8 August 2018

Ethiopia: Ways to Unleash Ethiopia's Financial Resource

Although mobilization of domestic resources has been improving steadily in Ethiopia, declining share of domestic revenues with respect to GDP has showed stress over the past few years, according to government officials and economists.

Various experts state that the level of domestic saving in Ethiopia has been low, leaving the sustainability of the country's encouraging growth vulnerable to availability, access and conditionalties of external resources. The cause and ways to address the issue is the focus of this news piece.

Talking to The Ethiopian Herald, Alemayehu Geda, Professor of Economics at Addis Ababa University, says that the poor performance in terms of domestic resource mobilization comes down to a long time running deficit on the side of public saving. This is the case because public expenditure has always surpassed what the government collects from taxes and from other domestic revenue streams like public enterprises such as ethio- telecom etc.

Also, he adds, in terms of private saving, increasing interest rate in banks does not trigger saving in Ethiopia's case. "What trigger saving in private household in the country's case is an increase in average income, which has not really increased, and if it did, it went to few people, despite the country's impressive economic growth in relation to Africa." For instance, if National Bank increases interest rate in the hopes of mobilizing saving, it would be a loss at it would not bring any change, he elaborated.

Thus, in order to bolster national saving, and help the country attain the achievable potential in mobilizing financial resources, the Professor suggests short and long term solutions.

"In the short term, I recommend expanding mobile banking", he suggests before adding how the huge expansion in banking branches of commercial banks in the past few years has enabled the bank to successfully mobilize (domestic resources), and especially the saving in the rural areas.

"Given that setting up banking branches is more expensive than mobile banking, I recommend working on expanding the latter as it affords us the same service whilst putting the money longer for the banking system to use it. Buying, selling, or trading through your mobile means that the money will be still there in the banking system while you are able to do with it whatever you want."

Arguing that expansion of mobile banking can present short term solution to the issue of domestic resource mobilization, Alemayehu points out something like Safari, Kenya's mobile payment system, which provides the majority of the country's with banking access.

But, the long term solution to it is increasing income, he opines. To this end, he says, bringing in inclusive economic growth is important, as economic growth without inclusive income distribution is pointless. "To bring this, increasing the productivity of the agriculture sector, and building on the labor intensive manufacturing area the government initiated is the way to go."

Finally, he points out domestic resource mobilization will be pointless without including foreign exchange generation as part of the package. "Raising domestic resource is important and crucial, of course, but it would not be fully effective if it is not laced with improving our foreign currency saving and export performance."

Ethiopia imports 70 percent of the goods it needs, so, even if we save huge amounts, it would still not be enough, as we need foreign currency to bring in the goods we need. Thus, we should be working on saving foreign currency as well by bolstering our import substitution, among other initiatives, he concludes.

There are many factors to consider when talking about low saving for Atlaw Alemu (PhD), Economic Lecturer at Addis Ababa University, like demographic factors, dependency-ratio in a society, but most importantly, he believes the fact that labor price being low discourages saving, and addressing this issue will not only help enhance private saving, but it is also a way to narrow income gap.

He believes boosting the businesses sector can serve as a way to bolster domestic savings. With this in mind, he mentions creating conducive environment for start-up businesses to flourish. He suggests further simplifying, the process, rules and regulations so that entrepreneurship takes off, which is great for the economy in not only encouraging saving, but also in creating job opportunities for young graduates.

He argues this would give people and young graduates, the impetus to save and utilize whatever resources they have on various business ventures and creating jobs. It would also help people minimize expensive festivals, marriage and other extravagant festive culture in the country, according to him.

The other is the tax system. Atlaw says that the tax system should further be improved, and be more fair to the business community, and transparent on what it is used on along with awareness creation on the societal benefits and values of taxpaying. Such initiatives will help further increase tax compliances, and broaden the tax base, he stresses.

Eyessuswork Zafu, Chairman of Board at United Bank, for his part cites that the country's economic growth has been achieved mainly through public investment, and nurturing the private sector is the optimal way to increase the saving rate in the country. "It is through the private sector that it is possible to increase domestic savings."

Zafu states that so far the private sector was not that much the centerpiece of the Ethiopia's growth narrative, but in recent times the sector is being given bigger push so that its full potential will be unleashed. And I believe that our saving will get to perform better in parallel to this, he concludes.

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