Help from IMF Appears Inevitable, Not a Terrible Idea

Way back when the International Monetary Fund (IMF) had an office in Ethiopia, Jan Mikkelsen, its emissary to the country, a few week’s into the institution’s annual report on the nation’s macroeconomic performance, was guarded about the economic prospects. There were distinct merits in the government’s developmental strategies, he acknowledged, notably a subdued inflationary pressure and double-digit growth.

But Jan’s optimism was obscured by the self-centeredness of the economic theory, best epitomised in the National Bank of Ethiopia’s (NBE) issue that all private banks invest 27pc of their annual gross loan disbursements in its bills. A directive born out of the state’s scepticism that the banks were doing enough to contribute to the national good, savings were thus transferred to the Development Bank of Ethiopia (DBE). Only last year, private banks were compelled to buy such bills worth 54.5 billion Br, an amount equal to one-third of their combined paid-up capital.

Fast forward four years, where the IMF has closed its offices, but the warnings are no less dire for the negative consequences are in fact more evident. DBE’s non-performing loans (NPLs) have reached 25pc of its total loans while profit has dropped year-on-year with close to a 13pc decline just the past fiscal year. Contrast this with the relative success of commercial banks that are regulated left and right. Their gross profit has increased by over 10pc to 7.7 billion Br last year, and their non-performing loans stand at merely three percent.

DBE may be a policy bank where returns are expected to be long-term, and the types of loans extended riskier, but such polarity betrays a strategic misfire. National savings channelled to it through central bank bills are better off staying put as competition and shareholder value have guaranteed better credit management by commercial banks.

Thus, if one was to disregard the IMF’s policy recommendations as neoliberal propaganda, in this case phasing out the directive, reason dictates that fiscal and monetary suggestions deserve policymakers’ attention. The timing for this cannot be more appropriate.

The 2017 report by the IMF, though, may have painted a rosier picture, posting a stronger GDP of nine percent and praising the government on its tighter fiscal stance. But, various economic indicators exhibit the state is due for berating than adulation. And there is not a bigger headache to the Ethiopian economy than alarming foreign currency reserves that by May this year could finance less than two months of imports, which is lower than that of the same period last year with 2.6 months.

The crisis in the balance of payment has not been uncommon for the country. It is a symptom of the type of policy the government has followed at least for the past seven years ever since the inception of the first edition of the Growth & Transformation Plan (GTP), which dared to realise massive infrastructure projects.

And with an ever-increasing expenditure, and turbulent revenues the IMF attributes to lower global commodity prices, and what the central bank has determined is an overvalued Birr translating into export sector uncompetitiveness, the nation has slipped into external imbalance. While the national budget has swelled by almost 17pc to about 321 billion Br, exports have stagnated below three billion dollars for three consecutive years. In another direction, the import bill ballooned to 17 billion dollars last year.

Consequently, to sustain its projects, and finance recurrent expenditures, the state has had to recompensate by way of loans, resulting in a public debt equivalent to over half of the GDP.

Shortages in the nation’s treasury have been complemented by a consistent reluctance to overhaul the economy by implementing meaningful sectoral and macroeconomic reforms. Policy instruments have been short-sighted, not to mention unimaginative. The attempt to improve export levels by devaluing the nation’s official currency against a basket of major currencies, by 15pc at its most recent, is a sample. Another is the continued bid to consolidate state enterprises’ grip in strategic sectors such as shipping, aviation and to a certain extent, banking.

Developmentalism, thus, finds itself at a crossroad, if not reaching its limits. The state is not bankrupt per se, but the factors that constitute it are multiplying. For a net importer country, a worsening forex shortage can impede the import of strategic goods comprising pharmaceutical drugs, fuel and wheat which otherwise cannot be domestically sourced or produced adequately. The apparent crisis will force the Ethiopian government to open up negotiations with the IMF for more loans, which will not be forthcoming unless reforms are implemented.

