Sovereign Bond Passivity Limits Economic Transformation

Sufian Ahmed, the long serving finance minister, has so much to be proud of during his 14 years of service as the point man of the Ethiopian economy. Under his leadership, the economy has witnessed double digit economic growth. Even by the accounts of the international financial institutions (IFIs), including the World Bank and the International Monetary Fund (IMF), the economy has grown by an average of 7.5pc since Sufian’s appointment in 2001.

As a direct outcome of the economic growth, the budgetary pie that Sufian administers has been expanding swiftly. If one is to go by the latest proposition of the Council of Ministers – the highest executive body of the state – the national annual budget will be 178.6 billion Br in 2014/15 fiscal year. This is a little over four fold of the budget for 2001.

It was with the close supervision of Sufian that the nation rolled out three consecutive development plans, with the latest being the Growth & Transformation Plan (GTP). During the 12 years of planning, therefore, the economy has progressively modernised.

What has been achieved on the developmental fronts is even more astonishing. Access to essential services, such as roads, education, health, water supply and sanitation has seen a significant leap. This has rightly translated into progress in mobility, literacy, life span and wellbeing. Incidence of poverty has also declined to a historical low level of 29pc.

Of course, this growth in the real economy is driven by an expanding fiscal pie. The resource base that Sufian’s ministry – a focal point for managing resources coming from domestic revenue, loans and aid – oversees continues to grow. To the astonishment of international donors, however, the public finance management of the ministry remains solid and credible. Almost all of the assessments undertaken by the independent evaluation offices of major donors have applauded both the structure and operation of the public finance system that Sufian oversees.

Such is a sizeable achievement that any finance minister would dream about. If there is little talk about Sufian’s achievement, it could be because of the collective decision making culture of the ruling EPRDF. Under this culture, individual grandiosity is given limited attention. Successes ought to be attributed to the Party.

Nonetheless, it does not mean that Sufian’s leadership of the economy has all been smooth. It has been exposed to fierce critics, especially on its fiscal stance.

The economy under the custodianship of Sufian continues to witness expanding fiscal space. It has all been going even though the fiscal expansion, followed by a subsequent monetary expansion, has been fuelling the inflationary supercyle of the past decade.

Sufian and his team of experts have been resistant in reconsidering their stance on public investment, even when they were presented with dependable research outputs that the inflationary supercycle of the nation is being driven by expansionary fiscal and monetary policies. A research by the African Development Bank (AfDB), conducted in 2012, for instance, has shown that 35pc of the inflationary build-up in Ethiopia is caused by monetary expansion.

Another frontier of critique has been the structural biases and weakness of the economy that Sufian et al continue to overlook in their policy targeting. These relate to the balance between the state and the market, and between the public and private sectors.

In what could be defined as a political prioritisation, the economic gurus have created an economy biased against the market and the private sector. Their favour to the growth of the state has remained deep and multifaceted. As a result, the size of Ethiopia’s public investment as a ratio of gross domestic product (GDP) is one of the largest in the world. Unfortunately, this comes at the expense of the toddling market and private enterprise base.

Under the prism of composition too, the economy is still largely agrarian. Agriculture contributes a large proportion, 45pc on average, of the GDP, whereas the share of industry is still less than 15pc. Unprecedentedly, however, the role of the services sector has increased fast enough to compete with agriculture. Hence, distortion is a challenge in structure of the total annual economic output of the nation.

But, none of the challenges would be as definitive as the disequilibrium in the factors of production that the economy hosts. As was the case in 2001, capital is a scarce factor of production in Ethiopia. This seems to have a limiting effect on the economy, for it deters the productivity of land and labour.

Thus, the competition for capital is fierce. An ever growing state and its enterprises are seen competing with the infantile private sector for capital. Feeding the vicious cycle is the effort by the state to squeeze every surplus from the private sector; the forced investment of 27pc in private bank loans through Central Bank bonds could be mentioned as a case in point.

Cognisant of the isolation of the nation’s capital market from that of the global one, the decision of Sufian to promote an economic policy targeted at fulfilling the demands of the state might be considered sensible. After all, the ultimate decision of economic policy is made not by economists but by politicians.

But now the time has come to test the limits of Sufian and his team. With the latest credit rating of the Ethiopian economy by international rating agencies, the opportunity to ease local competition for capital has arrived. It is upon the finance minister, who continues to leverage considerable influence in the power circle, to make the right decision.

There are two options at Sufian’s disposal. He might decide to bound the resource regime within the nation and utilise the credit rating for foreign direct investment attraction only. Such a decision could be attributed to the suspicious stance the ruling Revolutionary Democrats have over the exposure of the local financial system to the international capital markets and the capacity of the Central Bank to manage the same. Eventually, this decision would further the capital constraint felt in the economy and hinder the structural transformation of the economy by virtue of its impact on the private sector.

A rather better option for Sufian and his team would be to decide to relieve the economy of the disproportional burden it has been feeling by adopting an outward looking financial mobilisation strategy. One crucial instrument in such a decision could be a foreign currency denominated sovereign bond.

In addition to giving foreign investors the opportunity to take part in the growth experience of the Ethiopian economy, such a policy could provide the state with resources for its ambitious plans. This could also ease the competition that the private sector would face from the state.

Even if issuing a sovereign bond might expose the local economy to some volatility of the international capital market, the risk involved would not be beyond the absorptive capacity of the rather managed currency system of the nation. A high return on capital also means that the market itself could rightly absorb the risks.

The global dynamics is also well suited for such a purpose. As it stands, global capital lacks reliable high return frontiers, with all the available economies hosting serious uncertainties. And Ethiopia could rightly be one such frontier.

If their whole target is sustaining the growth of the economy for yet another decade and taking it to middle-income status, then economic gurus, and chiefly Sufian, ought to decide in favour of an outward looking financial mobilisation strategy. They ought to opt for a well-regulated sovereign bond regime, which strikes a good balance between effective regulation and opening-up.


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