If there is one difference between the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) and the Prosperity Party (PP), it is the latter’s preference for the Bretton Woods institutions’ late drive for structural adjustment programs (SAP). The incumbent believes that relaxing monetary policy will cure all problems, while the EPRDF focused on the real economy.
Nevertheless, the Ethiopian government faces a Sisyphean task in finding the correct remedy for the country’s stagflationary economy. Of course, macroeconomic distortions have reached a tipping point, even in the EPRDF’s final years. Against this context, fresh layers of economic troubles have emerged during PPs administration.
The second Homegrown Economic Reform (HGER 2.0) draft document, which will shortly replace the first HGER, wants to undo even the most sanctified policies, such as the “gradual transition to a liberalized forex market.”
The document, dubbed “The Next Phase of Reforms to Unlock New Growth Potentials,” also states that after three years, the third version of the reform (HGER 3.0) will be introduced under the theme “Building A Frontier Economy.” HGER 3.0 will wrap up the TYPP.
Except for a bird’s-eye view of the economy, the HGER 2.0 lacks a detailed matrix indicating parameters, from the baseline to the exact target to be achieved. Even in the preamble, the document has contradictory statements regarding the rationale of the HGER 2.0.
“The steadfast implementation of HGER 1.0 has helped the Ethiopian economy maintain growth in times of unprecedented global economic downturns and despite multiple compounded shocks,” it states. But in the same section, it says, “These external shocks have made it harder to reach all of the goals that were set, and key macroeconomic imbalances, such as inflation, debt risks, unemployment, and shortages of foreign exchange, still exist.”
At the same time the government claims HGER 1.0 was successful, it attributes all the economic problems happening to “external shocks.” It did not even take responsibility for any of the failures whose policy measures and implementation have exacerbated the economic downturns in the past few years.
Under the macro-financial section, implementing banking sector liberalization, correcting the exchange rate misalignment to improve market-based valuation of the birr, and gradually transitioning to a liberalized forex market are among the objectives set. It also targeted the introduction of property taxes, a revised income tax policy, reducing the redundancy of various incentive packages, shifting from a blanket to a targeted pro-poor subsidies regime, linking debt strategy to revenue and export goals, and building a social contract with taxpayers.
The focus is on strengthening the role of Ethiopian Investment Holdings (EIH) as the government’s strategic investment arm and addressing the link between the Commercial Bank of Ethiopia (CBE) and the Liability and Asset Management Company (LAMC) by providing dedicated and timely financing to LAMC, speeding up the privatization of the sugar corporation and ethio-telecom, and giving out an additional international telecom license.
Regarding sectoral reforms, agriculture, manufacturing, digital economy, mining, tourism, trade, and logistics, among others, have been mentioned roughly.
Experts are, however, dismayed by the targets set in the draft HGER 2.0.
Ayele Gelan (PhD) is a scholar with long experience researching the Ethiopian economy and lecturing at international universities. He says that the plans were never meant to solve the country’s economic problems. Instead, they were meant to put western economic ideas into place under the guise of being “homegrown.”
“From the beginning, when the government introduced the first homegrown economic reform in 2019, and again now with HGER 2.0, there is nothing homegrown about it. The content is all foreign, and the intent is to open up the economy to please the liberal west. It is an insult to Ethiopian scholars,” Ayele said.
He claims that the first HGER is all about selling Ethiopian state-owned enterprises (SOEs) and was prepared by western pressure, which is hand-twisting the Ethiopian government. “Initially, the government even tried to sell Ethiopian. Nobody knows what happened with HGER 1. Except for the Safaricom licensing, none of it was successful.”
For Ayele, Ethiopian governments, including the EPRDF and PP, make policies just for “instant gratification.” “The EPRDF created ALDI, and when it failed, the government jumped right into short-term industrialization. Now, PP has jumped to the second phase of HGER, while the first is not yet implemented.”
Especially, the floating currency management and further devaluation plans stated in the HGER 2.0, are completely wrong antidotes, according to Ayele.
“Consecutive devaluation has been done in the past years, and it has failed to deliver. How does the government expect a different outcome now by doing the same thing?” asks Ayele. “Ethiopia has no export capacity, and its exports will not grow by devaluing the birr further. There is no product, so why devalue birr?”
Devaluing boosts exports, but only when there is surplus production supply, Ayele says. The value at that point benefits the exporter. “Instead of encouraging exports, devaluation raises the cost of imports, and Ethiopia is highly dependent on imported medicine, fertilizer, fuel, food, and others.”
Ayele believes that if the birr is further devalued, every imported item will be highly expensive for Ethiopia, rendering the plans, particularly the further devaluation and flotation, extremely dangerous. The scholar argues that Ethiopia’s exports failed to thrive even under the Affordable Growth Opportunity Act’s (AGOA) privileges.
“The government and many say Ethiopia’s exports are suffering because AGOA is banned, which is completely incorrect,” Ayele said, adding that Chinese companies operating in Ethiopia have benefited from AGOA.
For Ayele, footwear exports to the United States account for a sizable portion of all items exported under AGOA. But those shoes are made by Chinese industries in Ethiopia, and commodities like coffee are still exported through the traditional export channel outside AGOA.
“Simply put, AGOA benefited China, not Ethiopia. So, further devaluing the birr is like adding fuel to an economy in deep crisis instead of improving export performance. Just like the first HGER, the second is pushed by the western liberal economic experts, who have the ear of this government,” Ayele explained.
Further devaluation and then floating the exchange regime are on the agenda of International Finance Institutions (IFIs), according to him. “They push for those agendas, but they do not care for their grave consequences for Ethiopia,” added Ayele.
Other experts say the public will suffer more if HGER 2.0 is implemented.
“The economy has reached a backbreaking point for Ethiopians. This government is lucky that the population does not protest. It’s insane that the government is raising tax rates and introducing new tax items. What Ethiopians need at this point is a tax break, not tax increments,” a political-economy analyst who spoke to The Reporter on the condition of anonymity said.
The analyst says that the government also lifted subsidies at a time when many countries are giving subsidies. Ethiopia, on the other hand, is in reverse, and its economy is suffering continuously. Devaluing and floating under the existing circumstances will be devastating. “Is floating and devaluation truly Ethiopia’s problem now?” inquired the analyst.
Political experts say that the PM ignores the advice of Ethiopian scholars and only listens to the IMF, the World Bank, the UNDP, and other western organizations.
“It is confusing whose advice the PM is implementing. It is certain that the PM is not listening to the macro team. The Ministry of Finance is busy with privatization and liberalization. So the PM is listening to somebody else’s advice from abroad. Nobody is working on the macroeconomy,” said the analyst.
The experts recommend that the government delay the homegrown reform agenda and focus on the post-war reconstruction roadmap, which they believe would mobilize the international community.
“The international community can be mobilized by reconstruction. “Only predatory Western liberals are moved by open-up reform,” Ayele asserted. “Over 600,000 people died, and a huge crisis happened due to the Tigray war. How can the government come up with a reform plan while the country is still in crisis? Growth cannot be imagined under the circumstances.”