10 February 2013

Ethiopia: Growth Forecast Closer to IMF, World Bank

Compared to the pre-revised 1999/2000 base year, gross domestic product (GDP) estimates based on the new base year has shown changes where GDP level has decreased by close to one percent from 511.2 billion Br to 506.6 billion Br in 2011/12 fiscal year.

Dogged by questions on the credibility of its data, the government has changed the base year for calculating the gross domestic product (GDP) to 2010/11 from 1999/2000, which brings the annual growth of the economy close to the prediction made by the International Monetary Fund (IMF) and the World Bank.

In 2011, the IMF estimated that the GDP growth rate to be 7.5pc, whilst the Ethiopian government reported an 11.4pc growth rate for the same year.

However, the latest move by the government has brought the growth rate to 8.5pc.

The government ofEthiopiaand the IMF have been at odds over projected GDP growth figures for a couple of years.

The change in the GDP base year is made to include new products and services in the calculation, not to bring it closer to the IMF estimation, said Leulseged Dechasa, director of national accounting directorate at the Ministry of Finance & Economic Development (MoFED). The new base year will be used starting from 2011/12 to 2016/17.

Based on the new estimate, the agriculture sector registered a 4.9pc growth rate while industry and service sectors registered growth rates of 13.6pc and 11.1pc, respectively. The average growth rates for the last eight years calculated based on the old base year for agriculture, industry and service were 9.6pc, 11.1pc and 12.7pc, respectively.

The new base year will follow the revised GDP accounting methods, in line with international standards, according to Leulseged.

"Now the country's current methods are in conformity with the 1993 version of the United Nations System of National Accounts," he said.

Macroeconomists said the government has taken the right step, as the GDP used to be measured using a very old base year which had raised questions on the accuracy of the data that was accumulated.

"It is a step in the right direction, though it is a little too late," said an economics lecturer at Addis Abeba University (AAU).

In most countries, national accounts are compiled in broad conformity with the guidelines and benchmarks recommended in the System of National Accounts (SNA), published collaboratively by the statistical departments of the main international economic and financial institutions, including the United Nations (UN), Organisation for Economic Co-operation & Development (OECD), the IMF, European Union (EU) and the World Bank. The SNA was most recently revised in 2008.

However, since this requires significant and costly additional statistical effort, the SNA recommends that re-basing be undertaken at five to 10 year intervals.

However,Ethiopiatook 11 years to change its base year.

The Ministry failed to revise the base year within the recommended year due to a lack of financial, human and technological resources, Abraham Kesete (PhD), state minister of MoFED said at a press conference held at the headquarters of the Ministry on Monday February 4, 2013.

The Ministry had been receiving technical assistance from the IMF for revising the base year; it also had recruited an expert and an assistant fromIndia. Nearly 20 local experts were also involved in the revision of the base year, which took almost a year.

The change was necessary, as data on services and some components in industry was outdated. The closer the base year is to the current year, the better the results, the expert argued. "The weight given to some of the sub sectors previously was very low, and it should be revised in the new base year he said.

Government officials also agree with the comments made by the economist.

"We cannot say every sector has got equal focus, which we need to correct in the coming years," reflected Abraham Tekeste (PhD), state minister for the MoFED.

Updating the base year through revising the GDP estimation has become essential for various reasons including newer economic activities, progressive expansion and downsizing of various industries and economic sectors over the years, according to Leulseged. Changes in the relative prices of commodities also require revision to correctly mirror the real growth.

Abraham Tekeste, state minister for the Ministry of Finance and Economic Development (MoFED), left, and Haji Ibsa, public relations director of MoFED, right, in a press conference at the Ministry on Monday February 4, 2013.

Starting from the 2011/12 fiscal year, the GDP is estimated by benchmarking 2010/11 as the base year, meanwhile, different sub sectors under 15 fixed sectors which are the components of the GDP calculation will be reshuffled as it is not possible to change the fixed sectors.

The 15 sectors were also identified in accordance with the System of National Account (SNA) in 1993 for calculating the GDP which was also approved by the UN.Ethiopiabegan calculating GDP according to the international benchmark four decades ago.

The 15 sectors include agriculture and forestry, fisheries, mining and quarrying, manufacturing, electricity and water, construction, wholesale and retail trade, hotels and restaurants, transport and communications, financial intermediation, real estate, renting and business activities, public administration and defence, education, health and social work, other community, social and personal services, and private households with employed persons.

These 15 sectors are unchangeable, according to Leulseged. In a revised base year, different sub sectors such as bajaj vehicles and mobile phones come under the sector of transport and communication, while the horticulture of flower has been added to the agricultural sector, he added.

The new measurement will not change any of the realities ofEthiopia's economy because it has no direct effect on underlying economic realities, argued the macroeconomist.

'It does not alter the extent of poverty or the scale of unemployment or the size of the domestic market. Nor does it alleviate any structural deficiencies or remove any obstacles to development, he said.

However, it does potentially bring significant implications for policy both internationally and domestically.

At the international level, the significance of re-basing frequently lies in the consequent changes in a country's global rankings, particularly those that depend on estimates of GDP (or income) per head as seen in the case ofGhana, he argued.

In November, 2010, Ghana Statistical Services announced that its GDP for the year 2010 was revised to 23.3 billion dollars, as compared to the previously estimated 13.4 billion dollars. This meant an increase in the income level ofGhanaby about 60pc and the country moved from being a low income country to a lower middle income country overnight, according to the report published by the Ghana Statistical Service, in 2010.

This shows that dramatic changes in GDP levels are likely to occur if countries revise their national accounts methodology and incorporate new source statistics more frequently, the expert stated.

Ghana has been revising its base year every five years since the 1990s.

Whilst Ghana saw an increase from the rebasing, the new base year has reduced the size of the Ethiopian economy from 511.2 billion Br to 506.6 billion Br, a close to one percent decline.

Domestically, re-basing carries implications for all of the standard benchmarks of macroeconomic policy involving ratios in which GDP features as the denominator, said the economist. These include various measures of the fiscal deficit, government indebtedness, current account deficit, and investment and savings ratios.

The new estimate for the year 2011/12 has put the national savings rate at 12.8pc from 8.8pc and investment rose to 27.9pc of the GDP from 25.5pc while per capital income has fallen to 387 dollars from 392 dollars.

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