PM Lauds Inflation Downturn, While Debt Increases

Despite concerns over the country’s outstanding debt burden, and a derailed business climate, Prime Minister Hailemariam Desalegn declared last week that his administration has achieved a “stable and healthy macroeconomic environment.”

Hailemariam pointed out that inflation has been tamed to single digits. This is an accomplishment, considering the persistently higher rates observed since 2005.  Foreign exchange stock has been beefed up to pay for 2.2-months of imports; an improvement over the previous amount of one and half months. The birr has also remained stable against major currencies recently.

The Prime Minister’s address to Parliament came one month after the Central Statistics Agency (CSA), announced that the economy has witnessed an impressive drop in inflation. For the first time since September 2010, the year-on year inflation rate dropped to 7.6pc in March 2013, down from 10.9pc a month before.

It took the government almost three years to bring inflation down to its target under the administration’s flagship program, the Growth & Transformation Plan (GTP).

“It’s about time,” said a senior macroeconomic advisor to the Prime Minister, speaking to Fortune on conditions of anonymity.

For the past three years, the administration has been implementing a fiscal policy manoeuvring to tame inflation, Hailemariam told the 352 MPs present last Tuesday, April 23, 2013. A notable absence was Girma Seifu (MP-Medrek), who was on a visit to theUnited States.

It was Hailemariam’s third appearance since he was installed to succeed the late Meles Zenawi, the House’s ubiquitous figure for three terms, in September 2012; and the first since his consolidation of  power after being re-elected to lead the ruling EPRDF last March, in Bahir Dar.

Reporting to Parliament about his administration’s nine-month performance, Hailemariam appeared to be assertive which was different that many pundits observed about him previously which they attributed to his being under the shadow of his predecessor.

Neither were the MPs their usual selves as they appeared to take pledges made by Abadula Gemeda, speaker of the House, to hold the executive accountable, seriously. MPs were seen demanding explanations for issues in a rather forceful tone.

From an MP of the ruling party who wondered how the EPRDF created a “demanding” and an “aspiring” society only to trudge, to another MP who questioned where the finance to pay for the mega public projects is sourced, and still another MP demanded the administration play tough on regional authorities who cause conflict among ethnic communities alongside state’s borders. This could be a sign that the otherwise timid and passive Parliament may soon be a thing of the past.

Nor was the Prime Minister the same as his predecessor. He was candid in admitting wrongs committed by regional authorities as he was forthcoming in accepting failures in performance in domestic revenue mobilization, meeting export revenue targets and attracting Foreign Direct Investment.

“I believe he found his own voice,” an aide told Fortune.

Yet, it was a voice as reassuring as it was forward looking.

“Finally, we have succeeded in achieving our goals,” Hailemariam told MPs, although some of his assertions about  achievements in rural road and railway construction are contradictory to what the ministries in charge have said lately.

The Prime Minister reiterated the goal in the ambitious five-year plan, launched in 2010, to transform the structures of the economy from agrarian to industrial.  It is a plan the administration hopes will put the country on a competitive trajectory, through an export oriented economy and would address the historical crunch in foreign exchange stock.

The administration saysEthiopia’s monetary policy objectives will continue to focus on the stability of the exchange rate regime, which will not exceed a six percent annual average growth threshold. The administration has managed to keep the annual average exchange rate increase close to 5.7pc, Hailemariam explained in response to Asheber W. Giorgis (DD), a lone independent MP, who raised a question about the effectiveness of government policies.

In order to reverse the shortage of foreign currency the country experienced back in 2008/09, when its reserves went down to 112 million dollars, enough only to pay for about three weeks of imports, the government started to implement a monetary policy in 2010. One such measure was narrowing the trade deficit through a 20pc devaluation of the Birr against a basket of major currencies. The devaluation was aimed at making exports competitive while holding on imports, particularly consumer goods.

Due to successive devaluations, the value of the Birr has declined by at least 45pc since 2008. In October 2008 the Birr devalued by at least 10pc, and a further 9.9pc in July 2009.

The administration claims it was such policy intervention that led the nation to boost its foreign currency reserve to 2.7 billion dollars in the 2010/11 fiscal year, showing a 700 million dollar increase from the previous year. Imports fell slightly, a mere 0.2pc, during the same period, and the trade deficit was down to 5.5 billion dollars.

Even better,Ethiopia’s foreign currency reserve had reached a historic peak of 3.2 billion dollars in December 2011. Such a huge reserve caused the central bank to call all commercial banks to buy foreign currency.

However, the sterilization process badly impacted the nation’s forex reserve.

The country now has foreign currency reserve enough to cover 10 weeks of import bills, Hailemariam assured MPs.

“This is much better than what we had six months ago, which was only enough for six weeks of imports,” said Hailemariam.

The Prime Minister told MPs his focus in the future is to keep the momentum and ensure achievements in the macroeconomic front are sustained.

“Our current achievement does not guarantee our future success,” said Hailemariam, “We’ll continue to implement the fiscal and monetary policies for some time. We need to strengthen our efforts to achieve the target outlined in the GTP to maintain the stability, especially in the export sector.”

