Uncertainly Optimistic

Although Ethiopia’s Gross Domestic Product (GDP) grew by 9.7pc in the last budget year of 201213, falling short of the government’s target of 11pc, Prime Minister Hailemariam Desalegn stated his satisfaction with the country’s economic performance, which he said had been g amidst both local and global economic challenges.

Presenting his Administration’s nine month performance report for the current fiscal year, on Thursday, April 24, 2014, Hailemariam said the government is encouraged by the country’s sustained growth, particularly when compared to the Sub-Saharan African average of 5.4pc economic growth during the period.

Despite local challenges emanating from three quarters – the fear of slowdown, following the death of former Prime Minister Meles Zenawi the fear of impact over the economy from the stringent monetary and fiscal policies to arrest inflation and initial mishaps surrounding the multi-modal system – Hailemariam’s Administration projected 11.3pc economic growth for the current budget year.

Agriculture is expected to contribute 8.6pc, while industry and services are forecasted to constitute 21.4pc and 10.5pc, respectively, to the growth.

The Administration lamented over the continued falling price of gold and coffee, Ethiopia’s flagship export commodities. Added to the list is the inflated price of fuel – one of the main import items.

Disagreement over technicalities in estimating GDP growth volume has arisen between Ethiopian authorities and international financial institutions, such as the International Monetary Fund (IMF). The latter went to the extent of describing official GDP data from Ethiopian authorities as being subject to significant methodological weaknesses, in a statement it made to the media back in November 2013.

In line with this, Mesfin Cherinet (MP-SEPDM) asked Hailemariam why the departure between the government and international financial institutions over estimating GDP continues and whether the wrangling affects projections.

“What matters most is the final GDP rate and not the differences over estimates,” Hailemariam said.

But he was much less enthralled by the export performance of the nation, which was recording dismal figures, with agricultural exports growing by nine percent during the period.

The global decline in the price of coffee, Ethiopia’s longtime leading foreign exchange earner, heavily impacted the performance, this time slumping by no less than 25pc during the past nine months.

With other agricultural exports, such as oilseeds, pulses, floriculture and fruits and vegetables, showing a growth of 58pc, 11pc, seven percent and one percent, respectively, export registered an overall growth of just above two percent during the last nine months – meeting 63pc of the government’s projection for the period.

The less-than-expected performance of the export sector was also affected by the fall in the price of gold, another major export item, in the global market. The global price of gold dropped by nearly 30pc at the end of 2013.

To counter the effect of the global market, Hailemariam said, the government will intensify follow-up and support efforts during the remaining three months of the budget year.

“Efforts are underway to improve the quantity and quality of the export of coffee and gold, and thereby to improve earnings,” he told MPs, who gathered for the 26th regular session of the fourth year of Parliament.

Part of this effort includes increasing the supply of gold by artisanal miners and the export of value added minerals.

Ethiopia’s export revenue has been declining progressively for the past three years, from 3.2 billion dollars in 201112 to 3.1 in 201213 and 1.3 billion in the first half of this fiscal year – achieving only 65.5pc of its target for the first two quarters.

An upshot of the government’s tight monetary policy, inflation remained at seven percent during the 12 months to February 2014, the report indicated. The government is pinning its hopes on the bumper harvest it already has forecasted during the current fiscal year and price stabilisation in the global market to estimate a single digit inflation rate for the current fiscal year as well.

Ethiopia had to endure a hyperinflationary rate for the years between 2005 and 2012, when inflation went out of control and containing it became the major policy anchor of the government. Although evidence pointed to a large proportion of the inflation being contributed by the aggressive public investment in the nation, the Administration denied it until 2012.

“I see success in applying a stringent monetary policy since then,” says a macroeconomist, who preferred anonymity. “This is unlike the previous passive monetary policy, which followed the fiscal expansion.”

The macroeconomist, however, fears that the fiscal policy choice adopted by the Administration of Hailemariam might bring about its own challenges. The Administration insists on public investment that continues to push the fiscal space further.

“And the resource gap is forcing the government to borrow from the Central Bank,” the expert said.

The macroeconomist, who sees a looming inflationary risk, says the only way of effectively avoiding it is adopting a restrained fiscal policy, in addition to the tight monetary policy already being carried out by the government.

“The pace of public investment should be slowed,” he said.

However, an expanding public expenditure coupled with the government’s tight monetary policy, intended to keep inflation down to single digits, might imbalance macroeconomic development by depriving the private sector access to credit and foreign currency, the International Monetary Fund (IMF) warned in February last year.

