Courage to Open Up the Nation`s Capital Account

The incumbents’ rhetoric has become refreshingly honest. It is not just in the political front, where Prime Minister Abiy Ahmed (PhD) acknowledged the practice of “torture” by law enforcement agencies, but it is welcomed in the economic front. The macroeconomic predicaments have not been sugar-coated. Contrary to the narrative where his predecessor and his central banker persisted in utter denial, admitting to having problems is a significant part of a search for solutions.

Given the scope of the macroeconomic crisis and the foreign currency crunch of most of the past years that has brought businesses in Ethiopia to their knees, it is harder to pretend all is well. There have been shortages before, even in this decade, but the authorities had tried to put lipstick on the state of affairs to paint what has been an apparent shortcoming in policy and implementations as growing pains of a rapidly developing economy.

To his credit, Abiy does not espouse such rhetoric. The forex crunch is a burden to a country that has to juggle with high debt, double-digit inflation, as well as the public discontent caused by internal displacements and regional instabilities.

But the means by which the country is addressing this major macroeconomic denominator remains passive and unarticulated. The Administration of Prime Minister Abiy has shown its desire to nip the problems in the bud but it remains unclear on how to accomplish just that. Instead, as his predecessors did, Abiy is trapped in a box echoing that the cause lies with the weak export market.

It is a repeat of the same old mindset reflected in the second edition of the Growth & Transformation Plan (GTP II), which has put much of its hopes in one basket. incessant spending on infrastructure – leading to national indebtedness that is as high as half of the gross domestic product (GDP) – instead of being directed to enhance the manufacturing base, diversify exports and reduce dependency on agricultural commodities.

The flaw in the plan is that it sought to achieve too much too quickly, and it does not stir the government away from its control over the flow of money in and out of the country. As in the case of access to credit, the private sector has been crowded out of the foreign currency it needs to thrive and compete.

How export performance has been faring since the start GTP II should have served as a warning, and this fiscal year is no different. The Plan had targeted 8.75 billion dollars from the exports of goods. After 10 months, only one-quarter of this goal has been earned, most likely falling short of even the much sober 3.3 billion dollars projection made by the International Monetary Fund’s (IMF) for the year. During the same period though, the import bill stood at 14.7 billion dollars.

Addressing this negative gap in the balance of trade – assuming that both import and export rates stay the same for the remainder of the year – is the most critical piece of the agenda that the Administration has rightly taken up. It is how policymakers have been handling this issues that need to be addressed.

Merely increasing the volume of exports will not work. It has been evident in the first year of the GTP-II, where export earnings fell by seven per cent even as the overall volume of exported items swelled. There are factors, such as declines in global commodity prices and a lack of a diversified export base, that has hampered growth in earnings independent of increases in volumes.

Another equally important factor is how rewarding the external sector really is, especially concerning foreign currency. If exporters are not allowed to keep all of the foreign currencies they earn, as is the case now where they can only retain less than a third, the urge will be to hide it. If not, they would spend it within the central bank’s 28-day grace period or turn to the parallel market which offers as high as a 30pc premium for every dollar invested.

It does not end with exporters though. A similar fate awaits every dollar that enters the country outside the auspices of the banks. Given the natural human urge for better gains, foreign currencies are fed into an unregulated market that is well established and is easily accessible to the general public.

In the face of these obstacles, growth in the volume of exports will not close the book on foreign currency shortages. And neither will foreign direct investment, even with the proposed privatisation schemes of state enterprises that are operating at the height of the economy, or currency injection by bilateral partners, as is the case with UAE’s one billion dollar loan agreement to deposit with the central bank.

What all these will achieve is to reduce the rate at the parallel market. The informal money market though will persist, even thrive, given that the central bank continues to shortchange private players as well as leave the financial sector closed.

Since the incumbents have put development at the forefront of their agenda, they have been faced with the likelihood of depletion of the forex reserve. Their tactic has largely involved looking for loans, foreign aids and foreign investments to fend off such a calamity until what the government considers the cure-all solution is realized – growing exports.

While building up the nation’s manufacturing base and substituting imports with domestically produced goods are smart policies, the true potential of the economy will remain unexplored as long as the government is adamant in keeping its grip over the inflow and outflow of foreign currencies.

A rethink outside the box is necessary. Abiy`s seemingly courageous opening of the political space should also extend to the economic front. His Administration should consider the option of opening up the country`s capital account for business to directly deal with the rest of the world.

With an apparent risk of short term capital flight, this will remove the paranoia of control and lack of transparency in currency allocations, and this will allow the forces of the market to operate freely. It will also wipe out the underground market as both the formal and informal markets will operate under the same rules, thus eliminating the current value disparity.

Such reforms ought to be accompanied by lifting restrictions on investments in the highly profitable sub-sectors of finance, telecom and power distribution.

The prevailing policy has been tried and tested. It is no longer surprising that it has failed to realise its goals. It is better to change gear and add an open capital account to the slew of radical reforms Abiy’s Administration is currently with.

Published on Jun 23,2018 [ Vol 19 ,No 947]



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