Neglect on the Macroeconomic Front Should Be Worrisome

Under normal circumstances, headline inflation as high as 15.6pc, as was recorded last month, would have been fodder for discussion. It is not a macroeconomic component as abstract as a nation’s current account but a crucial indicator of the health of an economy that hits laypersons and analysts alike where it ought to matter most: their pockets.

Despite general inflation standing at its highest level since half a decade ago, and food inflation double of its average value during this period, those on the political ladder and the public have primarily been focused on the state of the country’s politics. In light of what has been unfolding over the past two years, most, if not all, of the issues deserve recognition. The country is on the edge of seeing a new Prime Minister, and anxiety, despite the reinstated emergency decree, subsists.

While the political crisis deserves its fair share of attention, it would be regrettable if policymakers remain constrained by the ins-and-outs of politics to do anything about the macroeconomic challenges of the country. It would be a contradiction on the side of the Revolutionary Democrats, who attribute one of the drivers of the current political storm to the youth bulge, yet remain passive in the face of significant challenges that are bound to exasperate that very same component.

The strength of any leadership lies in its capacity to analyse the underlying currents and make decisions with the long-term consequences in mind. For policymakers, this ought to begin by paying particular attention to the escalating cost of living.

Inflation incentivises people to spend more. For Ethiopia lacks flexible avenues for investments, such as the money market, it is hard to count on the former. Inflation only begets more inflation, eroding the purchasing power of many, in particular, those of fixed income group. It is the undeclared form of tax declared on consumers.

Add to this a private sector that is credit-strapped as a result of a decision by the central bank to limit the credit growth rate of commercial banks to 16.5pc. And then add to that a severe forex crunch caused as a result of historical trade imbalance, standing at almost 13 billion dollars the past fiscal year.

This is despite an administration that continues to spend more than it makes, as it was witnessed in the 14 billion Br supplementary budget Parliament approved last month. A hamstrung private sector that fails to open up an adequate number of job opportunities, and a historically indulgent government that keeps plonking cash into circulation, can be a recipe for what economists call ‘stagflation’. It is a disconcerting perfect storm that policymakers the world over dread where both unemployment and inflation rise all at the same time and wages remain stagnant.

Although the roots of the current inflationary pressure date a little while back, devaluation of the Birr by 15pc against a basket of major currencies, made last year, has charged the pace. The measure by the central bank is also projected to push external government debt by a couple of percentage points next year, according to Fitch, a rating agency. The International Monetary Fund (IMF) also warns of a peak to debt servicing. This is due to the maturity period of some non-concessional loans related to transport and communication projects and deposits by bi-lateral creditors at the central bank.

The effects of the devaluation on the current state of the economy could almost be forgivable if it were not for the fact that it fails at its principal target.

Authorities at the central bank hoped that exports would find a better footing on the global market, through price competitiveness. The Ministry of Trade’s (MoT) report says otherwise. Ethiopia earned 1.35 billion dollars from the export of goods in the first half of the current fiscal year, a little over 61pc of the target. Even the best performer in the external sector, agriculture, showed the country still lacks when it comes to the diversification of exportable items. At over a billion dollars, agricultural products met close to 72pc of the target set by the administration.

Manufacturing and mineral products performed much worse, at 55.2pc and 18.1pc of their targets.

Such low figures would continue to exacerbate the trade imbalance that is the primary reason for the current forex crunch. There is some relief in that imports have shown a decline in the past fiscal year. And exports are expected to improve this year, albeit not at a level that would make a meaningful dent on the lopsided trade balance. The unabated decline in the value of the Dollar against international currencies could have been great news were it not for the neglect of the macroeconomic management in favour of attending to the political stalemate.

Better domestic revenues would have taken the burden away, but that is not to be as well. Tax revenues are closer to its target than returns from exports. But goals have remained below the necessary base value. The government will spend around 335 billion Br this year but hopes to collect only close to 69pc of that amount.

Such uncharacteristically low ambition for an administration that has remained doggedly over-expectant in areas such as the income status of the nation in seven years are symptoms of its growth model. Tax revenues are a good signifier of the health of the private sector. Only if it is large and highly profitable would the returns for the state be just as profuse.

The administration instead hopes to cover its expenses, aside from concessional loans and grants, through revenues from state enterprises in charge of the commanding heights of the economy. Such strategies contradict the government’s advocacy for ridding the economy of rent-seekers.

The absence of liberalisation is one critical issue, especially in the financial sector. By keeping away overseas-based firms from operating in the market, it has held back the financialisation of the economy. It has meant firms with limited financial services, thus restraints in pooling savings that can later be used to finance projects.

There is also the failure to implement the money market in Ethiopia, which could have bolstered capital formation and the efficient allocation of resources to the productive sectors of the economy with optimum returns. The effects of the current inflationary pressure could likewise have been cushioned had businesses been made privy to more opportunities for investments.

There is more of the state’s instinct to seek rent in its policies towards aviation, telecom and logistics. The state of those three industries affects any private player. Almost everyone at one point or another would have to book a flight with the Ethiopian Airlines or check-in at Bole International Airport, make a phone call or browse the internet through the network of Ethio telecom and ship or have shipped a product by the Ethiopian Shipping & Logistics Services Enterprise (ESLSE).

These state enterprises have an overwhelming share in their respective industries, not due to their competitive edge, but as a result of restrictive government policies. One would be hard-pressed to find a better example of rent-collection in a captive economy.

Lack of competition in parts of the economy that affect all businesses leads to inefficient provision of services. It retards the ability of the private sector to grow, open new job opportunities, meet supply at home and export various products to overseas markets.

The attempt to fix the macroeconomic misalignments should start by privatising, or at the very least, liberalising these industries. Other businesses, either local or domestic, must be allowed to take part if innovation, knowledge-transfer and streamlined services can come to the fore to rouse the private sector.

Such measures ought to be met with progressive policies and proactive regulatory involvement. They ought to strive to notice the flaws in the economy, and right the wrong. They should try to ensure that businesses can thrive by ridding the economy off of competitive bottlenecks and streamlining the public sector. Otherwise, the country will remain in the muck of low domestic revenues, high inflation, a lopsided trade imbalance and mounting debt – the sort of ills that can create just as severe a public discontent as allegations of bad governance.

For a ruling party which draws its legitimacy from its growth narrative more so than its records on democratic rules and human rights, it is only on its peril to have its leaders bury their heads in the sand and overlook the macroeconomic front.

Published on Mar 24,2018 [ Vol 18 ,No 934]



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