Global Headwinds Tough for Economy without Responsive Policies

As the Revolutionary Democrats convene to set the tune of their political orchestra for the next five years, their highly admired model economy is facing what could arguably be considered its most volatile trend in five decades. China, the global manufacturing hub and a growth model for the EPRDFites, is witnessing fragile markets, shaky economic fundamentals, and slowing growth. For the Communist Party leaders, who seem to remain fond of the socialist capitalism model introduced by Deng Xiaoping (a post-revolution Chinese leader that the chief EPRDFite, Prime Minister Hailemariam Desalegn, was heard quoting recently), this volatility is a natural corrective reaction of the economy.

Looking at how markets panicked since the Chinese slowdown in the last weeks of June, one would understand that the problem is far from a corrective reaction. The Chinese economy that has been sprinting with a double digit growth rate for over four decades seems to be taking a landing, even if the landing is not as hard as it was projected. It has become clear that the export-oriented growth model that China has been following for decades could no more sustain the economy, hence, the demand for a readjustment of the whole economy toward domestic consumption.

Yet, low income levels, low purchasing power, expanding income inequality, increasing wage rates and huge regional debt stock are driving a massive disequilibrium within the economy. Coupled with overvalued currency, suppressed monetary policy and expanding fiscal space, the volatility seems to have spread across the nation’s economy. With China serving as a global manufacturing hub, the precariousness has engulfed the whole world.

Times could have not been bleaker, if the Chinese problem was the only problem in town. However, the global economy has more problems to be worried about.

Europe, one of the largest economic blocs in the world, remains in deep trouble, with one of its members, Greece, living each day with emergency treatment. With the exception of Germany and the United Kingdom, most members of the bloc, are still struggling to emerge from the turmoil of the Great Recession. The United States, the largest economy in the world, is slowly pulling out the Quantitative Easing  survival pill it has been throwing into its economy. Predications are that its central bank, the Federal Reserve, will increase interest rates by mid-September. As most global transactions are denominated by the dollar, the official currency of the US, the upcoming change in interest rates is foreseen to fuel more uncertainty into the markets.

Patches of positive news from countries, such India and Brazil, are not strong enough to downplay the volatility around the global markets. Hence, the predominant feeling in policy circles is that certainty is a rare commodity at this time.

Closer, however, policymakers look relaxed. They seem to assume that global headwinds are not coming in the way of the Ethiopian economy.

But the facts are far from this assumption. The Ethiopian economy experiences more linkages with the global economy in 2015 compared to 2008. Contributing to the enhanced linkage are the ever increasing trade relationship and the latest issuance of a eurobond. This is not to mention aid inflows and debt commitments, both of which seem to be on the upward side.

More worrisome is that the fundamentals of the Ethiopian economy are also witnessing disturbances. Budget balance, balance of payments and trade balance are all seeing historic shortfalls. Neither is the monetary front stable as it is being rocked by inflation. It is just crawling to follow the fiscal front, as if it has no inherent independence.

True, one of the issues up for discussion in the EPDRF Congress is the performance of the economy. But there is no chance that the discussion will be looking at all the risks at hand for it is a convention of like-minded politicians with political prerogatives.

Regardless of the attention it gets, the Ethiopian economy is faced with external headwinds that could probably affect its performance. It is not possible to avoid the winds as they are swirling along the contours of economic relationships.

The best that countries can do is to prepare for the winds and reduce the impact on their economies. And Ethiopia cannot be different.

Chinese slowdown means that Ethiopian exports will be affected considerably. Not only does this relate to what China buys from Ethiopia, but to what others buy because China finances them, directly and indirectly. The multiplier effect of Chinese deceleration will express itself in Ethiopia in the form of decline in export demand from other regions, such as Europe, Asia, North America and Australia.

Furthermore, as China is the major creditor of Ethiopia, its slowdown will have a huge impact on ongoing and future infrastructure investments. Meanwhile, all outstanding debt repayments of Ethiopia need to be disbursed upon schedule.

Things will be complicated if the Fed is to stick to its plan of increasing interest rates. Since 64.5pc of the debt stock of the nation is denominated in dollars (10.9 billion dollars), any raise in interest rates will eventually increase the debt stock. Such a policy could also urge more creditors to ask for their money sooner, causing a ripple effect in the forex regime.

In light of the problems the Ethiopian economy is facing, such as lag in exports, foreign exchange constraints and inflation, the global headwinds could have a huge disturbing effect on the macroeconomy. No counter factor, such as low oil price, will be able to stop them from pouring flammability on the fragile economy of the nation.

The whole situation calls for responsive economic policymaking. In a purely economic sense, this means having an export plan with diversification of destinations as its key element and infusing restraint and sound management within the debt policy.

Sticking to the traditional export markets has become all the more risky. The need for diversification of markets has become urgent. There cannot be any more proper time to pursue new markets for exports than now.

In this, the government, under the leadership of the EPRDFites, needs to support exporters by doing the exploration and supporting them to navigate. The usual way of doing business, which largely entails an individual exporter identifying the market herself, is not viable. It is both costly and time-consuming. It could be done better by joint effort of the state and exporter associations, not to mention the chambers of commerce.

By way of diversifying the export market, then, policymakers could reduce the impact coming from traditional destinations. They will also be widening the opportunity to export more.

On the debt front, putting in place sound debt management policy and practice is essential. As the government lacks clear debt policy and a functional debt management institutional framework, the whole job has to focus on putting the fundamentals in place. If it can do this, it can manage the outstanding commitments well.

Nonetheless, the most important issue is to implement debt restraint. The debt frenzy the government has been under for more than a decade needs to end. Essential restraint has to be there as the impact of growing indebtedness could be huge.

It does not end there, however. Correcting the fundamentals of the economy is also important. It is only when the fundamentals are right that shocks, both internal and external, can be absorbed effectively. And this is what the convening EPRDFites need to discuss.


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