Although the import bill has shown a decline last year, this year's export revenue remains to disappointment with barely half of the target met. As macroeconomic problems continue, international financial institutions advice the government to consider making cuts to government expenditur. If the budgets are not modest a further devautation of the Birr is inevitable, reports YARED TSEGAYE, FORTUNE STAFF WRITER.
Amy and Jonathan Fiechter, United States' expats, living in Ethiopia for the past five years with their four children, are feeling the recent increases in the price of goods.
They usually make a long monthly drive to groceries and supermarkets in Addis Abeba from where the couple work and live in Gojjam, Northern Ethiopia.
Last Wednesday around lunchtime, the couple were at Bambis Supermarket on Jomo Kenyatta Street. The store was established in 1958 by its Greek owner, Charalambos Tsimas, a.k.a Bambis, a pioneer in the wholesale and retail business.
"I am looking for dairy products, margarine, jungle oats and Holland creams but none of these are here," Amy says. "Over the past three years, these items either kept vanishing regularly or their prices have been getting more expensive."
The family's monthly expenditure for good has now risen to 500 dollars from 300 dollars, according to Amy.
At the supermarket, packaged whole-grain pasta from Italy, which used to sell for 50 Br is now selling for 81.20 Br. Prices for olive oil has risen to 420 Br from 300 Br.
The food shelves at Bambis are not the only ones hit by supply shortages. Shi-Solomon Hailu Supermarket, which operates in the capital with two branches, one near the National Theatre and the other around Meshualekiya, has also faced the scarcities.
"We have been hit by a major supply paucity in the past few months," Tadios Kebede, sales representative at Shi-Solomon Supermarket's branch near the National Theatre, tells Fortune.
This dearth of supply for imported goods has to do with the foreign currency crunch the country is currently experiencing. Importers are forced to wait up to a year to open letters of credit (LC) to fulfil transactions. This macroeconomic failure, associated with the lack of foreign currency reserves that stands at less than two months, cannot cover the nation's import demands. According to the International Monetary Fund (IMF), these shortages have to do with the stagnant national income over the years and growing expenditures by the government.
The problem was given weight in last month's half-period performance report of the Second Growth & Transformation Plan (GTP II) prepared under the auspices National Planning Commission. The report shows that one of the key components of attracting foreign currency in the GTP II is exports, which have failed far too short of established goals.
For the 2015/16 fiscal year, export earnings had been targeted to grow to 6.8 billion dollars under the GTP II. Unfortunately, export figures only cracked the three billion dollar mark last fiscal year, while export earnings for the first three quarters of this year have remained disappointingly low at 2.1 billion dollars.
There are a number of factors that led to the reduction of foreign currency reserves including stagnant remittances that grew by only 0.2pc last year to 4.4 billion dollars. Another factor at play in reducing foreign currency reserves is a rising import bill, which has been expanding except for a slight dip last year.
Last year's import bill showed a decline to 15.8 million dollars compared to the 2015/2016 fiscal year expenditure figure of 16.7 billion dollars. Nonetheless, the IMF estimates that the number will get closer to 17 billion dollars by the end of the current fiscal year.
This adverse macroeconomic situation is further complicated by the 15pc devaluation of the Br against a basket of major currencies last October. The measure was taken by the National Bank of Ethiopia (NBE) to assure price competitiveness of exported goods on the global market. With the third quarter export performance report out, foreign currency earnings are shown to grow by just over four percent compared to the same period in the previous year.
Meanwhile, inflation has spiked and has stayed in the double digits, with last month's performance standing at 13.7pc.
While presenting the next fiscal year federal budget to parliament, Abraham Tekeste (PhD), Minister of Finance & Economic Cooperation, said "This year's export revenue has underperformed similar to past years, showing that fundamental improvements are needed."
The target for export revenues during the last nine months was 3.66 billion dollars, with barely half the target met. Agricultural commodities earned 1.58 billion dollars, with over 332 million dollars and almost 110 million dollars generated from the manufacturing and mining sectors, respectively.
In the prior fiscal year, the share of manufactured goods exports of the GDP declined to 0.5pc, compared to the 0.6pc obtained two years ago.
"If we continue down this line, growth will eventually dissipate," Abraham added.
Abdulmenan Mohammed, a United Kingdom based financial analyst with over 15 years experience, believes that the devaluation of the Br, which is not part of GTP II, is indicative of the failure of the government's target.
"Export performance will continue to underperform for the remaining implementation period of GTP II," he says.
The effect of weak exports and the associated shortages of foreign currencies are not limited to non-basic goods. The problem affects other importers of basic goods such as butane gas, or liquid petroleum, used as energy source for both commercial and private uses.
"We import butane gas from Sudan and Djibouti. We had a good supply capacity three months ago. But as the forex shortage increased, our supplies have dwindled," said Tewodros Hailu, Commercial Department head of Ghion Gas, a company that has been in business since 1962 and one of the wholesale importers of the gas.
The nation is a net importer of fuel and processed foods. The major trading partners of the nation are China, Saudi Arabia, Germany and Somalia.
"I do see the debt and the current account deficit of Ethiopia as a huge problem. There is a 50pc chance that it knocks Ethiopia for quite a loop in the next five years. That is still consistent with a longer-term optimism, however," Taylor Cowen (Prof.), a United States economist at George Mason University wrote to Fortune.
Ethiopia's debt to GDP ratio stood at 56pc last year.
As the macroeconomic problem continues, international financial institutions such as the IMF advice that the government consider making cuts to expenditures.
The federal budget that the Ministry presented to parliament last week appears to heed IMF's call for cuts in budget outlays. The coming year's budget stands at 346.9 billion Br, an increase of around 7.5p as compared to last fiscal year's budget.
Abdulmenan fears that given that expenditures continue to be high as shown in this year's proposed budget, a further devaluation of the Br is inevitable.
According to Eyob Tesfaye (PhD), a macroeconomist and a research fellow with vast experience, unless the manufacturing sector grows the problems will persist, since agricultural commodities are prone to price volatility of the global markets.
"Comprehensive economic reforms and mature planning that consider government expenditures are crucial," he told Fortune.