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    BusinessAs the war resumes, Ethiopia braces for a drop in forex inflow

    As the war resumes, Ethiopia braces for a drop in forex inflow

    Officials at the Ministry of Finance (MoF) buckle up as the federal government faces external pressure following resumption of the war in northern Ethiopia.

    The Ministry announced last week that the diaspora community could send any Euro, USD, or Pound to three bank accounts of the Ministry of Foreign Affairs (MoFA). They justified the move with the humanitarian and rehabilitation efforts underway to rebuild war-ravaged areas in the northern part of the country. 

    “The National Defense Force is tackling the attacks along with the public, and the sacrifice will bring long lasting peace to the country,” the Finance Ministry asserted, while describing how the army is fighting heroically in the war.

    The call from the Ministry comes in less than a week after the Ministry released the latest debt statistical bulletin, which indicated disbursement by external lenders is declining at a pace never seen in the last four years.

    Net inflow of forex from external sources stood at negative USD 551.9 million, while loan committed by the same lenders dwindled to just USD 290 million during the last fiscal year, six times lower than what was registered in 2020/21.

    Multilateral lenders also show little appetite in disbursing loans to Ethiopia last year, a situation which experts believe is linked with the war in the north and souring of relations between the Ethiopian government and Western countries, including the US.

    During the last fiscal year, multilateral lenders, which include the World Bank, the African Development Bank (AfDB) and the International Monetary Fund (IMF), among others, disbursed USD 773.1 million in the form of a loan. It is three times lower than what was registered two years ago, while showing a 16 percent drop from preceding year.

    “Re-engagement of donors remains critical. According to World Bank data, tax revenue only accounted for 6.2 percent of GDP in 2020. Even in an African context this ratio is very low and shows that the ability of the government to generate resources domestically is rather limited,” said Patrick Heinisch, an economist.

    In their recent public appearances, officials of the incumbent Prosperity Party appear to be adamant about putting an end to the war in northern Ethiopia, once and for all. 

    It was the third round of combat between the Ethiopian National Defense Forces (ENDF) as well as joint local forces, and forces loyal to the Tigray People’s Liberation Front (TPLF). Since the conflict first started in November 2020, the country has experienced three rounds of war. 

    Redwan Hussien (Amb.), the Prime Minister’s national security advisor, said during the regular Addis Wog discussion that took place at the Office of the Prime Minister on September 5, 2022, that the government has been very patient with the war. He, however, appears to be certain that there will not be another round of it.

    “If any party is coming to terms for peace, there can be a chance. But there is no more chance for those with the desire to dismantle the country,” Redwan said in the session.

    The government is pleading with the diaspora community for assistance, sounding clichéd but seemingly desperate in its appeal. The main motive behind the Ministry’s call is to collect assistance for any expenditure the government incurs because of the war, with amassing foreign currency coming along as an added advantage.

    For Getachew Asfaw, a veteran economist who had previously served at the former Planning & Development Commission and the Ministry of Finance, urging the diaspora community to transfer foreign currency to the country and increase remittance can be a better option than asking for help.

    “Instead of giving donations, sending their foreign currency through the banks can help the country more,” Getachew said.

    Seeing the figures of the country’s economic performances in the last few years shows how the war is taking its toll on the economy and diplomacy.

    From the loss of 5,000 jobs in a single industry park, Hawassa, due to the revocation of Ethiopia from the Africa Growth and Opportunity Act (AGOA) by the US government to a fall of foreign grants, several indicators show the grim reality in the economic front, though officials claim otherwise.

    There is nothing but the war in the northern Ethiopia to be blamed for this, as the economists emphasize. Domestically, the lack of peace brought the loss of countless lives, in addition to the unbearable challenges for consumers with the skyrocketing commodity prices.

    In the same Addis Wog discussion earlier this week, Fitsum Assefa (PhD), Minister of Planning and Development, seemed to be taking pride of her government’s performances while explaining the macroeconomic situations and how Ethiopia managed to bear the pressures.

    The USD 22.7 billion foreign currency inflow to the country was what Fitsum has been mentioning repeatedly as an achievement. But the data shows how the inflow is crawling slower than the drastically increasing outflow.

    Compared to last year, the forex inflow grew by less than USD half a billion. Export of services leads the composition with USD 6.2 billion, among which over USD five billion is generated from Ethiopian Airlines. Remittance, export of goods and foreign direct investment (FDI) follow in the composition with USD 5.2, 4.1, and 3.2 billion, respectively.

    FDIs had performed better with USD 3.9 billion during the preceding year due to the USD 850 million license fee Safaricom paid. Foreign currency from FDIs during the just ended fiscal year declined to USD 3.2 billion.

    The unimpressive performance in economic diplomacy is due to the war, for economists like Wasyhun Belay. He believes the Western countries punish in such forms for deteriorating relationships.

    “Peace is very significant for a poor country’s economic integration, because loan and grants can be big tools for Western countries. The diplomacy capacity has huge role to play in times like this,” Wasyhun said.

    The momentum of forex inflow was maintained mainly by the growth of goods and services export, and remittance, which together recorded about 70 percent of the total inflow. Wasyhun believes these are the outcome of the crisis in the international market and the great diaspora homecoming last fiscal year.

    Skyrocketing international prices of coffee and gold attributed to the highest income from goods export to Ethiopia.

    Nevertheless, the import bills were exaggerating the outflow. The report from Cepheus indicates that the import bill grew by 27 percent during the ended fiscal year compared to the preceding year, growing to USD 18.1 billion from the USD 14.2 billion. Cepheus also estimates an extra USD four billion in outflows.

    “We estimate that the overall balance of payments showed large deficit of nearly USD two billion in 2021/22, which had been covered by a drawdown of the National Bank of Ethiopia’s forex reserves,” reads the report.

    Furthermore, the report states that the national forex reserve fell by USD 1.4 billion in the ended fiscal year from the USD 2.9 billion in June 2021, to cover the deficit.

    Getachew debunked the government for adding up the USD 6.2 billion of service export income to the inflows. He claims that only the net income of the forex in service is what accounts.

    “Service isn’t considered in the outflow as not only imported physical goods should be considered,” Getachew said.

    With 90 percent of growth in a year, the net income of Ethiopian Airlines stood at USD 937 million. The Airlines accounted for 80.6 percent of the service exports the country registered last year.  

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