIS
THE ETHIOPIAN HERALD TUESDAY 12 SEPTEMBER 2023
