Thursday, July 25, 2024
In DepthAny way out of nation's economic doldrums?

Any way out of nation’s economic doldrums?

Many Ethiopians closely following political and economic developments in their country won’t forget the day when PM Abiy told a crowd in Addis Ababa that borrowing from the International Monetary Fund is like borrowing from one’s own mother. Not only his fellow citizens but leaders of several African countries as well were mesmerized by his remark, considering the track record of international institutions like the IMF.

Any way out of nation's economic doldrums?


Perhaps, he was deceived by the popular support he received from western countries and international institutions that were showering him with praises. Soon after assuming power and later forging a peace deal with neighboring countries, several leaders across the world came to his palace to show their appreciation and, of course, to assure him of their deep interest in working with him.

Just days after swearing in as a premier of the country, Abiy secured almost a billion dollars in financial assistance from the United Arab Emirates on top of twice that sum in investment pledge from the Gulf nation. His “homegrown economic reform agenda” easily won the hearts of executives of the World Bank, which committed three billion dollars to finance his economic blueprint. The International Monetary Fund did not also hesitate to support the agenda. The institution committed three billion dollar in loans to support economic reforms of Abiy’s administration. The European Investment Bank was also to extend its helping hand, willing to assist the African leader whom they were viewing as a reformist back then.

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However, things did not go well later. Abiy’s strong relationship with the west and the international financial institutions did not stay long. It was not something that he wanted, even though the political climate in his country forced him to accept the reality. Despite his willingness to adopt western liberalism and follow their economic principles, the war in north Ethiopia soured his relations with the west.

As the war with the Tigray People Liberation Front intensifies and the humanitarian crisis in north Ethiopia looms, the Bretton Woods institutions and their major funders, the US and Europeans, turned their back on him. At certain point, exactly during the fourth quarter of the last fiscal year, his administration received no grant to finance the federal budget deficit, forcing the government to use other financing mechanisms, including heavy borrowing from the central bank, which experts say is no different from printing money. Direct advance from the National Bank of Ethiopia portrays 169.4 percent upsurge.

It appears Abiy now wants to rebuild his relations with the west, though this can only be successful if he manages to end the war with the Tigray People Liberation Front (TPLF) through negotiation. His attempt to end the conflict, however, is being undermined by political differences within Prosperity Party, the ruling party that he is leading as a chairperson. It also depends on the effectiveness of his attempt to bring Issayas Afewerki, leader of Eritrean government, whose troops still control areas that was under the administration of Western Tigray before the war broke out.

Meanwhile, Abiy and his officials are in a rush to use every opportunity to persuade the international community that things are now getting back to where they were before the conflict started, while expressing the readiness of the administration to resolve the war in the north using peaceful means. Last month, a delegate led by Ahmed Shide, the minister of finance, attended the 2022 Spring Meetings of the World Bank Group and the International Monetary Fund (IMF), which took place from April 18 to 24, 2022 in Washington, D.C.

He was accompanied by Eyob Tekalign, the mastermind behind major economic reforms in the last three and half years, and his comrade, Mamo Mihretu, policy and economic advisor to the prime minister and CEO of the newly formed Ethiopian Investment Holdings as well as Yinager Dessie, governor of the central bank and his predecessor, Teklewold Atnafu, who is now chairperson of the board of the Commercial Bank of Ethiopia (CBE). The officials met executives of the two Bretton Woods institutions, including Kristalina Georgieva, managing director of the IMF. Ahmed called the meeting a success.

“It was a fruitful meeting where we met our national objectives and explained the reality on the ground to the leaders of the IMF and the World Bank. The diplomatic work helped us to clear the ambiguity over the security situation in Ethiopia. Understanding the change, IMF pledged to continue its financial support for the success of our homegrown economic reform agenda, while the World Bank, through IDA, promised to provide six billion dollars in financial support to Ethiopia to launch two new projects,” said Ahmed, while explaining the outcome of the meeting to state media outlets.

Observers in the policy arena welcomed the efforts being exerted by the government to rebuild relations with the Bretton Woods institutions and the west.

“The west controls every resource and it is impossible to follow a closed-door policy towards them, no matter how biased they are towards African countries. Be it the World Bank or the IMF, they are all under their control as they are major financier and a tool at their disposal when things go wrong with a country they consider as an ally. Russia is a victim and Ethiopia will face the same consequence unless it rebuilds its relation with the west,” said an economist who is currently working at an international institution with offices in Addis.

HR 6600 bill, which was on the verge of being approved by the US Senate, is among sanctions that US officials are threatening to impose if the Ethiopian government fails to end the war in north Ethiopia peacefully and make progress in giving unfettered humanitarian access to donors assisting people in need of urgent assistance in Tigray. The Ethiopian government is working hard to reverse the enactment of the bill which will impose a financial blockade against Ethiopia, including loan access from the World Bank and the IMF. S.3199 is another bill in the works at the US Senate to impose economic sanctions against Ethiopia.

“Despite claims that the act has been suspended now, the act is still active and Ethiopians and concerned stakeholders should continue their efforts to stop the ratification of these two bills which will hurt our country,” said Foreign Ministry Spokesperson Dina Mufti at a press briefing held mid-last month. It is a view shared by officials tasked with leading the macro economy, considering the economic pressure unfolding due to the war between Russia and Ukraine and problems piling up due to the coronavirus pandemic.

Inflation is already at its highest in over a decade, reaching 36.6 percent, becoming out of the government’s control. The country’s forex reserve is depleted and is only enough to cover less than one and half months of the country’s imports. The Ethiopian Economist Association, in its latest study released two weeks ago, attributed the inflationary pressure to the conflict in north Ethiopia, fall in agricultural production, fast depreciation of birr and surge in money supply, among others.

“Saving is deteriorating, another major consequence of the inflationary pressure,” said Degiye Goshu, an economist and director of the association, adding, “the contraction of the agriculture sector, leading the service sector to dominate the economy, is complicating the efforts exerted by the government to tame the inflationary pressure, as this is leading to mismatch between demand and supply.”

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