27 January 2013

Ethiopia: Fiscal Fiasco


It will take a lot before the ruling elite of our fair nation come back to their senses. A series of professional lies ought to be made. A great deal of unrealistic intent ought to be declared.

At last, the long awaited budgetary secret of the nation has been disclosed, by none other than the non-technical communications head of the finance ministry, last week. His reaffirmation that the government would fund its approximately 14 billion Br deficit through domestic borrowing brought the truth to light. Yet, it was followed by a prescribing lie.

In what seems to be a packaged statement, the official reflected that there would still be no central bank borrowing, or in a literal sense, no more money printed.

To start with, the ruling elite gave a deaf ear to all claims against budgetary expansion. They often equate expansionary fiscal policy with economic heroism. Less attention is given to the contextual aspects of budgetary expansion.

True, budgetary expansion could indirectly illustrate the robustness of the economy. But, its indicative role could go further than simply showcasing the possible sources of growth. And it is, indeed, in the analysis of such sources of growth that the reasoning of the ruling elite falls flat.

Officials at the finance ministry often pass over questions regarding the sources of growth. If anything, they forget that they sit at the helm of a dominantly government-financed economy, wherein a large proportion of the marginal growth could easily be associated with the money printing authority of the state. It is, indeed, undeniable that the government's share in each unit of economic growth, and subsequently its budgetary expansion, is significant.

At the core of such confusion lies a ministry wracked by unprofessionalism. The quality of professionalism in the Ministry of Finance & Economic Development (MoFED) is declining with each passing year. Merit is outrightly neglected. Political loyalty has become the lone currency in the human resource management of the Ministry.

As the saying goes - "garbage in, garbage out" - as a result, all recent economic prescriptions of the Ministry are lacking in the essential levels of professionalism. They are becoming half-baked breads. They are increasingly becoming insensitive to risks and context. No different is the latest proposition about domestic borrowing.

Despite the claim, the current economic situation provides no viable option besides printing money to cover the deficit. Every other possible option has a dimension of improbability.

On the external front, major donors and creditors are constricted by the problems in their own countries. Downward risk originating from rising debt burdens, high cost of deleveraging, anaemic growth and shattering financial markets drain external resources from western countries.

New creditors, such as China and Brazil, are preoccupied with creating domestic demand at home. And whatever little resource can be found on this front, it is not enough to cover the ambitious deficit of the revolutionary state.

Things are worse on the home front. The market for Treasury Bills (T-bills) has long been dysfunctional, due to low interest rates and rising inflation. Formal creditors, such as banks, including the largest state-owned Commercial bank of Ethiopia (CBE), do not have the capacity to shoulder such a huge deficit, for they live in a liquidity trap. A narrow tax base makes the domestic revenue front rigid.

Hence, the last resort for the government would be printing money. But, if history is anything to go by, growth in base money has been the major driver of inflation in the country. And the growth rate of base money has been faster than the growth rate of gross domestic product (GDP).

Higher monetary velocity, facilitated by an ever-increasing economic monetisation, has increased the inflationary impact of base money growth. Thus, it is obvious that the last resort of the ruling elite would fuel the inflationary fire that has already been blazing for over eight years.

Imports of edible oil and wheat will no longer be able to put out the fire. What is needed, rather, is fiscal restraint. Although late, the ruling elite have to revise their budget and prioritise capital investments in line with resources.

Some capital investments ought to be postponed until next year. And fiscal effectiveness should be the guiding principle.

Of course, although unprofessional, there is another option; cooking the numbers. That would be a little disgraceful, however. After all, there is no better judge than reality.

Getachew T. Alemu is the Op-Ed Editor for Fortune.

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