The major macroeconomic policy objectives and targets of GTP II for the fiscal year 2016/17 were footed on four major pillars. These are: firstly, maintaining a double – digit annual economic growth rate of 11.1 percent; secondly, ensuring structural transformation of the economy by raising the share of the industrial sector in gross domestic product (GDP) to 18 percent and that of manufacturing sector, in particular to 5.7 percent.
The third one is maintaining macroeconomic stability by keeping the annual average inflation rate with a single digit, enhancing export competitiveness by creating a conducive environment within a stable foreign exchange regime, maintaining a budget deficit of -2.8 percent of GDP, increasing the share of domestic revenue and tax revenue in GDP to 15.6 percent and 14.0 percent, respectively.
The fourth or the last but not the least objective in macroeconomic performance is increasing the share of gross domestic saving in GDP to 23.8 percent and, by so doing, increasing the share of gross domestic investment in GDP to 39.1 percent by the end of the fiscal year. National Plan Commission has recently issued the performance evaluation against these targets.
According to the report, the Ethiopian economy, measured in terms of GDP, grew by 10.9 percent (in real terms) in 2016/17, maintaining its rapid pace of growth observed during the preceding ten years. This rate of growth was more or less in line with the GTP II’s target of 11.1 percent for the fiscal year under review and has exceeded the 8.0 percent growth registered in the preceding year.
The growth was also broad-based as all the three major economic sectors (agriculture, industry and service) grew robustly and contributed significantly to the rapid pace of the economy. As to the report, the agricultural sector grew by 6.7 percent, rebounding from the El Nino induced drought effect which had dramatically reduced its growth rate in the preceding year to 2.3 percent. Favorable weather condition and improved agricultural input supplies also had an impact in boosting agricultural production and productivity.
The industrial sector registered a rapid growth of 18.7 percent and made a significant contribution to the 10.9 percent growth in the overall GDP. Within the industrial sector, the construction sub-sector was the main engine of the sector’s overall growth.
It performed rather well in terms of value added, registering a growth of 20.7 percent, which is well exceeded the plan target of 16.0 percent. The sector’s vigorous performance largely mirrored the implementation of massive infrastructural woks (such as roads, railways, electric power, educational and health facilities, urban development and housing, etc.)
The service sector grew by 10.3 percent, exceeding both its plan target of 10.2 percent as well as its performance of 8.7 percent in the preceding year, and positively contributed to the overall economic growth, the report noted. Gross Domestic Product as per the report, at current market prices had reached Birr 1.807 trillion, registering an annual growth rate of 17.2 percent.
As a result, per capita income reached USD 863, up from USD 801 in 2015/16, indicating that Ethiopia’s vision of becoming a lower middle income county by 2025 is within reach. Economic structural transformation Economic structural transformation entails expanding the share of the industrial sector, in particular that of manufacturing, in GDP, while the share of agriculture sector shrinks.
The industrial sector sharply increased its share of GDP to 25.6 percent in the fiscal year 2016/17, compared to 15 percent in the base year of the GTP II (i.e., 2014/15), and substantially exceeded the plan target of 8 percent for the fiscal year.
The manufacturing sub-sector, in particular, raised its share of GDP to 6.4 percent in 2016/17, compared to the plan target of 5.7 percent, and up from 4.8 percent at the beginning of the plan period. Meanwhile, during the same period, the share of the agriculture sector declined from 38.6 of GDP to 36.3 percent, exhibiting a slightly faster drop over the plan target of 36.4 percent. Maintaining macroeconomic stability Price Development- Inflation is one of the indicators of macroeconomic stability.
Maintaining single digit inflation, therefore, has been among the strategic directions singled out for the GTP II period. Thus, in 2016/17, the annual moving average of general inflation rate was maintained at 7.2 percent, which is lower than the 9.7 percent recorded in the preceding year, while the food related and non-food related inflation rates were held at 7.1 percent and 7.4 percent, respectively, stated the report. Overall, the GTP II target of keeping the inflation rate within the single digit level was successfully met during the fiscal year.
This was made possible by the 10.9 percent expansion of the overall economy, as well as the rapid growth of output registered by the agriculture, industry and service sectors.
Fiscal policy and public financeThe strategic directions of fiscal policy of the GTP II period include, among others, maintaining macroeconomic stability, enhancing the country’s financing capacity by strengthening the collection of taxes and other revenues, allocating public finance for an optimal impact on public welfare and high economic growth, and adopting tax and tariff policies which are consistent with goals of promoting manufacturing, development and export expansion.
Expenditure outlays are planned to underpin the country’s rapid pace of economic growth through the expansion of economic and social infrastructures, as well as electing the government’s commitment to end poverty. Overall, states the report, the GTP II targets an improved capacity of mobilizing domestic resources and gradually reducing dependency on foreign resources.
Government budget deficit is projected to remain at or below 3 percent of GDP, with the deficit to be financed largely from noninflationary domestic sources. Federal government revenue According to the report of the National Planning Commission, federal government revenue collected from tax and non-tax sources, as well as from foreign grants, amounted to Birr 204.1 billion, which showed a 90.7 percent performance against the plan target of Birr 224.9 billion for the fiscal year, and an 8.9 percent growth to the preceding year’s collection. General government expenditure During the GTP II plan period, the public expenditure allocation was aimed at ending poverty, as to the report.
The strategic directions to be pursued in this regard have also been laid down in the plan. They include increasing budgetary allocations for capital investments and propoor and growth enhancing sectors, financing recurrent expenditures fully from domestic revenue sources, and progressively building the capacity to fully finance capital expenditures from domestic revenue sources. The actual expenditure during the fiscal year amounted to Birr 329.3 billion.
