18 February 2018

Ethiopia: Govt Determines to Carry Burden Solo, Given Private Sector Could Help


Embracing the concept of a developmental state, the ruling EPRDF has sought to source its legitimacy from economic development. And at the end of the 2000s, there were enough roads, schools, hospitals, dams and university graduates for the ruling coalition to claim that Ethiopia could, within a decade and a half, become a lower middle-income economy.

A tool often used to substantiate that claim is the gross domestic product (GDP), a measure of products manufactured and services provided in a national economy. Ethiopia's GDP has been recorded to be in the double digits, uninterrupted for close to 15 years now, and unprecedented in the nation's economic history. International institutions have not been disappointed either, singing along the same lines of robust economic growth that is amongst the highest in Africa, and even the world.

A recent report by the World Bank on the wealth of nations, for instance, suggests that Ethiopia is amongst the low-income countries where wealth has increased the most since 1995 - only four years since rebel forces under the EPRDF toppled a military government, and their leaders took control of the government. Indeed, for a nation with a history of the increase in GDP in the single digits, if not shrinking below zero, when the party coalition took office, it stands a couple of decades later at over 70 billion dollars.

The devil though lies in the detail. The EPRDF government believes that the GDP growth rate for the past fiscal year stood at 10.8pc, but it is hard to gauge out what exactly accounts for such growth. Akin to the past couple of years, exports have stagnated, and have not braved the once possible three billion dollars mark. Import bills kept swelling. A consequence of this is a dilapidating forex reserve.

Low tax revenues exasperate this. Unlike its overall GDP growth record, the revenues that are collected from taxes is below the average of low income developing countries, standing at 11.8pc of GDP. A consequence of such a shortfall has been the inability to afford the government's ambitious development plans. It has been a challenge that the government has tried to by-pass through loans, ending up with a public debt worth over half the GDP.

Surprisingly, even remittances are not performing well. Despite a jump by over 16pc a couple of years ago, private transfers grew by a slight 0.2pc last year to over 4.4 billion Br. As a significant source of hard currency, raking in even higher capital than exports, it inevitably figures into why both the public and private sector is grappling with foreign currency unavailability.

The performance of foreign direct investment (FDI) starkly contrasts. It grew by 27.6pc. Overseas investments from countries such as Turkey, China and India kept flooding in, shoving aside possible red alerts such as the on-going political unrests, and assuring that projects with a capital of well over half a billion Birr become operational.

What this indicates is an economy that is, akin to exports, undiversified and suffers from profoundly structural constraints on the supply side.

Growth is buoyed by a single area of the economy, which suggests a couple of things. Faster growth can be achieved under circumstances where other sectors of the economy are as productive, and that it is teetering on the fringes of a recession in the instance that overseas investments start to falter.

Considering these are crucial for the first half of the current fiscal year, it points that there is little to indicate that the precarious condition of the economy will not persist.

Despite the devaluation of the Birr, in a lazy effort to attract global consumers by making goods cheaper, exports are not performing as the government would like to see. In the first half of the current fiscal year, only 61.2pc of the targeted 2.2 billion dollars was gained.

Domestic revenues, a great deal of which is made up of tax revenues, seems to be performing somewhat better. But it still confined within the government's low ambition for tax collection. It is a good sign that over 83pc of the targeted amount was collected during the same period - it is unfortunate that the 230 billion Br target for the current fiscal falls at around 12pc of GDP.

Such low growth indicators could mean stagnation. But a pullback from the darling of the government, which is FDI, could mean worse, such as a recession. And there is no reason to believe otherwise, for such investments are already showing signs of retreat.

For instance, although the growth rate of FDI for this year was impressive, which the IMF attributes to "investor interest in new industrial parks and privatisation proceeds," it has slackened, again. FDI growth rate of 27.6pc does sound nice, but it must get the authorities worried that investment from overseas firms grew by over 48pc just the year before that.

That is perhaps a consequence of political unrests in places such as the Oromia Regional State that is finally eating into investor confidence. Over 300 investment projects (both by overseas and domestic firms) became operational three years ago, compared to a mere 19 the past fiscal year.

And apparently dwindling FDI could dip further as the standard of living gradually and inevitably improves. A cheap labour force, aside from improving infrastructure, is a feature often ascribed by investors as a pull factor to Ethiopia. It is naive to expect the lowest electric tariff for a kilowatt-hour in the world, and another gimmick used to impress prospective investors will stay static forever. With the state utility company in massive debt and unable to service it, there will come a day when the honeymoon will be over.

Take these away, and what remains are most of the headaches owners of businesses dread, such as wanting logistics, shortage of hard currency and bureaucratic government institutions.

All of this is happening as population numbers increase, and GDP growth becomes less and less equipped to handle demand. GDP per capita has shown persistent improvement but at a slower rate than it ever used to. Last year, it grew by just 7.8pc while it improved by double that amount only four years back, signalling that resources are bound to be further stressed.

Such pitfalls are not a result of a failure in taking the initiative to plan ambitiously or, in some instances, to walk the talk on reforms. As the Revolutionary Democrats envisioned, a structural economic transformation is taking place, with the industry sector growing the fastest. It is instead a case of a failure to rise above politics and party ideology to see that the economy is heading in the wrong direction - from one that is led by low-productivity in agriculture to that of an economy driven by a low-productivity industrial sector.

Depressed domestic revenues and a weak external sector have long been the symptoms of a lack of productivity and supply-side issues. As the government has proved throughout the years with massive public investments and a slew of sectoral reforms in a bid to improve either macroeconomic fundamental, there is no getting around this fact.

Without a productive private sector that can contribute to the public coffer by paying taxes, exporting goods overseas to draw in hard currency and meeting domestic demand, the government is left alone to carry the burden of sustaining its growth-legitimacy. It only means capital for a slew of public projects that have to be sourced elsewhere and a demand that will look towards overseas markets to satisfy supply. The consequence is a trade deficit, and massive external debt such as Ethiopia has incurred now, the former amounting to over 19pc of GDP and the latter over 30pc.

Fixing the productivity quagmire thus should be the government's primary focus. It has to assure that essential resources to individuals and businesses - land and hard currency - are allocated to areas of the economy that can have optimum returns.

And under an environment where the government has all the information about a particular sector, it should continue to be the ultimate arbiter of where those resources must be channelled. But it is unlikely that any government, however transparent or aided by extensive data, knows all those that are productive or have the capacity to be. It is similarly impossible to gauge out when and how productivity will come to the fore.

But in a free-market economy, where the allocation of such resources is a function of the interplay between demand and supply, productivity will rise through mere evolution. It is similar to biological evolution, in that the market forces will not only reward those able to adapt and innovate but will diversify the economy.

If some goods or services are in demand, someone somewhere is bound to notice it, start supplying the product and acquire the commercial acumen to sustain that business. Thus, following flexible land and exchange-rate regimes is indispensable.

But that has to be complemented with more robust sectoral reforms that have not been the case thus far to assure that a healthy competition exists. It occurs if the telecom and logistics sectors are fully liberalised, and the domestic finical industry is willing to host overseas banks. It is not only that companies will gain equal footing with the heavy-lifters of the markets, but customers will have services and products streamlined. They can be empowered.

The spillover effect this could have on the economy can be enormous. It could mean better and new products from these sectors, improving the efficiency of the businesses and individuals that are privy to them. Pair this with a financial sector that can likewise fetch better services, which in effect will draw in more deposits for loans to the teetering private sector.

None of this though could happen without the political will of the Revolutionary Democrats to escape their leftist orientation, and give market forces a due chance at the driver's seat.


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