10 February 2018

Ethiopia: Vicious Circle of Weak Resource Allocation, Mobilisation


The existence of poor and inefficient domestic financial resource mobilisation has become a cause as well as a means for the nation's economic ills. To successfully implement development plans, the commitment of the government to work with the people is crucial, writes Kennedy Abebe (kennedyecondevt@gmail.com), an E-banking business development officer at Wegagen Bank.

Like most African countries that exist under the weight of massive debts and inconsequential domestic income, Ethiopia too grapples with the existence of weak and inefficient domestic financial resource mobilisation. It has been a long-standing problem, and we are now facing a deadlock. This is notwithstanding the fact that the nation is among few best-performing countries in the world in terms of gross domestic product (GDP) growth rate. The past fiscal year, the government estimates that the economy grew by over 10 percentage points.

Although one doubts how healthy this growth is, the government has drawn up the comprehensive first and second editions of the Growth & Transformation Plans (GTPI and GTP II) - which encompass numerous mega infrastructure projects. One good example is the billions of dollars-worth Great Ethiopian Renaissance Dam (GERD).

However, the implementation of these ambitious development plans require an estimated trillions of Birr. This seems unattainable if the government aims to finance the plans from internal sources. The existence of underdeveloped and inefficient domestic financial resource mobilisation and allocation will be a major handicap here.

In fact, such bottlenecks are mishandled to the point where they have become a reason for the on-going socio-economic and political problems of the country. Currently, the country's economy is suffering from an economic ill that is giving way to further macroeconomic instability. Thus, the economy arguably finds itself under the shadow of a recession.

There are multiple of symptoms of this fact. The economy has as a result become characterised by hyperinflation, massive unemployment, contractionary output, an ever-increasing budget deficit, a currency crunch, and stagnating exports both in terms of value and volume while the reverse is true for import.

What magnifies the seriousness of the problem is the living standard of the people, which is deteriorating if slowing growth in GDP per capita is anything to go by. Add to this one of the most burning issues that are often in public discussion, the adverse shortage of foreign currency. Both the government and the private sector is suffering from this shortage, contributing to the meltdown of the overall business and investment activities throughout the country.

The public sector is likewise handicapped by this shortage, where financing development has become tricky. The foreign currency reserve of the currency is far below than it should be, only able to cover 1.8 months of imports by the end of the past fiscal year, according to the International Monetary Fund (IMF).

Thus, as a remedy for the problems, the government has been introducing a number of irrational and fallacious policy measures and tight and restrictive regulations which are ineffective in bringing the anticipated outcomes.

They can only be best described by a famous quote the late Prime Minister Meles Zenawi once referred to and is often attributed to Albert Einstein, "doing the same thing over and over again and expecting different results."

Accordingly, our government is implementing the same policies time and again while expecting a different outcome. It is an indicator of the ineffectiveness of the government and a lack of innovative and risk-taking policymaking.

All the successive measures by the National Bank of Ethiopia (NBE) to arrest the money supply in the market have been unfair and unjust, merely aimed at filling the short-term gaps. They are being implemented at the cost of the private sector, which will subsequently hurt the overall economy.

This shows us that the government is merely using its authority to fix the economy, rather than rationally acting as the responsible organ of the country. Thus, the actions of the government taken on the financial sector and the private sector are significantly crowding out private investment. The recently noticeable slowdown in business and investment activities are clear evidence of this.

And the existence of poor and inefficient domestic financial resource mobilisation has become a cause as well as a means for all of these. Thus, to successfully implement the full-fledged development plan and sustain the on-going "renaissance", the commitment of the people and the government to work hand-in-hand is crucial.

The government's part in promoting public interest and maximising social welfare cannot be overstated here. It should work hard to finance its development internally, by developing sound policies, regulations and strategies that improve the efficiency of domestic financial resource mobilisation and allocation.

Creating a well-functioning, fair and competitive economic system that promotes the development of the private economy is another important reform that should be taken. Enhancing its institutional capacity, creating a sound and stable macroeconomic environment as well as an efficient bureaucracy will be even better. Above all, building good governance and a democratic system in the country are of prime importance.

These days, the political atmosphere in the country is not good. One of the consequences of this has been the inability to improve the efficiency of where and how resources are allocated - a system that has failed to eradicate poverty to the extent that it is satisfactory.

Even though the public at large has had the patience to make do with a ruling party for well over a couple of decades, this was in the hope of a better tomorrow, which has remained a tomorrow. It has become an immediate cause for social unrest and the current political situation. People are eager for change, and such violence suggests that too many are ready to pay the necessary sacrifice.

Therefore, with a country at a crossroads, it is a critical moment to re-think and deliberate upon the sorts of reforms that need to be taken. They should do this in an effort not to repeat the mistakes of past regimes who failed to bring about the necessary changes in the face of popular discontent. It is about time that officials sit down with the public and carve a path forward based on the interest of the public and only the public.

Kennedy Abebe (Kennedyecondevt@gmail.com), an E-Banking Business Development Officer At Wegagen Bank.


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