IMF Reports Positive Economic Growth Despite Unrest

The Fund forecasts that the economy will grow by 7.5pc next year

The International Monetary Fund (IMF) has affirmed that Ethiopia’s economy continued to perform favourably last year, while ignoring the impact of widespread public discontent and protests in various parts of the country. If any, the IMF mentioned the severe drought last year and depressed global demand for commodities as a drag on Ethiopia’s economic performance.

In its customary report, issued last week after the conclusion of Article IV consultations with the government, the IMF said that Ethiopia’s Gross Domestic Product (GDP) growth has contracted to 6.5pc during the first year of the second Growth & Transformation Plan (GTPII). This is against the backdrop of a 10.2pc average growth in GDP registered over the past 10 years.

The Fund has complemented what it says are “stability oriented macroeconomic policies” of the government in importing grain from abroad to distribute as welfare to drought affected areas, which checked the headline inflation at six percent in July 2016. The massive drop in global oil prices has helped the country save what it has spent on supplementary budget (18 billion Br) to procure imported food, while remittance and foreign direct investment proved to be “more than offsets”.

Budget deficit remains at an acceptable three percent, and foreign borrowing was at five percent – “a significant reduction compared to recent past”, according to the IMF.

However, the IMF noted that proceedings from export revenues stagnated at 2.86 billion dollars due to weak international commodity prices, despite increases in the volume of exported goods and diversification of items, according to the IMF.

Yet, none of the political fallout – seen since November 2015 in the Oromia and Amhara regional states, and the consequent uncertainty – was mentioned in the report. Neither was the forex crunch, which has crippled businesses and caused economic slowdown, although the Fund disclosed that Ethiopia’s buffer for foreign exchange reserve had dropped down to cover less than two months’ of imports.

In its world economic outlook, entitled “Too slow too long” and released five months ago, the IMF had projected that the economic growth would shrink down to 4.5pc – largely due to the effects of the drought. Prime Minister Hailemariam Desalegn bounced back in his speech to Parliament in June 2016, asserting that the economy was to register an 8.5pc growth.

His State Minister for Finance & Economic Development, Ahmed Shide, claimed last month that the economy would grow nonetheless, despite the drought and the political turmoil.

In spite of the continued uncertainty from the resurged political fallout, the IMF is upbeat about the prospects of the economy in the year 2016/17. The economy will likely pick up, registering a growth of between 7.3 and 7.5pc, expanding by one percentage point. It attributes its positive forecast to an increase in exports, while it sees a more stable commodity prices globally. The IMF hopes to see the public infrastructure and incoming foreign direct investments give ground for further growth.

During the launching of the 2016 African Economic Outlook last month, Ahmed said that more foreign direct investment is needed to ensure sustainable economic growth.

Nonetheless, it was several foreign investors, from Turkish to Dutch and Saudi to Nigerian, whose investments were attacked by protestors last week, with some of them leaving the country since then. Many see this as a bad spell in the government’s efforts to persuade investors to Ethiopia.

Naod Mekonnen, an economic and development policy researcher, is one who believes it will be difficult to achieve a pickup in the economic growth with the recurrent political turmoil in the country.

“Foreign direct investments will be discouraged with such instances,” he told Fortune.

In August 2016, more than seven hotels and a trade centre with 400 shops were looted and destroyed during the unrest. Last week, no less than 13 flower farms, three factories and two lodges were looted and destroyed in Oromia Regional State, while over 60 trucks were torched.

The IMF rather cautioned the government over the country’s external vulnerabilities, with its deficit and indebtedness widening.

The nation’s current account deficit – the difference between exports and imports of goods, services, receipts and payments of income from and to foreigners – widened to 10.7pc of the GDP. This was largely due to low earnings from exports caused by the declining trend of the international commodity price. Mirroring these deficits has been huge foreign capital inflows or a rise in local demand, Naod, the economist, told Fortune.

Last year, Ethiopia’s revenues from exports declined by more than 139 million dollars. The drivers of that fall were a drop in the value of goods exported, particularly from coffee, gold, pulses and textiles. Imports accounted to a little over 22 billion dollars – 12.5pc higher than the preceding fiscal year.

The IMF wants to see the administration of Hailemariam focusing on import-intensive investments, while insisting on the policy of export promotion. However, Naod argues that this cannot be achieved in a short period with the country’s recurrent foreign exchange crunch.

The IMF also supported the government policy concerning the privatisation of state-owned enterprises with less strategic roles. The Fund estimated public debt to be at 54.2pc of the GDP in July 2016, up from 50pc a year before. But it did not say much about the adverse effects of the rising debt of public enterprises unlike its previous report, released on September 30, 2016. It noted then that public enterprise debt would have a crowding out effect on the private sector, forcing the private sector to lower its access to loans.

The IMF continued to suggest that the government introduce property taxes, reduce exemptions on tax and reform the system of administration in the hope of beefing up the public coffers.

By Samson Berhane
Fortune Staff Writer

Published on Oct 11,2016 [ Vol 17 ,No 858]



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