Although this was only 89.1percent of the budget, it showed a 17.2 percent growth over the preceding fiscal year’s expenditure. Recurrent expenditures absorbed Birr176.7 billion (53.7 percent) of the total budgetary expenditure, while capital expenditures claimed Birr 152.6 billion (46.3 percent), noted the report. Monetary policy and development of finance industry Monetary policy-
The main objectives of the monetary policy and financial industry development under the GTP II are maintaining annual average inflation rates within single digits, ensuring a stable exchange rate consistent with export promotion, and enabling the financial industry to facilitate the structural transformation process of the economy.
The key strategic direction of monetary policy during the plan period is based on the principle that money supply in the economy should be consistent with a healthy relationship with the supply and demand of goods and services. During the fiscal year, as to the report, the Ethiopian Birr exchange rate against foreign currencies remained relatively stable, consistent with the government’s policy objective of maintaining macroeconomic stability and supporting foreign trade.
Financial sector developmentThe finance sector assists economic transformation by mobilizing domestic savings and strengthening the financial capacity of the country. It is expected especially to serve as a major source of finance for investment projects to be undertaken by both the private sector and public enterprises.
During the GTP II period, total bank deposits are projected to grow at an annual average rate of 30.9 percent, while he number of bank branches is expected to expand from 2,754 in 2014/15 to 5,736 by 2019/20. In addition, microfinance institutions are expected to expand their services to cover at least 50 percent of the rural areas by the end of the GTP II period.
The growth momentum observed in the domestic banking industry was also reflected in the microfinance sub-sector as well in the insurance industry. Regarding lending operations, during the fiscal year, as to the report, the banking industry continued to support the county’s economy by expanding its lending activities. New loan disbursements of about Birr 157 billion were made to different borrowers in the economy, depicting an increase of Birr 25.9 billion, or nearly 20 percent, over the preceding year’s disbursement.
The private sector took the lion’s share of the new loan disbursements, amounting to more than 60 percent of the total, while the public sector took less than 40 percent. In fact, the private sector’s share of new loan disbursements has been increasing during the last three years. With respect to the sectoral distribution of the outstanding loans, the largest share of 32 percent was claimed by mining, power and water resources, while the next biggest share of 23.2 percent was taken by the industrial sector. It should be noted, as to the report, the industrial sector’s share, reflecting government’s priority policy of supporting the rapid expansion of the manufacturing industry, has been rising from year to year since the beginning of the GP II period.
External trade Export- Merchandise export earnings were targeted to reach USD 6.8 billion, out of which USD 1.3 billion, would be earned from the export of manufactured goods. Actual earnings amounted to USD 2.91 billion, equivalent to 42.79 percent of the target. On the other hand, the earnings showed a 1.4 percent increase over the preceding year’s earnings, owing mainly to a 5.2 percent increase in the volume of exported goods despite a 4.3 percent decline in the average prices of commodities in the international market.
Coffee export, which accounted for 30.5 percent of the total merchandise export earnings, registered a 13.6 percent increase in volume and a 22.2 percent increase in earnings, compared to its performance in the preceding fiscal year, owing to a 7.5 percent average increase in its international market price.
Imports- The import bill for the fiscal year decreased by 5.5 percent, compared to the level recorded in the preceding fiscal year. This was mainly owing to the decline in the import bills of raw materials, durable goods, capital goods, semi-finished goods and consumer goods by 15.8 percent, 13.7 percent, 11.7 percent, 9.5 percent and 7 percent, respectively. In general, the total import bill decreased from USD 16.7 billion in the fiscal year 2015/16 o USD 15.8 billion in the fiscal year 2016/17.
In particular, the import bill of capital goods which in 2015/16 accounted for 38.2 percent of the total import bill, decreased from USD 6.83 billion in the fiscal year 2015/16 to USD 6.03 billion in the fiscal year 2016/17. Balance of payments (BOP) As it is stated in the report, in the fiscal year under review, the overall balance of payments recorded a surplus of USD 658.4 million, in contrast to the USD 830.9 million deficits registered in the preceding fiscal year.
Similarly, the capital account surplus increased from USD 6.5 billion to USD 6.8 billion in the same period owing mainly to direct foreign investment inflows. On the other hand, the current deficit slightly narrowed to USD 6.55 billion in the fiscal year 2016/17, from USD 6.57 billion in 2015/16. The major contributors to the overall balance of payments surplus were private transfers (remittances) and foreign direct investment.
Remittance contributed about USD 4.43 billion, which was bigger than the USD 2.9 billion earned by the merchandise exports, while foreign direct investments generated USD 4.2 billion in the fiscal year, registering an increase of 27.6 percent over the preceding year’s foreign direct investment inflows. In general, although the overall balance of payments showed a surplus in the fiscal year 2016/17, sustaining this achievement requires on the one hand, enormous efforts to enhance the export sector’s performance in the years ahead and, on the other, streamlining imports to focus more on strategic items, particularly on capital imports.
In addition, sustained promotion of foreign direct investment in export generating activities, encouraging continued expansion of private transfers from abroad, as well as giving more attention to exploiting the country’s tourism potential is also measures that could be considered.
Private sector development The GTP II recognizes the key role that the private sector plays in the process of economic development according to the report. Particularly during the plan period, the private sector, domestic as well as foreign, is expected to make a significant contribution to the country’s rapid pace of economic growth by making investments, creating jobs, expanding exports, transferring modern technologies, etc.
Since the beginning of the plan period, the government, on its part, has been taking various administrative, institutional and other policy reform measures to encourage and support the private sector to play its expected role in the process, the report noted. In general, according to the report, the major macroeconomic policy objectives and targets of GTP II for the fiscal year 2016/17 have been implemented significantly; the progress would predict the successful achievement of GTP II.
Herald December 25/2018
BY BACHA ZEWDIE
