It was with much fanfare that Ethiopia launched its Home-Grown Economic Reform (HGER) agenda on August 28, 2019, at the lavish Sheraton Addis Hotel in Addis Ababa. The Reform was presented by Eyob Tekalegn (PhD), the State Minister of Finance and a member of the Macroeconomic Team under the Prime Minister’s Office (PMO) to hundreds of attendees at the Lalibella Hall where he commended the economic growth of the country registered over the past 15 years. But, he stated, this economic growth cannot be sustainable given the wide-ranging structural challenges the country is faced with. This way, Eyob declared, the country won’t attain the aspired goals by the year 2025.
Among the deficiencies in the economy that Eyob listed are the capital driven growth, hindrances to the agricultural sector including input shortages, as well as structural and institutional bottlenecks that limited productivity. The economy suffered macroeconomic imbalances that showed themselves in foreign exchange shortage, foreign debt distress (which the IMF puts at high), high inflation rates, as well as very limited source of finance to the private sector. Eyob underscored that the government would appropriate finance to the private sector and enhance their participation in the economy while the government maintains its economic role in sectors the private sector avoids.
He also announced that forex shortage won’t be a feature of Ethiopia’s economy within three years, although the Governor of the National Bank of Ethiopia, Yinager Dessie (PhD) said it would be difficult to avoid forex shortages in full given the country’s high demand pertaining to its economic development needs.
This same reform agenda was also presented to donors and development partners at the United Nations Economic Commission for Africa (ECA) hall where the main question from the attendees was the release of a comprehensive document detailing areas of intervention in which they could lend a hand.
Apart from PowerPoint slides released on the PMO website, the detailed plans the government intended to achieve through the reform agenda were not publicized although officials within the Ministry of Finance say they have a document that presents the plans in detail. The same is true for the ten years’ perspective plan launched this year under the motto “Ethiopia: Beacon of African Prosperity.”
The HGER agenda has been, however, facing staunch criticisms from various experts in the field of economics and development who said the plan is not home-grown as its name suggests in addition to lacking proper diagnosis of the causes to country’s economic downsides.
In an argumentative article published in September 2019, the renowned macroeconomist at Addis Ababa University’s School of Business and Economics, Alemayehu Geda (Prof.) stressed that the reform resembles the International Monetary Fund’s liberalization initiatives prescribed to the developing world. Hence, “it doesn’t look homegrown as strongly claimed,” he stressed.
He also debunks the fact that capital accumulation was the primary drive to the country’s economic development, which he argues against saying, “We know for a fact that the contribution of capital has been only 1.6%, labour 2.4% and technology/efficiency about 1%, respectively.” The plan also missed on pin pointing the “fundamental sources of the macroeconomic problems of the country.” With these deficits in diagnosis, Alemayehu argues, the interventions proposed are rather useful to a market with no structural imbalances than creating one by avoiding such imbalances. Hence, there is an “inevitable contradiction and mismatch between the macro policy and structural and sectoral policies envisaged to address the problems as well as the instruments of policy to be used for the purpose.”
A recently released HGER progress report by the Ministry of Finance (MoF), however, tries to show another perspective of the plan stressing that interventions targeted at macro-financial, structural, and sectoral pillars of the economy created resilience in the economy so that it could withstand shocks such as the coronavirus pandemic.
“The Ethiopian economy showed remarkable resilience in the face of global-economic downturns due to the COVID-19 pandemic,” the report declared, adding that, “The effects of the Covid-19 pandemic on the economy were mitigated through extensive policy measures and stimulus packages including liquidity support, tax relief, and debt restructuring to support affected sectors and prioritization of government investments.”
Highlighting that the economy grew at 6.1 percent, exceeding the Sub-Saharan Africa average of three percent, and the economy’s downward trend was reversed during the implementation period, it states this was realized as a result of improved revenue mobilization, export performance, debt management, and financial sector stability.
“Compared to the Ethiopian Fiscal Year 2011, tax revenue increased by 16 percent, the debt to GDP ratio decreased to 51 percent, and the budget deficit was maintained at 2.8 percent of GDP,” it indicated.
