Despite widespread concerns over foreign exchange crunch in the economy, Prime Minister Hailemariam Desalegn was mute last week when he appeared before Parliament, presenting half-year performance report on his administration, reports Fasika Tadesse, Fortune Staff Write.
Back from recess after the first half of the current fiscal year, the all EPRDF and allies dominated Parliament heard from the Prime Minister, who chose to focus mainly on macroeconomic issues.
A Chief Executive Officer (CEO) of an IT firm established around 15 years ago was one of the many Ethiopians who followed the session in Parliament transmitted live on Thursday morning, March 15, 2017.
Running the business of a company engaged in developing and customizing software and providing solutions to businesses, the CEO was hoping he would hear from the Prime Minister on how his administration handles what is ailing his company. Scarcity of foreign exchange and extremely limited access to open letters of credit (LC) is impending many companies like his from fulfilling their contractual obligations.
Most of the business of this IT firm based in Addis Abeba consists of importing hardware and software, especially for the financial sector. It customizes the software it imports to fit the needs and systems of the domestic financial sector, which is clamouring to automate most of their transactions in keeping with customers’ demand. But the Firm is facing rough times. Unlike previous years, it is confronted with a severe problem of accessing foreign currency to import software for the projects it has signed contract for.
A 20 million Br contract it won in June 2016 is one of them. The firm is contracted to install a system for use at a public enterprise. However, it has run into major difficulties in handing over the project within deadline, mainly because it could not access foreign exchange for the project. The project delivery period was within six months of the contract signing.
“Eight months ago, we applied for an LC to get hard currency,” said the CEO. “We have yet to get our applications approved.”
Banks receive applications fro LCs from their clients, oblige them to deposit the full amount of their request in Birr, and make them lineup for months. The average waiting time has reached at nine months, according to industry sources. A directive from the central bank, meant to fight corruption and kickbacks by bank managers, denied bankers their discretions in discriminating between what is important and urgent from applications that can wait.
“Now we’re subject to penalties, which are equivalent to one tenth of the total project cost for every day we are late in delivering,” the CEO told Fortune.
The forex crunch is deeply structural and may not be addressed in the lifetime of those in charge of running the affairs of the government, many senior administration officials have admit occasionally. Yet the crises continue to grip the economy, leading businesses to frustrations and hopelessness. The economy suffers from a current account deficit of 7.4 billion dollars last year, attributed by the International Monetary Fund (IMF) to stagnated export revenues due to sharp falls in export prices.
The first half of the current fiscal year have brought no pleasant news marked by poor export performance, according to the Prime Minister. Earnings from export shrank by 4.2pc from the same period last year to 1.3 billion dollars, Hailemariam told MPs in his 24-page report. This falls far shorter than the administration’s plans, which target is an increase of 20pc in the country’s annual export revenues from 2.9 billion dollars last year.
“The decline in export earnings has been happening for the past three years,” the Prime Minister said in Parliament where 404 of the 547 MPs were in attendance. “The response we have had to address the issue has not succeeded for various reasons.”
The trade deficit from the past six months performance was 6.72 billion dollars, a decline from the seven billion dollars registered during the first half of the 2015/16 fiscal year. Foreign exchange spending on fuel and merchandises has declined by 4.1pc, according to the Prime Minister.
Hailemariam appeared before Parliament last week, days after Parliament declared a three-day national mourning after a landfill slide claimed the lives of no less than 115 people in an area known as Repi, in Kolfe-Qeranio District. Here too, the Prime Minister chose to remain silent from explaining the causes of the national tragedy, but offered families who have lost their loved ones few words of condolences.
Rather, his report gave more emphasis to the low performance in the export sector and the economic growth rate, which he says is below the expectations of his administration. He largely focused on 10 areas, from inflation to revenues mobilization, and from agricultural productivity growth to the manufacturing sector and the enforcement of the state of emergency.
A day before, his Defense Minister, Siraj Fegessa, who is also secretary of the Command Post formed to see through the enforcement of the state of emergency, briefed the media on the administration’s decision to relax on some of the restrictions imposed on civil liberties. Imposed in October 2016 to contain violent public protests that has seen the death of hundreds and damages to public and private properties, the decree remains in place, while the deadline comes close to expire.
The Prime Minister hinted nothing to Parliament if his administration wants to extend it, but claimed over 82pc of Ethiopians surveyed would want to see the decree remains in place. Pundits, however, blame the state of emergency for the loss of foreign exchange earnings from tourism and foreign direct investment.
Nonetheless, Hailemariam attributes the decline in foreign currency reserve, which was 3.4 billion dollars last week, to a combination of factors he said were internal as much as external. The decline in global commodity prices caused a drop in demand for Ethiopian products from China and other major buyers, and the strong exchange value of the Dollar against the Birr was the external factors, according to the Prime Minister.
In contrast to declining export earnings, the amount of foreign currency the country spends has been going up sharply from year to year, unable to be covered by revenues from exports. In the last two quarters, export earnings only covered 15.5pc of import expenditures. Other sources of foreign exchange, such as loans, grants, foreign direct investments and remittances have shown a downward trend.
The flow of remittance to the country through non-governmental institutions has seen a decline, Hailemariam conceded, although he attributed the decline to the fall in donations by development partners this year due to high amount of money they sent last year to the drought relief efforts. Ethiopia’s loans have declined during the past fiscal year, due to the increase in the amount of debt ratio, Hailemariam disclosed. As a consequence, foreign exchange earnings from loans and grants have declined by 14.5pc.
All these factors led the country to find itself in a foreign currency crunch, which became even more severe at the start of the current fiscal year. It has made life no less stressful to those engaged in the import business, such as the software company.
The Prime Minister downplayed these challenges in the business sector, mentioning only that the country is under-performing in the export sector. Yet, many companies are on the verge of having to close down business, as a result of the foreign currency shortage they are encountering.
“This omission by the Prime Minister was intentional,” said Alemayehu Geda (Prof.), a lecturer at Addis Abeba University (AAU). “The foreign currency crunch should have been the major agenda of his address but he failed to make it so.”
Last fiscal year’s import and export performance illustrates Alemayehu’s point. Imports worth 16 billion dollars came into the country, while exports brought in four times lower; there was a 500pc gap between the two.
“Last year was the first time in the country’s history where we saw such an export gap,” says Alemayehu.
Alemayehu would have wanted to see the Prime Minister give much emphasis to what his administration does to overcome the forex shortage, such as cutting the country’s expenditure and going out for euro market.
In the meantime, companies such as the IT firm, which has now stopped undertaking any of its activities because of the forex shortage, remain uncertain about when, if ever, they will be able to access foreign exchange to open LCs.
“We’ve no option other than switching to another business line or closing the company if this persist for a long time,” the CEO told Fortune, rather with visible frustrations.
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