The Economy at a crossroads

The economy has been expanding for over a decade. Real GDP grew by eight folds since 2008, reaching 827.6 billion Br in last fiscal year. Such an achievement though seems uncanny in an economy characterised by high unemployment rate, massive external debt, widening trade deficit and lack of access to finance, coupled with severe forex shortage. Exacerbating these are shortage of cash and double-digit inflation after devaluation. Nonetheless, analysts, World Bank and the IMF forecast a positive growth prospect, writes FASIKA TADESSE, FORTUNE STAFF WRITER.

For an advertisement company owner, Yohannes Seyfe, 27, running Vexcel Graphics Plc, things have gotten tough since the beginning of this Ethiopian new year.

He opened his company a year and seven months ago, engaging in the promotion business such as branding, logo and graphic designs for different clients. Before he ventured into this business, he was employed as a graphic designer.

Realising the untapped potential of the advertisement industry, he opened his own company with the aim, like any other business, of making profits.

Nonetheless, his expectations remained unmet even after over a year of his company’s establishment. About the same time the economy started to witness major changes with the devaluation and complimentary directives issued to mitigate the devaluation-driven-inflationary-pressure.

In October 2017, President Mulatu Teshome (PhD) signalled the current devaluation of the Birr. Authorities at the central bank had followed the pledge with a 15pc devaluation of the Birr against a basket of major foreign currencies in a bid to encourage export. The next day the National Bank of Ethiopia (NBE) complimented the devaluation with countermeasures such as a 16pc outstanding credit growth cap on all commercial banks for the current fiscal year. It was part of a series of monetary policy measures taken to fend inflation off.

For macro-economists such as Eyob Tesfaye (PhD), who once worked as a senior expert at the central bank, the move was  a short-term relief to what pains the economy.

“The way forward is acceptable as a short-term solution to control the inflation rate as a result of the devaluation,” Eyob told Fortune.

Eyob believes the measure should not stay effective for long. It was, nonetheless, a fateful decision to small businesses such as owned by Yohannes.

Soon after these changes, his business slowed down and the influx of client to his office, located near the Rwanda Embassy, significantly declined.

“I see most of my clients rushing to get primary inputs needed for their businesses, considering advertisement as a luxury,” he told Fortune, rather in a frustrated tone.

Not only did his customer-base shrunk but many companies could not even settle what they owe for the services they had already received from his company.

“I’ve over 100,000 Br receivables which I’m really in need of,” he said. “But the companies complain that they have no cash in hand to settle the payments.”

Vexcel is an upstart with a skeletal workforce of two, where Yohannes is the major shareholder, general manager and work as a designer, with a single staff assisting him as a marketing hand.

He now faces pressure from his landlords to pay rent; salary to a staff; and outstanding bills for the printing offices he gets services from.

“I’m struggling to sustain the business,” he said.

Yohannes’ experience is in sharp contrast to very upbeat reports released by international finance institutions and risk analysis companies projections that Ethiopia is one of the best performing economies in Africa, if not the world.

It is not handy to find surveys and indexes that measure business confidence in Ethiopia. But it is common to encounter business owners and leaders bitterly complain about a myriad of problems they face in doing business in Ethiopia. The World Bank is one of the rare organisations regularly gauging the ease of doing business in 191 countries in the world.

It found out that close to 40pc of small businesses shut down due to lack of access to finance. Regardless of size though, almost everyone in the private sector complains about having little access, if any, to foreign currency, pressure put on the economy due to the wide balance of payment gap.

The World Bank attributes the widening gap between what cost Ethiopia’s economy to buy from overseas and what it sells to an increase in public borrowing. Yet, it projects an economic expansion much higher than the five percent average for low-income countries.

It is a projection that is echoed by the Economist Intelligence Unit (EIU), which ranks Ethiopia as the fifth best-performing economy in the world, with a projected growth of 7.2pc in a gross domestic product (GDP), while Dominica sits on the top with 8.8pc. The FocusEconomics, another private risk analyst, likewise places the country as the fastest growing African nation, with 7.5pc estimated GDP growth for the year 2018.

However, the projections of both the Economist Intelligence Unit (EIU) and FocusEconomics are lower than what the administration of Prime Minister Hailemariam Desalegn hopes to see forward. It is ambitious to see a double-digit growth reaching at 11.1pc, consistent with the low base growth scenario in the second generation of the Growth & Transformation Plan (GTP-II).

Such optimism in prospect is not shared by businesses operating on the ground.