However, the calculations concerning budget deficits are considerate of external loans and grants and exclusive of domestic borrowing.
The interventions as a result of the HGER are also said to have increased the per capita income to USD 1080 from USD 983. Export revenue also showed a 12 percent surge, based on the report, bringing in USD 2.89 billion. But, excluding gold export revenue which grew by six folds, the customary high revenue fetching products such as coffee, pulses and oilseeds brought in lesser revenue during the second quarter of the Fiscal year 2020/21 according to the National Bank of Ethiopia. Fall in export volume and fluctuations in the international market decreased revenue from textile & textile products, fruits and vegetables and leather and leather products.
On the other hand, the National Bank of Ethiopia’s second quarter report for the 2020/21 fiscal year shows a decline in import value to USD 3.2 billion from USD 3.8 billion during the same period in the fiscal year 2019/20. The first qurter of the 2020/21 fiscal year had also seen USD 3.4 billion in import expenses.
In terms of jobs, it was reported that the economy was able to create 3.4 million jobs by June 2020 out of which 62 percent were permanent. Out of this, 1,545,000 jobs were created in the Small and Medium Enterprises sector while 1,018,000 went into the industrial parks and large manufucturers as well as public services. Tourism, creative industries, irrigation, horticulture, mining and tech created jobs to 783,000 job seekers while 16,000 employees were sent oversees. The remaining 25,000 received employment in other sectors such as housing and solar energy.
Because of the government’s avoidance of non-concessional loans, aka market priced loans, the public debt stock in terms of the GDP decreased by seven percent, reported the HGER progress. According to the report, the current status of public debt stock is 51.3 percent of GDP while the domestic stock takes 24 percent of GDP. The external debt stock stands at USD 55.8 billion.
According to the report, “The volume of disbursement from non-concessional sources decreased to 760mln USD in EFY 2012. The total share of non-concessional loans to total loans decreased by 18 percentage points – from 46 percent in EFY 2011 to 28 percent of total disbursements in EFY 2012. A total of USD 3.1 billion of loans was disbursed in EFY 2012, compared to USD 2.7 billion last year in the same period. A total of USD 4.7 billion of loans has been mobilized in commitments in EFY 2012.”
Even though the government reported this to be a success, the IMF report on Ethiopia in May 2020 observed “Ethiopia is facing a pronounced economic slowdown and an urgent balance of payments need owing to the COVID-19 pandemic.”
With an aim to create jobs to three million citizens in the 2021/22 fiscal year, the government plans to register a growth of 6.1 percent. This is on the backdrop of unattained nine percent growth planned for the just completed 2020/21 fiscal year. However, the IMF projects that Ethiopia’s economic growth will just be two percent with a projected consumer price index change of 13.1 percent.
Having failed to contain inflation at single digits over the implementation periods of the HGER, the government is faced with similar challenges in the context of conflicts and security challenges in various parts of the country. According to a recent report by the Central Statistical Agengy of Ethiopia, “the country level overall inflation rate (annual change based on 12 months Moving Average) rose by 20.2 percent in June 2021 as compared to the one observed in a similar period a year ago. The country level food inflation increased by 23.1 percent as compared to the one observed a year ago. The country level Non-food inflation rate increased by 16.4 percent in June 2021 as compared to the one observed in June 2020. The 12 months moving average inflation rate shows the longer term inflationary situation.”
The HGER also admits that inflation remains to be a challenge standing at double digits.
“It is expected that ongoing targeted reforms to address supply-side inflation drivers and broader policy adjustments would help to achieve the goal of a single-digit inflation rate,” the reform suggested. But this has been the direction from the outset and this report repeats similar recommendations of addressing the inflationary challenges. One new addition to this recommendation is amendment of sur tax which the government hopes to reduce inflationary impacts by lowering cost of production.
To mitigate the restricted international financial inflows and decreasing remittance as a result of the effects of the pandemic, recommendations from economists show that domestic resource mobilization and value added export could help the economy withstand the challenges ahead.