It is a rare event to find a minister being comfortable in his skin, at ease and comfortable in facing members of the private sector on widely varied issues. That was what Abraham Tekeste (PhD), minister of Finance & Economic Cooperation (MoFEC) did last week, appearing at a chief executive officer (CEO) breakfast organised by Precise Consult, a private company, held at Hilton Addis Hotel.
Busy defending a bloated budget approved by Parliament three days later, the Minister reportedly said – upon receiving an invitation – he would, of course, find time to speak to leaders of the private sector. Not surprisingly, he showered no less than 60 CEOs attending the breakfast with all the great news of growth and promise.
It is a familiar narrative now that Ethiopia has grown consecutively since 2004; for the first time in its history. Both gross domestic product (GDP) – which made it claim the largest economy title from Kenya – and per capita income has increased. But most importantly, the disturbingly pervasive narrative of Ethiopia as a poster child of destitution has changed to one of a growing manufacturing hub in Africa and a new frontier for international investment.
Abraham cleverly used the occasion in selling the achievements of his government, citing how everyone, including the Ethiopian government, was surprised with the over subscriptions of the euro bond it had issued two years ago.
It is, in fact, a hard sell to deny the growth phenomenon of Ethiopia’s economy over the past decade and a half. State-led infrastructural development was carried out but at a high cost.
Local and foreign direct investments are also growing, though not as expected of them and within limited sectors of the economy. Ethiopia’s population is projected to reach 102 million in a few years, a tremendous market opportunity for consumer goods and services. But a curse because it makes insignificant whatever gains were made over the years.
Needless to say, the import volume is surging. At a little over 20 billion dollars last year, Ethiopia’s bill for imported goods and services has doubled from 2011, according to data from the World Bank. On the other hand, though the aggregate amount of exports is growing by a marginal rate, it is nowhere to narrow the gap with imports, let alone to signal a hope that it would break even shortly.
Indeed, the share of imports to GDP has a trend of up and down over the past six years while the story for exports is the unabated decline from 16.6pc in 2011, to eight percent last year. Earnings from exports only cover 17pc of expenditure of imported goods. Hence, the current account deficit of the country growing, recording close to 15 billion dollars in deficit last year; the ratio of debt to GDP is growing alarmingly against the backdrop of official complacency.
The debt sustainability analysis of the country has shown that the external loan distress moves from a low to moderate stage, which is going to be harder for the economy to pay back, becoming an enduring burden for the country.
The troubling signs sourced in the failure to pursue prudent microeconomic policies must not come as a surprise for a country which advocates conflicting priorities between import substitution desire on the one hand and export-led economic growth strategies on the other. It requires time to build systems and penetrate global markets to find a space.
A developing nation like Ethiopia will always have a gap in the import-export nexus, unless it has leaders who know their priorities and are capable of setting it straight. However, for Ethiopia which claims to be engaged in speeding up the industrialisation process to export goods for which its leaders think has a comparative advantage, and all the time advocating for a policy of substitution of imported goods, an increase in current account deficit must be hinting that something has fundamentally gone wrong.
It ought to be a call for policymakers to pause and think for a viable alternative and sustainable gains.
There are those who chose to understand the challenge within the context of the policies the administration of Prime Minister Hailemariam pursues. His Finance Minister is one; he told the CEOs gathered to listen to him that the challenge ahead is about diversifying the economy; joining the world economy in a meaningful way; and creating jobs.
While there is an enormous potential for growth and a reason for a healthy dose of optimism, lack of diversification in exportable items is one of the major weaknesses in the export sector. Though there seems now, with the upcoming of industrial parks, that manufacturers would enjoy a significant state support, they have a long way before they help the government meet its goals both in export earnings and creating jobs.
Along the same line of thought, others urge for bureaucratic efficiency and liberalisation of the logistics sector as a strategy to improve exports both in volume and value.
These are not arguments without their merit. Not surprisingly, the high cost of production and doing business due to inefficiency and delay in public services provision, lack of quality output, and a shortage of foreign currency are painfully constraining a coupon economy. Lack of quality in production and the bureaucratic hurdles in the logistics corridor, as well as the cumbersome procedure with the customs authorities would undoubtedly make exports sourced from Ethiopia not to be competitive in the global market.
In fact, due to this and as demand in the domestic market is also surging, some companies are shifting to target local markets, which further contributes to the decrease in export earnings. It is now a widely established norm to see street-smart business people taking advantage of the high-margin the domestic market offers but undercutting prices while exporting. They are only interested in having access to foreign currency, even if it may mean selling their commodities at losses.
A cash-strapped economy forced to coupon forex has indeed become an instrument of competition where some gallop in the market while others are tossed away for legitimately playing their cards.
Nevertheless, the causes of the increase in trade and current account deficits are far beyond these policy implementation drawbacks. The nature of the problem is not accidental nor has it an easy way to be overcome. Design in policy has created it, and its source is ideological as it is structural in nature.
It is all related to the nature of the developmental state and the underlying convictions its leaders have in controlling the commanding heights of the nation’s political economy. The EPRDFites, though they say it rarely, indeed prioritise economic development over political freedom and competitive politics. The reciprocal relationship between democracy and development seems to be overlooked, some in their midst or is mere rhetoric for many of their leaders.
It appears that it is an ideological goal for the Revolutionary Democrats to seek legitimacy through economic growth and social development, instead of through the liberal conventions of the rule of law, checks and balances in the exercise of state power and the sacred rights of life and property.
Like the East Asian countries of the late 20th Century, the developmental state the Revolutionary Democrats aspire to install wants to achieve economic development through a strong intervention of the state; unconstrained and unchallenged. State-led infrastructural development is at the heart of this process and it brushes aside non-state actors in the civil society, the private sector and the media as mere noisy messengers of the liberal world.
The politics of infrastructure that China is currently using to influence the world is a major tool the EPRDFites are trying to use to win the hearts and minds of the Ethiopian public. The huge infrastructural investment on its part demands massive spendings, whether mobilised domestically or to a large extent borrowed.
Most of the inputs used for such investments in public infrastructure are imported, consuming huge amounts of foreign currency. This, coupled with the growing demand for consumption of imported items, is the primary reason for the ever-growing current account deficit.
There is no wrong in spending on public infrastructure. Had it not been for the extensive financing in public infrastructure, the economy would not have been as vibrant. However, as pleasing everyone is impossible and stretching hands all over is impractical, there should be a prudence in prioritising the most gainful public projects and a form of accountability in their evolution.
Even if the problem is so deep and structural, it still is possible to tame the risks of negative trade balance and reduce the deficit in the current account through budget discipline, a preserve of Minister Abraham. That will be possible whenever the EPRDFites stop thinking that economic growth is the only means for their legitimacy to stay in power.
Besides, when they start to strategically support the private sector to grow, on a scale that could employ a large segment of the unemployed youth and increase the productive capacity of those in the exports sector, breakfast forums such as the one held last week would be rewarding to attend.
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