Sunday, April 14, 2024
Money TalksMountains to climb

Mountains to climb

Ethiopia’s economy struggles to regain its footing

As Ethiopia tentatively transitions out of conflict, ambitious economic reforms needed to revive its struggling economy appear daunting.

After decades of strong growth under infrastructure projects, Ethiopia’s economy stagnated under Prime Minister Abiy Ahmed (PhD) since 2018. The Tigray conflict cost thousands of lives, displaced millions, and diverted resources from development.

Finance Minister Ahmed Shide recently acknowledged Ethiopia faces a “serious economic crisis.” The government is seeking debt relief and pursuing reforms, but structural changes require external support.

The Ethiopian economy grew 6.4 percent in 2022 but is projected to slow to 5.5 percent in 2023 due to conflict, high inflation, and Russia’s war in Ukraine. Inflation in Ethiopia sits at a record 33.5 percent, straining households and businesses while constraining government finances.

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The government has spent over 50 billion birr to subsidize fuel and 21 billion birr in fertilizer subsidies over the past eight months, with the cost of the two strategic imports witnessing an increase by as much as 100 percent. While subsidies aim to mitigate rising costs, S&P Global economist Alisa Strobel notes they have been “only modestly effective.” She thinks fuel subsidies may need further reduction, and absent structural reforms, Ethiopia’s fragile recovery could quickly reverse.

Despite previous attempts to reduce spending, which have had limited success due to rising government expenditure and disappointing growth of government revenues, the bitter pill for Ethiopia may be central bank borrowing. However, experts equate this with money printing, which has been a driving force behind the country’s high inflation rate of 32 percent year-on-year in April 2023. This comes on top of the depreciation of the Ethiopian Birr by around 18 percent against the US dollar in 2022, a situation that has put pressure on citizens and businesses alike.

Foreign exchange reserves have fallen dangerously low, slowing imports and causing goods shortages. An estimated 20 million Ethiopians require food aid.

Strobel says while some indicators offer hope, “Ethiopia’s economic challenges are substantial.”

While economic recovery resulting from the peace achieved in the country’s north might seem within reach, the soon-to-mature external loan the country took to develop its mega projects over the decade is another worrying development.

Debt restructuring has been on the table for over a year and a half now, with the International Monetary Fund (IMF) and its financiers seeming to be the ultimate decision-makers, given that creditors are unwilling to make any moves without getting an updated assessment of the nation’s current debt risk status.

The IMF is already in discussions with Ethiopia’s government to provide support. But any new assistance program would likely require financial commitments from creditors to make the deal work.

Credit rating agency S&P Global Ratings believes an IMF loan for Ethiopia is under serious consideration, which would be an important first step to eventually restructure the country’s large debts. An IMF program is hoped to help revive Ethiopia’s struggling economy by providing emergency funding, encouraging critical economic reforms, and boosting confidence among investors.

However, IMF assistance would likely come with conditions requiring greater transparency, accountability, and governance reforms—areas where Ethiopia has been hesitant in the past. If an IMF deal can be reached and implemented successfully, it could lay the foundation for Ethiopia’s debt restructuring to eventually move forward, which has been delayed for some time, according to experts.

But any IMF program and debt relief would only be part of the solution to Ethiopia’s deep economic challenges; broader reforms, political stability, and sustained growth will also be needed to make meaningful progress, said an official who closely follows the situation.

Strobel says one priority will be liberalizing Ethiopia’s exchange rate, given that the IMF provides funding and boosts reserves. A “sensible approach” could mitigate hyperinflation risks as the Birr’s depreciation rate declines. However, floating the currency quickly likely requires substantial IMF disbursements and reserves, according to Strobel.

Convincing leaders to implement ambitious reforms after instability appears difficult. Ethiopia’s economy remains at a crossroads. The path chosen will determine whether people finally see better days. Wisdom, restraint, and meeting needs could still lead to an economic revival.

Strobel concludes external support is critical due to Ethiopia’s debt default risks and “critical shortage of foreign exchange,” requiring budget support due to high costs of “fuel, food, and fertilizer.”

In the meantime, the World Bank’s Africa Chief Economist Andrew Dabalen this week remarked on Africa’s debt sustainability, which may add to the concerns already facing economies like Ethiopia, grappling with low growth and high inflation.

Almost half of the countries in Sub-Saharan Africa are already in debt distress or at high risk, and growth is expected to remain sluggish at just 3.1 percent in 2023 while inflation remains in double digits in many parts of the continent, according to him.

The situation has been further compounded by recent debt defaults in Zambia and Ghana, as well as civil unrest and delayed debt restructuring negotiations in Ethiopia.

“While many countries are implementing necessary reforms, the challenges facing African economies remain significant,” said Dabalen.

Despite the difficulties, African countries are uniquely positioned to take advantage of a low-carbon future given their abundant mineral resources, according to him. However, it remains to be seen whether Ethiopia can be one of the indebted African nations with the capacity to maximize revenues and build sustainable, industrialized economies in the face of ongoing economic challenges.

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Video from Enat Bank Youtube Channel.

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