However one thing the Prime Minister did not mention when he spoke about a “healthier and stable” macroeconomic environment was the derailed business activities that marginalized the private sector and at the expense of shrunken economy.

The Prime Minister missed one big component while talking about macroeconomic stability, which is the level of the national debt, says a macroeconomist, who has been teaching at the Addis Abeba University (AAU), for the last 16 years.

Hailemariam, who believes macroeconomic stability will be maintained regardless of the influence of the crisis coming from abroad, failed to mention a single word about the current status of the outstanding public debt in his address to Parliament.

Calling the current macroeconomic situation “temporary”, macroeconomists fear that the existing stability might be reversed if the government keep ignoring debt in the equation.

What is more alarming to them is that the administration is still borrowing from abroad, although they are off-budget and through state enterprises, said the macroeconomist.

The federal government plans to spend 1.2 trillion Br during the GTP period, 509.2 billion of which will be off-budget. Among mega projects not included in the budgetary spending are the Grand Ethiopian Renaissance Dam (GERD), the railway networks, 10 sugar factories, and a fertiliser factory. The GERD is expected to take 80 billionBr.The 104.6 billion Br loan for the railway networks and other loans for the other mega projects can be added to the current outstanding loan figure of 158.9 billion Br reported by (MoFED).

“There is no limit to government borrowing to cover its deficit in an off-budget system,” said another noted economist Fortune talked to. “This is because of the intractability of the off-budget financing scheme. Most of the time, only the government knows how much it has borrowed from abroad.”

Indeed, Hailemariam reassured MPs last week that his administration is not worried about sourcing finance as it is with in-house capacity to manage and implement public projects.

“The issue isn’t money,” the Prime Minister told Parliament. “The Chinese are willing to help.”

The economist, who lectures at AAU, sees a number of downside effects to a borrowing spree in the long-run.

“The government has to spend more hard currency each year in debt interest payments to lenders, which ultimately leads to a foreign currency shortage,” he said.

The borrowing will affect the reserves, according to this economist, since it has to save to pay the debts, which again will ignite inflation.

Macroeconomic stability is measured by four variables, including low and stable inflation, a stable foreign exchange regime, enough foreign wealth and low national debt relative to the economy, according to the International Monetary Fund (IMF).

The total outstanding public debt of the country is estimated to be around 158.9 billion Br, which was 21.5pc of the gross domestic product (GDP) at the end of the 2011/12 fiscal year, according to public sector debt statistical bulletin published by the Ministry of Finance & Economic Development (MoFED), in October 2012. The largest chunk of this, which is 97.4 billion Br, was borrowed by the central government.

It is this huge federal debt overlooked in the Prime Minister’s report, according to this macroeconomist.

High government debt harbours inflationary risks if current government liability (debt) does not match the net present value of future surpluses, argued experts.

The annual average economic rate of return for infrastructural projects implemented in Sub-Saharan African counties is close to four percent, according to the World Bank. However, the outstanding debt of the government has been increasing at 11.5pc on average for the last five years.

Although public debt is one method of financing government operations, it can result in hyperinflation if not used cautiously, said the expert.

“This will return the government back to square one,” said the macroeconomic lecturer.

One instrument countries use to bridge their national debt is enhancing revenues from exports. Export performances, inEthiopia, habitually fall short of their targets.

In the 2011/12 fiscal year, 3.2 billion dollars was earned, about 20pc lower than targeted. During the first nine months of the current fiscal year, the performance showed a marginal six percent increment compared to the same period the previous year, while it fell by close to 23pc of its target.

The failure was attributed by Hailemariam to declining global demand, which led to low international prices for commodities such as coffee – despite growth in volume by 54pc – gold, and flowers, the latter declined by eight percent.

The situation is far gloomier in the manufacturing sector.

In 2011/12 fiscal year, export revenues of textiles registered the lowest export figures at 49.4pc, bringing in 84.6 million dollars, while leather and leather products brought 112 million dollars, achieving 54.5pc of the plan, according to the export performance report published by the Ministry of Trade (MoT).

Hailemariam puts his administration on trial for the poor export performance in the manufacturing sector. Domestic investors have not positioned themselves to have a place in the industrial economy, due to poor provision of finance, and foreign direct investment not coming in sufficient volume, he admitted. It was a sobering admission for an administration to accept blame for failing to fix the port and logistics problems caused by its own doing.

What the administration has not done though is to use monetary policy instruments in raising national savings, according to a macroeconomist now working for an international organization. Despite recent growth in national savings of up 40pc, the Prime Minister has admitted that it has not reached a level where it pays for mega projects on its own.

Reviewing interest rate for treasury bills from its current less than one per cent to be competitive in the market, and making the trading system modernized and computerized could help the administration travel a long way in mobilizing domestic savings, according to this macroeconomist.

Such could be an issue of interest for increasingly vocal MPs to raise next time the Prime Minister appears before them for question time.

 


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