Ethiopia: Export Strategy Needs to Consider Political Unpredictability


It seems that Ethiopia should be a country in much better footing, in terms of trade, than North Korea. North Korea suffers from dilapidating trade sanctions and is a command economy with negligible private sector participation in its economy. Yet, the nation's export revenue stood at almost three billion dollars in 2016, according to estimates by the CIA World Fact Book, well over that of Ethiopia's.

No two economies are alike. For Vietnam, for instance, exports are the backbone of the economy, while for the United States, it is just one more important component of its economy. For Ethiopia, which does not suffer from a single trade sanction and has a relatively robust private sector, the situation has been uneasy. While exports have continued to remain stagnant for the past three years, the economy has grown, shrinking the contribution of trade and swelling the trade deficit.

The bad news persisted in the last fiscal year, but it could not be said it is for lack of effort on the part of the government. Industrial parks have continued to be built, and incentives are in place to attract foreign investment.

This is not to mention the bitter pill the government swallowed by devaluating the Birr by 15pc against a basket of major currencies last year. The move risked inflationary pressure, which the government tried to curb by hiking interest rates and instituting credit caps, only to end up with an annual average inflation rate of 13pc.

But it was evident that these efforts would not pay the dividends the government had hoped for, as second and third quarter reports have shown. The projected revenue from exports was 5.23 billion dollars. Even the International Monetary Fund, which had advised against an overvalued Birr, was optimistic, projecting that the nation would earn 3.3 billion dollars.

Export revenue did not just remain stagnant as feared but declined over the last fiscal year. Ethiopia generated 2.83 billion dollars, 2.4pc lower than two years ago. The top performer in the economy was agriculture, from which almost 2.2 billion dollars was earned and manufacturing brought in close to half a billion dollars. This is the third year in a row that export revenues have remained below the three-billion-dollar mark.

A number of reasons have been advanced to account for the decline including contraband, shortage of inputs and delayed investment projects. But the major contributing factor has been reported to be political instability. Having reared its head three years ago, political unrest has persisted even after changes in the cabinet and premiership, and even after two states of emergencies have been imposed and lifted.

As has been evident in the past couple of months, unrest across the country are highly disorganised and conflicts have continued to occur along lingo-cultural lines. Violence is becoming common and normalised, with law enforcement bodies failing to fulfil their duties of ensuring the safety of the public.

The unfortunate results have been the internal displacement of hundreds of thousands of people, the loss of many lives and the destruction of property. The consequences have also extended to the sapping of investor confidence.

The free flow of people and goods across administrative demarcations is fundamental to the economy, as is investors' willingness to invest, employ and expand. Without security guarantees and free movement, economic developments can be hindered. It shrinks the market base where businesses may have hoped to enter, leads to lower production levels, diminishes employment opportunities and curtails the circulation of money in the economy.

Adding to this woe is how the severe political malaise that the nation faces distracts focus away from the current macroeconomic unease. It can lead to a more frequent switch of macroeconomic policies aimed at solving short-term crises, which in turn may raise policy uncertainties.

The effects of the political turmoil are severely affecting an already weak private sector that is suffering from lack of access to credit, infrastructure and skilled human resources. Instability is the most significant challenge facing the nation and will result in a retreat from risk-taking by companies, with fewer new businesses opening and older ones not expanding. This leads to cowed businesses that are unable to compete in the international market.

The policy initiative the nation has followed since the beginning of the Second Edition of the Growth & Transformation Plan had ambitious goals that, had it come to fruition, it would have helped. The plan was to follow an exchange rate policy that promotes exports, make logistics efficient, facilitate infrastructure and incentivise through land and foreign currency prioritisations.

But the Transformation Plan never envisioned the political turmoil that engulfed the nation soon after its launch in 2015 when the economy entered an unchartered territory. In the past, the culprits were enumerated as an undiversified economy, irregular global prices and poor economic policies that arrested competitiveness. Businesses can work around regressive policies and weak contract enforcement, but the unpredictability of a political environment ties their hands.

Robust law enforcement and the institutionalisation of power are the most important factors that can help revitalise the economy. Adding to this ought to be a clear policy initiative from Prime Minister Abiy Ahmed's (PhD) administration that the external sector remains an integral part of the government's economic strategy.

Just as significant would be refocusing the economic strategies towards building an external sector that is flexible enough to adapt to the ongoing political tensions within the country.

This can be achieved by beefing up the capacity of the Trade Ministry to make targeted assessments of the effects of the unrest on the external sector, and instituting appropriate regulations that can cushion the impact. In this dynamic environment in which the nation has found itself in, strategies can neither remain static nor target-based.

Another important factor that the government needs to consider is the importance of the service sector for the export sector. It is commendable that the tourism sector is getting into focus as revenues from the goods' export sector dry up, but other avenues such as offices services ought to be included. They require lesser investment capital, thus lesser risk on the part of investors.

Expediting accession into the World Trade Organisation and striking bilateral deals, which take lesser time than multilateral ones, can also help reduce policy uncertainty. International agreements are difficult to reverse and provide proof of predictability.

Export is indispensable for improving foreign currency generation, employment opportunities and technology transfers. While the political ills of Ethiopia are distressing, the administration ought to be well aware that deteriorating macroeconomic factors only add to the turmoil.

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