2 October 2017

Ethiopia: Saner to Meet Forex Dilemma Halfway

opinion

If there is any solace to be had by the Administration of Prime Minister Hailemariam Desalegn, it came last week from the International Monetary Fund (IMF), that bastion of liberal economic orthodoxy. Its naysayer technocrats have always been irritations to the statists in Ethiopia, who believe the might of the state is all there is to it to address society's ills.

Not last week. The brief statement preceding staff report cannot be any more delightful to the Prime Minister, his Finance Minister and the Governor of the Central Bank. The report affirmed that Ethiopia's economy is in the best of shapes, showing resilience from drought and robust in its expansion as well as keeping the vagaries of a budget deficit and inflation at bay.

Despite political instability and subsequent violent protests compelling the federal government to declare a state of emergency, the IMF mission nonetheless saw an expanding economy by nine percent. A "prudent budget execution" is attributed to keeping the deficit at 2.5pc, half a percentage point lower than the European standard. Strong private investments, completions of critical infrastructure projects and raising productivity in export-related sectors are credited by the IMF mission, led by Julio Escolano, for stimulating medium-term growth.

What should, however, be troubling to the Administration is what was not said by Escolano's team. Except for a phrase or two of "external imbalances" which the statement said should be narrowed, there is no mention of the forex crunch that is near implosion. It is too good to be true for Escolano and his team to miss an element that is written all over the walls. It is an omission of a grand scale.

There is nothing like the shortage of money to spur a government into action. If past events do recur, as historians warn, then the state's inability to provide for its people is, as they say, a recipe for disaster on top of the political dysfunctionality. Although not an issue that has ever eluded the country, at least while the current Administration has been in office, the forex crunch gets worse now and then. And even if the most basic economic indicator of supply and demand points that the problem deserves structural solutions, Ethiopia's policymakers have prescribed non-structural fixes.

The inter-bank foreign exchange market traded around 12 million dollars in the 2015/2016 fiscal year, a figure 13pc lower than the previous budget year. For the same period, foreign currency reserves stood at 3.4 billion dollars, an amount that would not have even covered food costs for a couple of months if it was not for food aid.

The government has taken measures clamping down on the informal sector by mobilising a group of importers to replace those that it does not trust. Or by taxing all subscriber identity module (SIM) supporting devices that enter the country, even for personal use, as the Ethiopian Revenues & Customs Authority (ERCA) has taken it upon itself to do so neither competently nor in a coordinated fashion.

Abraham Tekeste's (PhD) Ministry of Finance & Economic Cooperation (MoFEC), for its part, enacted measures to cut spending on the acquisition of items like books, calendars, overtime pay and the use of government field vehicles by federal institutions. The Minister of Government Communications Affairs Office, Negeri Lencho (PhD), attests the measures, the last one, in particular, is the government's way of cutting unnecessary costs. But not even Negeri, or any other minister or director at the Customs Authority or MoFEC, has ever claimed that cutting back on these expenses will make up for a fraction of the 14 billion dollars in deficit imports have on exports.

Amongst the primary reasons put forward for the forex crunch is the very nature of the state. The worldview of those who captured it believes that there should be no earthly limits to its power to affect the kind of change they deem the state can bring. No checks and balances between the various agencies should be a roadblock on the path of an expansionary fiscal policy they chose to follow. They want to pick the winner in the market, using policy arsenal at their disposal.

Thus, massive government spending (with capital expenditure of over a 100 billion Br), a parallel market with premium rates over 20pc and a stagnating global economy, have created the perfect storm for those in charge of the nation's forex reserves.

Indeed, none is as acute a strain on the currency stockpile as the massive deficit on the country's current account, prompting the IMF to call for tightening the belt.

As the foreign exchange shortage has festered, businesses have been unable to import the goods and services they need into the country. The biggest financial channel of the nation, the Commercial Bank of Ethiopia (CBE), itself has shown that it cannot satisfy the pressing demand for forex, including meeting liabilities to foreign creditors and the increasing difficulties in footing the bills for the imports of fuel.

Not long ago, the Bank required the help of private banks to cover the Ethiopian Shipping & Logistics Services Enterprise's bill to the Port of Djibouti. The government has been forced to resort to methods like a currency swap - where the principal and interest payments are made in different currencies - with Sudan.

The future is grimmer, and the government is unlikely to take a breath from the issue. The trade deficit is expected to balloon by a billion dollars more every year until 2020 at least, according to IMF's estimates. Even as exports will continue to grow, it would be far outshined by imports.

What is evident is that demand is not meeting supply. And much can be done to address the issue from the supply side. Officials themselves, for all their sluggishness in dealing with the issue, are not blind to the fact that it would be a long time before the country can generate enough to meet its imports bill. Hailemariam, in his speech to parliamentarians before the figures on export revenues were released, had ominously predicted that the government's response to address the issue has not succeeded. Perhaps, alluding that the solution needs to take into consideration the structural problems.

The forex crunch could last years, even decades, though maybe not in the perpetually severe manner it exists in now.

Accepting the reality on the ground is a good beginning if it leads to prudent measures. As the government has alluded to in its seemingly facetious approach to budget cuts, the solution may lie in a shrewd budget allotment strategy. If the Revolutionary Democrats are dodged on their developmental approach, where the economy is driven by a heavy hand from the state, a check on public expenditure is crucial. It is time to tighten the belt in the interest of focus and prioritisation.

Granted, spending on infrastructure has created many jobs and stimulated the economy. But it has not come without its shortfalls. It is a long-term investment with a decidedly longer return period. One of the major imports is capital goods, a significant strait through which foreign exchange flees the country. It is also a strain on the state's coffers, with spending on capital goods constituting more than a third of the current fiscal year's budget.

It is rational to build roads that shorten travel time, and consequently, cost. It is sensible to construct dams that would lessen electricity shortage and improve output. But it is entirely illogical to undertake such palatial projects, in bulk, that are far removed from the bare necessities the forex stockpile has difficulty covering. There is no reason that they could not be undertaken in succession and the government does not distinguish between projects that could take precedence over others.

Take, for instance, the dozen different sports stadiums under construction throughout the country at the moment.

Can they not wait for rainy days?

Foreign exchange prioritisation itself is an area where much improvement could be attained. Its allocation could be used to promote competitiveness. Imports and payments the government has deemed crucial - in the agricultural and manufacturing sectors, mostly - could instead be used as instruments to reward productivity, efficiency and experience. As the surge in demand, with a limited increase in supply, has been the constant worry, businesses that could produce much with little resources are significant assets the Central Bank has and can continue to nurture.

There is hardly any instrument to be a judge than a market that is allowed to pick those with optimum returns.

Ethiopia

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