Global Exposure Without Macro Adjustment Risky

Globalisation is taking things in a rather different direction. It has brought unprecedented changes in the way states interact. It is no more possible to sail through the waters as an isolated actor since the tides of the time could only be managed by acting in tandem.

This aspect is what makes the reign of the ruling Revolutionary Democrats different from their immediate and distant predecessors. Unlike the times in history, governing in this era has become a global matter that small changes made in one country could have huge multiplier impact on others.

Indeed, it is basically because of this very change that the latest report by the International Monetary Fund (IMF), an institution often labelled by the ruling EPRDFites as the choreographer of neo-liberal fundamentalism, would have to worry Ethiopian policymakers. Nothing is joyful about the latest report. If anything, the report is full of gloomy projections on the performance of the global economy and its major players.

Amongst the developed nations, it is only the United States (US) that is identified as a bright economic spot with a projected economic growth rate of 3.6pc. This entails an upward adjustment of 0.5pc. China, the second largest economy in the world, is foreseen to see a historic slowdown in its economy. The IMF says the 6.3pc growth Chinese economy is going to experience in the coming year will be the lowest since 1990. Europe, a monetary union that remains to see significant growth slack since 2008, will be witnessing yet another year of recession.

Under a localised world, such stories would have been meaningless for Ethiopian authorities. After all, none of it would have directly related to the situation they are entrusted to manage. They could have thrived well without considering any of them as essentially important.

This all, however, is a utopian scenario under a globalised world. In a world where economies are so intertwined, a government does not have the luxury to ignore what is happening in other countries. It could not just live alone.

Making things even more complicated is the recent action taken by the ruling EPRDFites. By virtue of their decision to join the international capital markets, through the issuance of the first ever Euro Bond, the EPRDFites have decided to integrate the nation’s economy with the swings of the global market place. It is indeed a rare decision from elites that have always been wary of the international capital markets.

Ever since they come to power, the Revolutionary Democrats have been against opening the nation’s market for global players. Their disagreement with the IMF in early 1990s, for instance, have been all about opening the telecom and finance sectors to foreign investors. Their visible reluctance to push reforms meant to take the nation to World Trade Organisation (WTO) membership was also evidence to their distaste to integration.

The policies in both cases are still firm and bold. Liberalisation is the one thing the ruling EPRDFites do not like to account when it comes to policymaking. In a way, therefore, theirs is a policy that is inclined to the hypothetical closed economy employed in classical economic theories.

Under a typical closed economy, external linkages are reduced to their lowest possible level. Economic activities happen within the economy itself. Policymaking, therefore, considers the linkage between factors active within the economic boundary.

Unfortunately, times have changed on the approach of the Revolutionary Democrats. It is no more possible for them to dissociate the situation closer from what is happening globally. Key aspects of the economy are so interlinked with the global situation that they have to account the pros and cons of the outside swings before making any decision.

In view of all this, the latest case may involve some downside risks to the local economy. Left unattended, the risks could grow bigger, mightier and impactful.

With growth consolidating fast, the US Federal Reserve is planning to increase interest rate. Such an increase would take costs up for any dollar-denominated debts. No different would the case be for Ethiopia’s dollar-denominated debts.

According to latest government reports, the consolidated debt portfolio of the nation stands at 20 billion dollars. A large proportion of it is denominated in dollars. Any increase in interest rate by the US Fed, thus, would increase the nominal value of Ethiopia’s debts.

The ruling EPRDFites might try to reduce the transfer cost by stabilising their currency. Yet, such a job also entails building-up more foreign currency reserves by the National Bank of Ethiopia (NBE). Sadly, though, this objective has constantly been missed.

Building reserves could not happen without increase in export revenue. Eventually, export is one aspect that is going to be affected by the latest global swings.

China, Japan and Europe, all three regions wherein demand is faltering, have remained key export destinations for Ethiopia. A slowdown in these economies, therefore, means slower demand for the primarily agricultural exports of the nation.

Indeed, Ethiopian policymakers have a lot to worry about in this term. The export regime of the nation has been dominated by agricultural products sent to few countries. Structurally speaking, then, little has changed in the export regime of the nation for about a century. There even has not been an increase in the number of export destinations over time.

These all structural rigidities in the export regime means that changes in demand could have considerable impact on the macroenomic stability of the nation. That is what lays ahead for the ruling EPRDFites, if they fail to take any policy measure.

Things would have been stable, had the factors were limited to reserves and export. But it is not. Yet another important aspect related to the global exposure is development finance.

Chinese slowdown will tighten the resource sphere for the Revolutionary Democrats. This, if furthered, could be a huge blow for their hugely state-financed growth. It is just the one thing they would not like to see happening. The fact, however, is that there is huge chance for it to happen, according to the latest projections.

Adjusting to the winds of change is not all impossible, though. There are concrete, reachable and viable policies the EPRDFites could take to live with the changes.

On the monetary front, they ought to be more cautious. Their preference ought to be more about pushing slacks forward. There is a huge possibility for the impacts to be reduced with time since the risks could be diversified.

Building up the reserve would demand enhancing export earnings. This could not happen without diversifying the destination base of the export regime. Hence, the EPRDFites might have to test new waters of export, especially in Latin America and West Africa.

Whatever earning obtained have to be managed properly. A slight reduction in reserve could create currency depreciation. This may create more negative externalities in the economy.

Yet another area that needs aggressive decision from the ruling EPRDFites is that of diversifying the sources of development finance. Leaning only on Chinese finance is not sustainable anymore. So is reliance on concessional loans from bilateral and multilateral sources.

Therein lays the importance of diversifying to new ventures, such as Public Private Partnerships (PPPs). It is vital to take the resource emblem of the nation away from traditional sources. Else, the impact of global swings will be huge.

By and large, the job of the time is to account for global swings in local policymaking and adjusting to them accordingly. That is where the attention of economic policymakers should be at this time.


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