Angagaw Belay, a car retailer off Djibouti Street, around Hayahulet near Shalla Park, had been hopeful about business potential, seeing his sales last year grew three-fold from the previous year, hence bonanza in profit. His business, Indoven Car Sales, sold no less than 60 imported vehicles before he saw sales plummeted immediately after the recent devaluation.

“I believe people had more cash to spend last year,” Angagaw told Fortune. “The devaluation though has drastically compelled people to hold on to their purse.”

Last year, close 573 billion Br was in circulation, showing a 29pc increase in broad money supply compared to the same period the previous year, according to the NBE, which reported that the real GDP reached 827.6 billion Br.

Neither was the banking industry spared from the effects either. Bank managers say the number of depositors flocking to their doors has significantly dipped.

“Without credits, how can we expect companies to deposit their money in banks?” a senior executive at one of the private banks posits.

Not only the credit cap but also last year’s political unrest played a significant role in lowering the cash circulated in the economy and the foreign currency inflow to the country, according to the bankers.

“We’re facing challenges even from covering capital expenditures in settling cheque payments among banks,” he said. “It is hard to believe how the banking industry performed so well this fiscal year.”

Against such backdrop, many of the international finance institutions forecast Ethiopia’s economy to continue to bloom this year. They owe such positive prospects to growth in the global economy, particularly China; increase in the world’s commodities market, and growing foreign direct investments to Ethiopia.

The International Monetary Fund (IMF) says private investment is strong in the country view.

“Medium-term growth prospects are favourable, supported by strong private investment, completion of key supporting infrastructure projects, and rising productivity as export-oriented industries take root,” says IMF’s staff report released in late September 2017.

Alongside this is a continued public expenditure to finance recurrent and capital goods by no less than 170 federal agencies which will spend 60pc on the procurement of goods and services. In the current fiscal year alone, the Federal Parliament has passed a budget of 320.8 billion Br, 17pc higher than last year, or 32 times larger than the first budget approved in the year followed the fall of the military government.

But expanding expenditure might not continue into the current fiscal year, for President Mulatu warned during his address to the joint session of legislators from both houses four months ago that the government wants to reduce costs in a bid to squeeze the budget deficit. It was a rare pledge by the government to introduce austerity measure to the otherwise bloating national budget.

“We’ll cut public expenditure,” he told members of the two houses back in November 2017.

Days after the President’s remarks, a directive signed by Abraham Tekeste (PhD), minister of Finance & Economic Cooperation, circulated to federal offices urging them to watch on expenses and alerting them to be cautious in conservatively utilising their budget. It also listed 19 items that should not be bought henceforth.

Despite a call for tightening the belt, it is the fiscal expansion and growing private-foreign investments that mask the structural bottlenecks in the economy, according to Eyob. With the impending foreign currency crunch in the economy and the credit cap imposed on banks, Eyob sees it inevitable for the activities of the domestic private sector to slow down.

Last fiscal year, the foreign currency reserve of the country was enough to cover import bills only of 2.4 months. It has gone down since then, alarming policymakers in as much as development partners.

The measures taken by policymakers to mitigate the forex crunch focuses only on demand, according to Eyob.

“They have to work on addressing the supply side issues to increase productivity in the areas of manufacturing and agriculture,” Eyob told Fortune.

Yohannes Ayalew (PhD), chief economist and vice governor of the central bank, argues that that is what policymakers are doing. The reforms already put in place by the government have propelled export earnings and began to keep inflation at bay, according to Yohannes.

Indeed, the data for the two months of November and December 2017 seem to vindicate policymakers. They show that earnings from export have increased by 26pc and 27pc, respectively, compared to last year. At 13.6pc headline inflation remained unchanged last month, though it has been on the upward since January 2017.

“The economic growth is sustainable, and it can grow further,” Yohannes told Fortune. “As we can see from the projections of the international finance institutions, it is improving.”

The IMF has been forecasting Ethiopia’s growth to be below six percent – now, they come around to concede that growth is to be over eight percent, according to Yohannes.

Though macroeconomists such as Eyob suggest that significant reforms in the supply side is indispensable, policymakers remain content with the prospects of the economic growth.

Yet, Yohannes of Vecxel is already in search of alternatives to keep himself afloat in business. Determined not to join the 40pc of business the World Bank says close their doors, he has the resolve to try other schemes.

“Knocking doors after doors with persuasive propositions is one of them, along with reducing operating costs,” he told Fortune.

Published on Jan 13,2018 [ Vol 18 ,No 924]



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