Poverty is a tough cookie to crack. This has been evident across the world and over the centuries. Creating wealth takes careful deliberation and hard work. Otherwise, it either will not occur or becomes distorted.
Ethiopia faces the latter problem, and there is no better way of showing this than with the half-year report of the Second Growth & Transformation Plan (GTP II). Almost in its third year of implementation, the outcomes are not encouraging. The key macroeconomic targets it had set up for the nation have mostly not been met.
This is not to say that wealth has not been created. Last year, gross domestic product (GDP) was 10.9pc and eight percent the year before that. Even the lower figures reported by the likes of the International Monetary Fund (IMF) and the World Bank point that Ethiopia’s economic growth is one of the fastest in the world.
It goes downhill from there. There is a structural economic transformation going on, with industry the fastest growing sector, but the manufacturing subsector has grown at less than three percent. The target was at over 20pc for the past couple of years.
Single digit inflation is unlikely in the current fiscal year, with most months having recorded inflation in the double digits. The currency is not stable, with the black market rates persistently outperforming the formal exchange rates with well over a quarter of its value.
Tax to GDP is still low, the budget deficit has been at over three percent, and the external sector is worse off than it was at the end of GTP I. All of these have added up to make up a severe forex crunch, debt stress and a reactionary regulatory clampdown on the financial sector.
High GDP growth rate and an alarming macroeconomic situation betray an unhealthy economy. The authorities say this is because of political instability, the 2015 El Nino-induced drought and global circumstances such as the slowdown of China’s economy.
This is not the case though. The actual problems have been a lack of political competitiveness, ad hoc policies and, most importantly, high government spending to finance megaprojects.
Indeed, few can dispute that Ethiopia requires infrastructure developments, and most of what has been invested in will only have long-term benefits. But the current level of spending the government has chosen to engage in has come at the expense of foreign currency reserves, the country’s credit rating and limit to private sector’s access to credit as a result of being crowded out.
The government has to resign to the idea that the ambitious goals at this point are too costly to chase. While infrastructure is vital, it has to be slowed down until a time where the national income can carry it.
The focus has to be making the current investments more efficient. This could be giving more attention to the distribution of power instead of generation, and making the existing online industrial parks produce more efficiently by phasing the crowing out of cheap goods’ production.
Over the years, high government expenditure has been used to stimulate the economy by creating job opportunities, improving spending and invigorating parts of the private sector.
The same can be achieved if government lowered its spending and instead deregulated parts of the financial sector. The latter can be by reducing the deposit interest rate floor and lifting the credit cap. It can also include increasing the bond interest rate on central bank bills mandatorily invested by private banks on the loans they disburse.
This will encourage investment, spending, employment and domestic revenue, only slowly. Instead of the government injecting currency into the market, it would be the private sector. Inflation will continue to be a problem, but with growing productivity, prices of goods will come down as aggregate demand matches supply.
Such reforms will mean slower growth, but also a healthier one and less susceptible to drought or the global market. Attaining the promises of the GTP II is to the benefit of everyone, but policymakers have to be careful that it does not crush the economy.
The new budget by the Ministry of Finance & Economic Cooperation (MoFEC) is, thus, a move in the right direction. It is higher than that of last year – at 346.9 billion Br – which is inevitable given annual inflation. But it also has seen one of the lowest increases to the federal budget, at around eight percentage points. This is in comparison to its 16.9pc growth rate last year.
The time is ripe for austerity. This is not good news to the government’s GTP targets, or the lower-middle income status it has been aggressively driving for the past couple of years. But desperate times call for desperate measures. Ethiopia’s government ought to sober up.
Last Wednesday, Addis Standard, an English online magazine, shared a re...
Ethiopia's banking sector is criticized for its traditional system and...
During one of his North American tours, Prime Minis...
Investment in the continent’s internet infrastructure will change how...
Much like the rest of the world, the history of Ethiopia is not monolit...
Ethiopia is undergoing rebranding of its politics. In just a few months...
Despite the lack of good governance, low standard of living, poor infra...