Tuesday, January 17, 2023
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Money TalksWhat does Ethiopia need most: a reform or reconstruction?

What does Ethiopia need most: a reform or reconstruction?

The least to be expected in the post-Pretoria peace accord is the reconstruction and redevelopment of war-torn Ethiopia. However, officials from the Ministry of Planning and Development (MoPD) and the Ministry of Finance are torn between sticking to the homegrown economic reform plan and introducing a new recovery plan. But the worst is that there are no resources for both plans. Another battle is ensuing between the Ethiopian government and donors over whether to focus on reform or reconstruction.

Is it a reform or reconstruction plan Ethiopia needs at this moment, as there is no consensus reached regarding where to begin the journey of the next three years? Is it the Tigray reconstruction plan document that needs to be beefed up for the national level, or a new development plan that needs to be crafted? Is the financing mobilized from donors or domestic sources?

After the first Homegrown Economic Reform (HGER) was phased out, the Ethiopian government could not mobilize financial assistance from donors without a new plan. This plan has to be short-term. Understanding the need for a new plan, Eyob Tekalign (PhD) and other officials at the MoF embarked on crafting a new one, coming up with the previous reconstruction and recovery plan with minor retouches. But the MoPD also came up with another plan, which is the HGER 2.0.

Before the second Homegrown Economic Growth Reform (HGER2.0) came to the table, there was the three-year recovery plan, tabled by the MoF.

The two ministries are beefing up the reconstruction and redevelopment plan. This means they are beefing up the Tigray reconstruction and redevelopment plan, which was previously launched with the support of UNDP. It has a similar template model. The element of reform will be added to the reconstruction plan.

“Basically, a single plan document will be released, combining both the reconstruction and reform components. The MoF will use the reform component, while the MoPD will seek for finance using the reconstruction and redevelopment section. They will mobilize resources together,” an official involved with the process said.

But the general consensus and direction now are toward adopting a plan focusing on reconstruction and redevelopment. There will be an overarching plan for the next three years that focuses mostly on rebuilding and redeveloping but also has some reform goals.

But still, there is another disagreement between the Ethiopian government and donors. Donors are insisting the plan should focus on macroeconomic issues in Ethiopia. Debt, exchange rate, inflation, payment balance, and other external and internal scenarios should be at the center of the new plan, according to donors.

On the other hand, the Ethiopian government insists the new plan should focus on real sectors such as agriculture, industry, and other real sectors, even though they agree macroeconomic issues should be reformed.

But donors and experts on International Financial Institutions (IFI) are perplexed. They argue that reform cannot happen while the existing exchange regime is in place and that the real sector cannot be reformed within the existing macroeconomic distortions. For instance, they say agriculture and its value chains are being distorted by the exchange rate regime. Reforming industry, improving the balance of payments, bridging trade deficits, and other issues are impossible to achieve without first reforming the exchange rate regime, according to donors.

“Even the first HGER was not fully implemented,” says Abdulmenan Mohamad (PhD), a financial analyst based in London. “How does the government intend to implement HGER 2.0? Plus, core institutions like the central bank should be reformed first in a bid to reform the economy.”

Abdulmenan says the government should introduce a reconstruction and redevelopment plan, shelving the HGER. “The government should not fall into the trap of IFIs and western countries’ advice. They always push for reform, deregulation, liberalization, privatization, and getting the market price right.” He claims that their ultimate target is to create space for their investors.

“They say the supply side improves if macroeconomic problems are addressed, but they do not care about the negative impacts on Ethiopia. They do not care about inflation rising in Ethiopia, but they push for further devaluation,” Abdulmenan explained.

Officials at the MoF and other government officials wanted to go back to the old development models, which meant starting from the real sectors.

“The current scenario in Ethiopia does not allow such approaches. With old development plans, focusing on the real sector is now difficult,” an economics analyst who spoke to The Reporter on condition of anonymity said.

The economist believes that increasing agricultural growth by a certain percentage cannot be achieved under current conditions. “This was possible before because the macroeconomic situation was relatively stable.”

Today, the global dynamics have also changed. Previously, there was a lot of capital to be invested, and there were a lot of international creditors willing to give loans, including China. But now, with increasing domestic issues around the world and global uncertainty, investors and funds are not keen on significant outlays, and the cost of capital has also climbed.

The cost of capital rises whenever there is less capital, and competitors vie for that small amount of capital. China, Africa’s biggest lender, is also working to reduce its external exposure, further impacting countries like Ethiopia that were dependent on the Asian giant to finance their infrastructure development projects.

Devastated by a two-year war between the federal government and the Tigray People’s Liberation Front (TPLF), Ethiopia is in a precarious state. Focusing on real sector growth may seem a luxury at this point, which is creating a big divergence between the government and donors.

Whatever plan Ethiopia approves, the budget deficit will be large, unlike in 2018-19, when donors provided funding. At the time, the IMF approved a USD three-billion loan, the biggest in history.

Currently, Eyob is steering the formation of the new planning document.

“They are not getting attention or interest from line ministries. Other ministries and officials are not excited about the new plan, HGER 2.0. During their meetings, other ministries’ officials expressed no appetite for a reform agenda at this point in time. Previously, all government officials were pro-reform, but now they see no tangible light at the end of the tunnel regarding the new program budget,” the official said.

