Ethiopians Need a Break from the State

Following the financial downturn in the United States and the debt crisis in Europe, for a brief moment there seemed to be relief for much of the global economy. But it is proving itself to be short-lived, with developing countries such as Ethiopia and their non-dynamic economies likely to assume the brunt of the burden.

It started with a political crisis across the Atlantic ocean in Venezuela, one of the world’s largest producers of oil. It was triggered by falling prices of oil that led to a government hard pressed to provide public goods. That, in turn, resulted in lower oil production.

Added to that is Iran’s falling out – yes, again – with the United States. Fearing to incur the North American country’s wrath, Iran’s clients will look for other markets. What the uncertainity has resulted in is a decline in the supply of oil, while demand keeps increasing.

Currently, the price of a barrel of oil stands at around 86 dollars (Brent), which is its highest level since 2014. It is excellent news for oil exporting countries such as Nigeria and Angola. Net oil importing nations such as Ethiopia will not be as lucky though. Last year, Ethiopia imported 2.23 billion dollars worth of fuel, which took up over 77pc of the nation’s entire export revenues.

With the price of fuel projected to stay at over 80 dollars in the coming year, and the annual fuel demand of the nation expected to grow by about 11pc from the previous year, experts forecast the oil bill to top three billion dollars. This may very well cancel out the proceeds in foriegn currency the country earns from exports, which have stagnated below three billion dollars for the past three consecutive years.

There are strong signs that the foriegn currency problem will get even worse. As the price of one of the nation’s main imports increases, the price of the commodity that brings in the largest amount of foreign currency, coffee, is declining. It is driven by yet another political crisis far from Ethiopia, in South America.

Stricken by a highly contentious upcoming general election, political uncertainty in Brazil is weakening not the production of coffee but the Real, Brazilian currency. This is cheapening the nation’s export commodities, chief among them being coffee. Currently, the price of a pound of coffee stands under 1.1 dollars, a 12-year low.

Coffee supplies Ethiopia with close to a third of its foreign exchange, and its decline in value on the global market will throw the nation’s balance of payments into a whirlwind. Worse still, commodity prices such as coffee can be hit further with the souring economic relationship between China and the United States. Global uncertainty spawns a decline in aggregate demand, which will most acutely affect such primary commodities.

Given the weak economies of developing countries such as Ethiopia, their governments would have no sway over the unfolding of disadvantageous global commodity prices. All they could hope for is that powerful players on the international scene come to their senses.

There is some solace found in the direct budgetary support the government has received from Emirs in the UAE, who deposited one billion dollars with the National Bank of Ethiopia (NBE). And direct budget support from the World Bank is another cause for optimism, although it will no doubt come with a string of policy prescriptions, for there is no free meal.

But Ethiopia is already classified under “high risk of debt distress” by the World Bank itself, with non-concessional financing accounting for over 30pc of public debt. And while a friendly foreign policy with the Saudi-UAE bloc of the Middle East is perceptive, financial sustenance from there will equally, if not severely, constrain Ethiopia’s policy sovereignty.

Neither is the global commodity price predicament coming after a bullish period for the country. The relatively opportune state of global commodity prices and improving international trade for the past couple of years were not felt in Ethiopia. It was mainly wasted due to incoherent leadership and political turmoil on the domestic front.

This opportunity was also cancelled out by the El Nino-induced drought two years ago. The respite much of the world took from the global economic slowdown passed Ethiopia by in terms of trade, as the deficit ballooned to close to a fifth of GDP.

It would have been fortunate had the government figured into its calculus the possibility of a rainy day on the global scene. Instead, infrastructure projects consumed what little foreign currency the nation generated.

By last year, with foreign currency reserves exhausted, unable to cover two months of imports, the administration of former Prime Minister Hailemariam Desalegn had to devalue the Birr against a basket of major currencies by 15pc. Citizens are now paying for these series of fateful decisions with an ever-escalating price of goods, hence inflation.

The EPRDF-led government is not entirely powerless from the exasperating condition of global commodity prices though. It has for far too long assigned itself the task of running almost every layer of the economy. It could have allowed the private sector to rise to the occasion.

The private sector has been held at arm’s length, expected to fill in the gaps unattended by the heavy arm of the state. Instead of putting its weight behind effective regulations and containing itself to focus on market gaps, the government monopolised key sectors of the economy to control the allocations and distribution of resources.

This has come at the expense of the economy’s dynamism and health. It has incapacitated the private sector to a point that it cannot be counted on to cushion the impact if the government at some point drops the ball.

Prime Minister Abiy Ahmed’s (PhD) administration is on the right track in its intention to partially privatise state-owned companies that control the heights of the economy. But it is neither comprehensive nor enough to rescue the economy from the severe winds ahead. It should have the courage to liberalise service industries such as telecom, airlines and logistics, all exceptionally important to the economy but are not open to the private sector.

These industries contain a yet untapped demand that will offer great opportunities for profit. They can easily stimulate private players to engage in these industries, which will in the short term create a source of revenue for the state from licensing and taxes. In the long term, a well and fairly regulated competition will correct inefficiency, which in turn will improve the movement of capital and labour, as well as information and resources. It will help create a more dynamic economy.

Abiy’s administration faces a nation in upheaval, with the provisions of public goods either in bad condition or lacking. It has more than its hands full, barely able to steer the wheel. It is about time that the private sector sits in the driver’s seat and plays a part it is much better suited for.

Let the state focus its energy and resources on securing the nation; ensuring the rule of law; regulating the market; providing for social services and offering welfare to the neediest. This could be the most fabulous legacy Abiy’s administration leaves behind. Ethiopians need a break.

Published on Oct 06,2018 [ Vol 19 ,No 962]



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