Little appears to have changed in the views of those at the International Monetary Fund (IMF) about Ethiopia’s macroeconomic performance. Disclosing its latest conclusion, on September 30, 2015, the assessment and recommendations of the IMF executive board for Ethiopia is the “same ol’ same ol’,” despite an unusually brief report with a couple of omissions from its predecessors.
The verdict is that growing at 8.7pc, Ethiopia’s economic performance remains “buoyant,” a word with connotations of “light-heartedness”, which executive board members used, changing the tone from “robust,” the term used in their previous assessments, implying vigour in the economy over the years. The size of the economy grew from 877 billion Br in 2013 to 1.2 trillion Br last year, largely due to “prudent fiscal and pro-poor growth” policies the government has been following, according to the IMF. Yet, it warns that the economy faces risks from “rising domestic and external vulnerabilities,” again looking at Ethiopia’s growth prospects changing its tone from “encouraging” to “favourable.”
IMF is worried that revenues from exports slowed significantly, while the nation’s bill to finance its imports is increasing. This is bound to widen the gap in the current account (trade) deficit, which was estimated to have reached 12.8pc of GDP. Economists worry that a large current account deficit signals an underlining problem in an economy, such as a sudden boom in domestic demand or lack of a national economy’s competitiveness in the world. Nonetheless it is not unusual for countries to have a current account deficit such as in the case of Iceland at 20pc, and desirable as in the case of the United States (six percent) because it helps inward investments and shows a growing and strong economy, according to a macroeconomist. However, Ethiopia’s current rate of deficit should be a source of alarm for it is double the five percent threshold considered prudent, says the economist.
The battleground of the Ethiopian government and IMF has remained unchanged over the years.
Among IMF’s worries are that it still sees debts held by public enterprises having the adverse effect of crowding out the private sector. Its deep concerns that publicly guaranteed loans and advances made to public enterprises such as the Ethiopian Electirc Corporation, ethio telecom, MeTEC and Ethiopian Railway Corporation (ERC), are also shared by those in the domestic financial industry. The data too, show a marked increase over the years, growing from 20.5pc of the GDP in 2012/13 to 50pc in 2014/15.
“Directors expressed concerns over acceleration of public sector borrowing with attendant risks of external debt distress and private sector crowding-out,” said IMF’s latest statement. “They advised careful selection and implementation of public projects.”
Calls for the government to introduce tax reforms and administration to broaden the tax base, and improve data collection and analysis on national accounts and the financial sector, are not new. So too, the demands on government to simplify and ease the business environment, and to push for public-private business partnership, remain unchanged.
The Fund remains persistent in calling the Ethiopian authorities to allow enhanced room for the private sector through additional allocations of resources in credit and access to foreign exchange. A major contentious issue is the government’s policy of forcing private commercial banks to channel their deposits to the development bank, in buying 27pc cheap bills from the central bank. The government considers it crucial to channel gross domestic savings – which swung between 15.9pc of the GDP three years ago and 12.8pc the following year, to 18.2pc last year – to mega national projects in its desire to bring transformation to the economy. If there is anything exceptional in IMF’S latest report, it is acknowledgement that last year’s growth was sourced from “booming manufacturing and construction sectors,” a noted departure from agriculture and service sectors of the previous years.
The executive directors of IMF, however, remain firm in their support for the phasing out of “the requirement for banks to channel resources to the national development bank, which may distort intermediation.”
IMF continues to believe that the Birr is overvalued in exchange with other currencies. It posits real effective exchange rate growing by 21pc this year, compared to the 13pc growth seen in the nominal rate, thus warranting policy changes that allow “greater exchange rate flexibility.”
SIDE BAR
WHAT IS NOT TO WORRY ABOUT
- Current account deficit can be beneficial to an economy if it is financed from long term capital inflows. Inward investment can increase the productive capacity of the economy.
- It is much easier to attract sufficient capital flows to finance the deficit.
- If the deficit gets too large, it will cause a devaluation which helps to reduce the deficit.
- When there is a slowdown in consumer spending, the deficit will decrease.
- It provides an outlet for domestic demand and prevents inflation.
REASONS FOR CAUTION
- There could be problems in financing the current account deficit in the long term. A deficit of over six percent of GDP is a problem if the economy relays on capital flows.
- Most countries would not be able to borrow large amounts at low interest rates.
- Higher interest rates will reduce demand in the economy, and hurt consumers when they hold large amounts of debts.
- If capital flows cannot be attracted, the currency will continue to devalue further. This could cause inflationary pressures, interest rates may need to rise to stabilise it.
- Correcting the deficit would be a painful experience, and result in a slowdown or possibly recession.
- A large current account deficit is often a sign of an unbalanced economy. It could be a sign of structural weakness and an uncompetitive manufacturing sector.
- A deficit in the current account increases foreign liabilities. In the beginning a current account deficit could be just a deficit on buying goods. However, over time the deficit will be increased by the interest payments on the capital surplus. Foreigners invest and receive interest payments or dividends. These dividends count as a debit on the current account. The longer the deficit goes on the higher will be the level of investment income debits accrued. This means that in the future the economy will need to attract capital flows just to pay off the investment income as well as the deficit on goods and services.
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