Line ministries say reform requires huge sums of money and it cannot be done unless donors release new funds. But they are happy to implement new plans and projects if the program budget comes from donors.

On the other end, donors’ appetite is at its lowest, and trust in the government is at its lowest level. Line ministers are also focused on other pressing issues rather than pushing for a new reform plan at this point.

Government officials are currently concerned about reshuffles and, in some cases, imprisonment as a result of the widespread corruption.

Even though Prime Minister Abiy Ahmed (PhD) met with US and African leaders in Washington during the US-Africa summit, not much has changed in terms of financing from outside the country.

The US government’s position is unequivocal.

The White House, the State Department, the Treasury, the Trade Department, and other agencies have all made it clear that if they want to fund development programs in Ethiopia, they will have to decide as a group. The four agencies must reach a unanimous decision and will not act until they reach a consensual agreement regarding the issues in Ethiopia. Multilaterals did not also change their stance on Ethiopia.

So far, the west is just sending positive signals, saying, “We move when you move.” It is this signal that is confusing Ethiopian officials, who think the US is about to release funds. The arrival of technical-level experts in Ethiopia to conduct assessments and design pipeline programs is a clear indication of a positive move by the multilaterals. However, no technical teams have been sent to Ethiopia recently.

IMF experts might arrive next month, according to Ahmed Shide, Minister of Finance. The IMF also failed to release its debt distress consolidation analysis for Ethiopia, which was due in October or November. The report will indicate the IFIs’ stance. The IMF is pushing the G20 to react.

Though the US’s credit share in Ethiopia is insignificant, it sits on the IFI and multilateral creditors’ board with veto power.

“The Chinese did not make policy changes. They are determined not to make any debt restructurings on commercial credits for Ethiopia. The creditors’ committee is not moving, mainly because of China. It’s really challenging for Ethiopia,” the official told The Reporter.

The MoF’s debt bulletin says that Ethiopia will be in high debt distress if the G20 framework is not put into place. In a nutshell, it is difficult to expect the G20 framework to happen now, given Ethiopia’s scenario. IMF programing is not happening, and the creditors committee cannot have trust to restructure Ethiopia’s debts unless the program happens.

The west is waiting until fundamental changes on the ground take place in Ethiopia. This precondition includes the complete evacuation of Eritrean troops from Tigray, the resumption of services, and the establishment of stable administration in Tigray. The EU and US are also pushing to send human rights investigators to Ethiopia.

From the west’s side, dramatic changes are not expected soon, unless there is a dramatic change on the ground regarding Tigray.

Basically, the US government approves decisions in October and November for its financial packages for 2023. Even the resumption of the Africa Growth and Opportunity Act (AGOA) in 2023 remains unlikely. Ethiopia will not get much from the US in 2023; the hope is for 2024. Even though the government has played down the effects on Ethiopia, the country did not move quickly to get back its AGOA privileges.

The way forward

There are serious distortions in the market and the macroeconomy is not also stable. Developing the real sector at this moment seems delusional while the macro is distorted. But once the macro distortion is cleared, the market and the real sector gradually start to respond positively. Industry also needs imported inputs, which cannot be imported unless the forex issue is solved. Solving inflation, the forex regime, debt distress, and other macro-issues can have a positive outcome for the real sector.

“For instance, if you want agriculture to work, cheap input supply is crucial,” the expert said. “Forex is needed to import inputs abundantly, farmers must access finance, and the market should have fewer intermediaries.” The expert says inflation must be tamed to correct the market value chain, which responds to macrocorrection. “So the macro-correction has to come first, before the real sector.”

The global situation is not enabling Ethiopia to mobilize large funds and redevelop the war-torn areas in three to five years.

“Of course, donors’ appetites might improve once the US changes its stance on Ethiopia. Then they will release some money. But they will not release more than USD three or four billion. Compared to the USD 20 to 30 billion Ethiopia needs for redevelopment, that will be a drop in the ocean,” the expert explained. He says Ethiopia is expected to generate a significant amount of the redevelopment money from internal sources. “To do so, the economy not only has to sustain itself but also grow.”

Of course, all the projections have positive outlooks. The African Development Bank’s (AfDB) most recent forecast predicts 4.9 percent growth. But unless the economy is put on a high growth trajectory, it cannot generate surplus resources. It is expected to generate resources for basic needs, redevelopment funds, and sustainable growth.

“First, the government must start using available resources wisely. How can the government say it is developing the real sector while all the money is going to unproductive sectors?” the expert asks. “The government is throwing huge sums of money into luxury and entertainment projects. Close to a trillion birr is slated for the Chacka project.”

The government, according to the expert, is not investing in long-term projects, which can translate into economic growth in the long run. “Capital expenditures must be maximized, and minimizing the recurrent expenditure will also reduce inflation, which is a daunting government activity. Given the high project price adjustments due to inflation, the government cannot bridge the financing deficits. So it must start by reducing inflation,” added the expert.

Experts agree that public investment reprioritization is the key if the government has to rebuild the economy and grow at the same time in the coming few years.

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