Anti-inflationary measures that were undertaken by the government since mid-2010 were against the aantage of the private sector, according to the IMF.

General inflation stood at 7.4pc in June, ascending slightly to register 8.8pc by March 201314, according to data from the Central Statistical Agency (CSA).

For Girma Seifu (MP-MEDREK), however, the government’s partial success in the monetary aspect of its policy might not work after some time.

“As far as I am concerned, it is not only the government’s tight monetary control that kept inflation down,” he said. “It is also the deliberate reduction in individual spending, be it prompted by saving for the housing projects or the GERD [Great Ethiopian Renaissance Dam].”

Girma fears that these savings, which “have tightly squeezed the nation,” might at some time be dropped when they go beyond the capacity of the people.

“The tight monetary policy must be supported by less public spending,” he said.

But monetary policy is not all a success story for the Administration, as could be seen from figures of foreign currency reserve. The nation’s foreign currency reserve has been witnessing a drop, according to data from the National Bank of Ethiopia (NBE). Standing at 2.94 in 201011, the reserve slumped to 2.23 in the following year. By the end of the 201213 fiscal year, Ethiopia registered a foreign currency reserve of 2.22, a trend showing decline.

This was one of the issues over which the Prime Minister admitted failure. Hailemariam said foreign exchange reserves will remain a painful state of affairs for the country for the next 20 years, while responding to a question raised by Agere Minale (MP-ANDM). The MP expressed her concern that the foreign exchange reserve might constrain Ethiopia’s debt repayment capacity and negatively impact foreign exchange supply to investors.

Hailemariam says there is hope for more foreign currency earnings from the increased export of manufactured goods.

The manufacturing industry grew by 11.4pc over the past nine months, with leather and leather products, textile and clothing registering 12pc and 14pc growth, respectively. The industry’s growth has, however, fallen short of its target of registering close to 30pc growth, as has been admitted by Hailemariam.

Hailemariam reiterated a global economic slowdown to justify the unmet national target in revenue from exports in the manufacturing industry. His report expressed concerns that the continued fall in the price of gold could hamper the nation from achieving its target.

The government expects fast growth in the manufacturing sector, because of the start of new manufacturing industries and the expansion of existing ones, particularly textile, leather, agro-processing and metals, Hailemariam said.

The Administration, however, fears that supply constraints, failure to increase quantity and quality as desired and mishaps in logistics might hamper the growth in the industry.

On the fiscal side, however, the Administration remains hard pressed, according to the macroeconomist.

In the last nine months, the Administration managed to collect 78.5pc of the planned revenues, the sources being tax, non-tax, direct budgetary support and debt reduction.

The government managed to collect 76.9 billion Br (76.9pc) out of the 100 billion Br it planned to collect in tax for the entire year – an increase of 26.2pc over the tax revenue collection in the previous year.

Despite only collecting 84.2 billion Br in the last fiscal year, the Ethiopian Revenues amp Customs Authority (ERCA) plans to collect 116.7 billion Br in 201314. Last year’s total represents just 82.9pc of the ERCA’s in-house target, set at 101.4 billion Br.

The Authority’s revenue collection projection for the current fiscal year is also 33.8 billion Br higher than the revenue collected during the 201213 fiscal year.

“The government has failed to meet even its own target, let alone ERCA’s in-house target,” says the macroeconomist.

Total revenue, including grants, stood at 115.6 million Br in the 201112 fiscal year, increasing to 137.2 million Br in the 201213 fiscal year.

Total expenditure, which stood at 124.4 million Br in 201112, jumped to 153.9 million dollars in the 201213 fiscal year.

While revenue increased by 18.6pc, total expenditure grew by 23.7pc.

Although 13 MPs other than Girma, the lone opposition politician in Parliament, raised questions, Hailemariam’s responses were all framed towards questions raised by Girma.

Girma’s appeal towards the beginning of his questions that none of what he was going to raise emanates from a belief that nothing is working for the government and that he wants the Prime Minister to differentiate his concerns from gloominess did not seem to earn acknowledgement from Hailemariam.

“My previous hopes that Hailemariam might come up with a departure from the EPRDF’s past tendency of smear campaigns and hate politics is nearly running out,” Girma told Fortune. “That is because I see the most powerful executive trying in vain to strike against his opponents with words, as if he was deliberately provoked.”

Hailemariam was particularly dismissive of the concerns raised by Girma. From the shortage of wheat and sugar in the market having the potential to worsen inflation to concern that the Growth amp Transformation Plan (GTP) is proving too ambitiou, the Prime Minister staunchly defended his government, opting to disagree with Girma.

Source : Addis Fortune

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