When looking deeply at the policy circle, one would understand that anxiety predominates over any other feeling. The converging temporal winds of the Growth & Transformation Plan (GTP), a rather ambitious book of developmental promises, the Millennium Development Goals (MDGs) and the upcoming national election are testing the strength of the government under the ruling Revolutionary Democrats. With challenges in all the aspects, therefore, producing a compendium of policies that could strike all the goals at the same time remains vital.
It looks like the new Ethiopian year is vital for the EPRDFites. In both economic and political terms, the year is important. Meeting multiple targets, albeit artistically, with less cost will be the characteristic challenge for the Developmentalists.
Politically, the national election to be held by the end of the year will be an important time for the Revolutionary Democrats to test their public acceptability. The public will be employing its voting cards to judge on whether it prefers policy continuity or change. As people given with the power to act on behalf of the public for five years, the EPRDFites would be evaluated on the basis of what they did with the entrusted power and whether they have done it in a way that is satisfactory to the voting public.
This side of the equation is less tense, though. On the one hand, there are enough developmental upshots that the ruling Revolutionary Democrats could use to persuade the voting public to give them yet another term in office. Of course, this might involve being upfront in admitting the plethora of shortfalls in the sphere, especially in areas of governance and respect to human rights.
But on the other hand, the political space witnesses no strong contender. It seems that the opposition camp enjoys shooting at its own foot. Not only that it is seen failing to live up to the challenges paused by the hegemonic ruling party, but it spends much of its time on infighting. Hence, it continues to suffer from competitiveness deficit. Of course, one could not get rid of the very chance that a contending merger might arise as the time gets closer to the voting date.
Thus, a large proportion of the challenge for the EPRDFites sits at the economic side of the equations. The past four years have been bleak in most terms of the GTP. From essential macroeconomic to sectoral targets, there had been widening gaps between plans and achievements. Some, such as exports, have even been in a downward spiral.
Little had come in the form of a golden policy bullet to fix the widening gaps. Instead, extending excuses and explaining failures has been the typical pastime for officials of the ruling party.
It all looked as if the EPRDFites overlooked the fact that the year will mark the end of both the GTP and the MDGs. With both doors closing, therefore, there is little chance of extending promises any further. The choice therefore is between fixing the problems timely and admitting failure.
In purely economic terms, there is no important aspect where the shortfalls of the past four years have been detrimental as the case is with exports. Although the plan was to increase the share of total exports in the gross domestic product (GDP) from 13.6pc in 2009/10 to 22.5pc in 2014/15, and push the share of merchandise export in the GDP from 6.7pc to 15.6pc, what has been achieved in the past four years has been consistently lower than the expectations.
With failing export, the trade balance of the nation increasingly remains in the red. This has been complemented with a vicious cycle of foreign exchange shortage, rising debt burden and related problems in financing important infrastructure projects. A direct outcome of the downward spiral of exports has been a GDP growth that fails short of even the base case scenario set in the GTP.
Lately, though, the World Bank has declared that devaluation of the local currency could play an important role in reversing the case with Ethiopian exports. According to the proposal the organisation made in its third Ethiopian Economic Update, a 10pc devaluation of the local currency could bring a 5.5pc increase in export revenue and a two percentage point increase in GDP growth rate. This simulation seems to be persuasive enough to push the Revolutionary Democrats to consider devaluation. Of course, the other Bretton Woods Institution – the International Monetary Fund (IMF) – proclaims that the currency overvaluation is more than 30pc.
But to say the least, the consideration of devaluation is self-defeating. It will only serve as a leap service to the challenges of Ethiopian exports. Though it might help realise improvements in short-term, it solves none of the structural challenges of Ethiopian export competitiveness.
As shown in the same report by the World Bank, the sources of the declining competitiveness of Ethiopian exports are multiple in nature. At structure level, this relates to overreliance on primary products, insufficient diversification, disproportionally high logistic and bureaucratic cost, poor quality of products, narrow markets and undeveloped branding and marketing efforts. Eventually, none of these structural issues relate to the overvaluation of currency.
If at all, the structural issues are all about production process, infrastructure and government policy. There is little that devaluation of currency could achieve in these terms, if any.
Taking the debate away from these essential structural issues means preferring short-term gains over sustainable changes. Even if such an act could be viable in political terms, it is economically damaging.
Devaluation creates macroeconomic instability. Although it might make exports cheap, it makes imports expensive. As much as cheap currency could increase the growth dividend of exports, it constricts the dividend from imports.
In the Ethiopian sense, devaluation makes exports cheaper at the expense of making growth producing imports expensive. Since over 75pc of Ethiopian imports are capital goods, which are crucial to drive growth, making imports expensive by devaluing the currency would hurt the growth. Hence, whatever marginal benefit obtained by making exports cheap could be eroded by expensive imports.
As it stands, policy devaluation of currency would also entail furthering the instability of prices in the economy and initiating a vicious cycle of macroeconomic instability. One should go no further than the inflationary books of the years been 2005 and 2013 to see what is at stake with the latest devaluation.
Despite the preeminent political challenges the ruling EPRDFites are faced with, therefore, it would be wise to fix the problems with the nation’s exports by focusing on the structural issues. The policy arsenals ought to also be focused on what could bring sustainable results than what might boost electoral chances.
Of course, a marginal increment of two percentage point on GDP growth rate might be tempting in political terms. But it would not be feasible in the long-term as it could haunt the economy back. A wise choice would, therefore, be reorienting the policy radar towards the structural challenges of the exports.
This, however, does not mean that the currency overvaluation needs to be maintained. It rather ought to be left to the markets by making the exchange regime open to the interplay of demand and supply.
As far as the converging winds of the time are concerned, the structural issues are more important. It is in there that the chance for the ruling Revolutionary Democrats to strike their political and economic goals at the same time resides. Settling for anything less will be costly, especially in economic terms.
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