The Greeks and the Egyptians know too well the bitter pills that have to be swallowed when talking to the guys on the 19th Street of Washington D.C., the kind of people William Easterly, an American economist, calls “expert tyrants”. They can be cold in their feelings and merciless in their prescriptions during negotiation with representatives of client countries.

In Egypt, for instance, the prescriptions included cutting back on oil subsidies and allowing the Egyptian pound to float after devaluing it by 48pc against a basket of major currencies. For its courage, the ancient North African state was granted access to 12 billion dollars over the span of three years.

The Greeks had it worse. Once the Eurozone’s fastest growing economy, the European nation was hit by an economic decline after, amongst other factors, a government debt crisis that followed on the hills of the late 2000s Great Recession. Greece was never able to depreciate its currency to withering the effects of the economic downturn as it was a part of the Eurozone – the monetary union formed by 19 members of the European Union (EU).

Thus, it had to make do with the IMF’s (and the EU’s) prescribed austerity measures that included cuts to public spending on the defence and health sectors, not to mention curbing public investment by almost 150 million euros shy of a billion.

Various forms of taxes were increased while the Greeks saw a reduction in their benefits amounting to cuts to pensions and social security. The bailout program worth 92 billion dollars, agreed a couple of years ago, was nonetheless folded by the IMF a few months past as it seemed Greece would be unable to repay its debts.

The lesson here is that the IMF is no China, and the kind of loans will not be concessional. If the cash-starved country does require liquid assets from the Fund, it would need to start programs to fundamentally overhaul the distribution and allocation of resources and production of goods and services. It would need to negotiate on the assumption that the structural reforms would at the very least streamline the economy, if not earn a financial support.

The reforms can start with land. For a state that is rationing it at the moment, to manage urban growth and speed up infrastructure projects, it should be redeemed of the land leasehold system that is hampering access for the sake of ineffective allotment and mismanagement. This perhaps requires an ideological reorientation by the ruling party, a measure that would nonetheless contribute positively to the economy by improving supply.

Another reform that will increase domestic resource mobilisation, by way of improved tax revenues, which has never reached its target all through the current decade, is better access to credit, especially to the private sector. The NBE bills and the series of recent measures undertaken by the authorities aimed at controlling the money supply, with the 16.5pc credit growth rate ceiling a specimen, will exacerbate the crowding out effect on the private sector which saw less than half the credit public enterprises were accorded a couple of years back.

Deregulation of the sector thus, abated by liberalisation, which would see foreign banks introduce new financial products, primarily where the insurance industry is concerned, will assist in the effort to promote financial inclusion. A modest beginning can be allowing foreign nationals of Ethiopian origin to own shares in the nation’s financial sector.

Additionally, the government has to allow the private sector to engage in telecommunication and logistics. The latter is critical as it is often a chief source of frustration for exporters and businesses that depend on imported raw materials. Hence, the regulation drafted by the Ethiopian Maritime Affairs Authority to allow private freight forwarders to transport cargo needs to realise for it would ensure better quality and lower costs through competition.

Then, there are the usual fiscal and monetary measures the IMF laments Ethiopia should undertake. They range from introducing a more flexible foreign exchange regime, which translates to floating the Birr, to curbing public expenditure, especially for capital goods, where over 100 billion Br was set aside in this year’s budget.

Granted, there would be negative political repercussions to both measures. One would raise inflation, and the other would slow growth for the government will be pumping less money into the economy. Thus, akin to the Greeks and the Egyptians, Ethiopians would go out onto the streets, more than are doing as such at the moment. They will even complain that their state has surrendered its sovereignty.

But, it should be a matter of consolation for the Revolutionary Democrats that with such overarching reforms, and IMF’s bailout loans to alleviate the damage on the health and education sector, the current generation would be the last to suffer. Supply constraint, recurrent over the previous two decades, is an outcome of an economy with a weak foundation, which is what deserves upgrading if sustainable development is to be realised.

Published on Dec 02,2017 [ Vol 18 ,No 918]



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