Ethiopia launches “Home-Grown Economic Reform”
The \Ministry of Finance unveiled what it called a “Home-Grown economic Reform” this week, spearheaded by the Office of the Prime Minister with the involvement of various policy institutions including the National Bank of Ethiopia (NBE), at an event held on Wednesday, August 28, 2019, at Sheraton Addis Hotel in Addis Ababa.
Launching the reform agenda, Ahmed Shide, Minister of Finance, indicated that Ethiopia’s economy was driven by a massive investment outlay from the side of the government in the past decade and half, resulting in a fast and continuous economic growth over the indicated period. But, the economy encountered various structural and sectoral hindrances that made it difficult to sustain the pace with which it was growing. Therefore, the government is now embarking up on a new economic reform which aims to capitalize on the potential of the youth and the private sector in Ethiopia, both which said to be curtailed from playing a major role in the economy in the past two decades.
Formally opening the session, Deputy Prime Minister Demeke Mekonnen reminded that the country is in a multi-faceted reform process that deals with politics, economic and social aspects, with a focus on rectifying the bottlenecks to economic growth and industrialization. Demeke also pointed that, the economic growth registered in the past 15 years had two faces; a globally commended economic performance and a wide-ranging inequality that distasted the public.
Eyob Tekaligh (PhD), who presented the contents of the reform to participants, reasserted that the past 15 years has seen a commendable growth and progress in the health, education and other sectors in Ethiopia. But, the country has a long way to go to reach the level of the aspired middle-income level by 2025. In addition to this, the economy has shown deficient in bringing about structural transformation and “income growth which was achieved primarily through capital accumulation and less through productivity growth.”
“The growth was driven more by capital accumulation. Productivity growth is constrained by structural and institutional bottlenecks. There were hurdles for the business environment too,” Eyob indicated.
According to Eyob’s explanations, the agricultural sector was strained by a shortage of inputs; the manufacturing sector incentives were not attached to efficiency measures; the mining sector was hindered by policy deficiencies that emanate from institutional inefficiencies; the tourism sector could not exploit heritages preserved through years; and the information communication technology sector could not penetrate the market well because of inflated prices and infrastructure limitations.
The economy, within this context, is impeded by macroeconomic imbalances that are manifested in foreign exchange shortage, foreign debt distress (which the IMF puts at high), high inflation rates, as well as very limited source of finance to the private sector, the state minister noted.
“High demand for imports and poor export performance resulted in large current account balance deficit and significant forex shortages,” Eyob admitted. “In turn, forex shortage resulted in investors spending 60-70 percent of their time in managing forex rather than their companies.”
Eyob also indicated that rapid increase in external debt in the context of poor project execution and export performance resulted in the forex shortages. This coupled with the expansionary fiscal policy and associated budget deficits brought about inflation which averaged at about 15.5 percent annually between the years 2005 and 2019; also resulting in wide-ranging economic consequences.
With the implementation of the reform, foreign exchange shortages will not be a characteristic feature of Ethiopian economy, Eyob proclaimed, indicating that the reform agenda is aimed at addressing the aforementioned challenges through a “comprehensive and well synchronized set of measures”.
These sets of actions include macroeconomic reforms that will be matched with structural reforms and sectoral reforms. The macroeconomic reforms aim to solve forex challenges such as inflation, finance, and debt distress, while the structural reforms will be aimed at easing business constraints. The sectoral reforms will bring about changes to sector-specific institutional and market failures. The macro-economic reforms along with the structural reforms will result in confidence in the economy as well as rebalance growth and enhance productivity which will, in turn, translate into inclusive growth and poverty reduction.
Eyob also pointed out that, because of the influence the Keynesian thinking has on most of the economic team in the policy circles, he admitted that the role of the government in economic development of Ethiopia is not something that could be easily shaken; however, he asserts that the role form now on has to be in areas where the private sector is not ready to invest; not the other way around.
Reminding that the Ethiopian economy is mainly driven by huge government involvement, central bank governor Yinager Dessie (PhD), on his part, argues that the involvement by itself is not bad and that developing nations like Ethiopia need such government investments to bridge their infrastructure deficits. But, the inability of the projects to repay their debt as well as the increasing debt burden should be considered in this engagement.
“Therefore, one of the directions of the reform is decreasing the state’s involvement in the economy and increasing the private sector’s role; the role of the government in the economy will decrease through time,” Yinager said.
Also indicating that the foreign exchange shortage the country is experiencing has originated from the supply side which is a structural deficiency. He said that the problem was created and worsened because of the lack of structural transformation in the productive sector.
“I won’t say that we will eliminate forex shortage because of the customary huge forex demand of a developing nation. But, the focus is to cover as much as possible. I would say the forex problem will stay with us for some time,” Yinager reminded.
