Economic code blue
Ermias Amelga is a prominent businessman who has been playing founding roles in various activities that range from real estate to the financial services sector. He established and led Access Real Estate until recently. He is also the person behind a one branched bank concept that brought Zemen Bank into the financial bloc of the country. Although born in Addis Ababa, he grew up in Egypt making Arabic his first language. His later move to Kenya made him fluent in English and Swahili. The young Ermias came to Ethiopia to attend his secondary education at the International Community School in Addis Ababa and joined Haile Selassie I University to withdraw after a year and go to America where he established the rest of his life. Ermias, who came back to Ethiopia after 22 years, says that his return to Ethiopia is to share his experience from the US stock market in Wall St. Through, his endeavor was not all a success story. Access Real Estate complications because of buyers’ complaints is a big development in the country’s business history which totally changed approaches to real estate businesses. An economist and an outspoken personality, Ermias also reflects on various economic sector issues, the recent one being his review and recommendations of Ethiopian economy which he deemed to be at a cross roads. Asrat Seyoum of The Reporter has sat down with Ermias to reflect on the recent Ethiopian Peoples’ Revolutionary Democratic Front’s (EPRDF) announcement to privatize large state-owned enterprises, the country’s economic performance, loan distress, forex crunch, as well as foreign direct investment. Excerpts:
The Reporter: Let’s start with the conclusion of a recent paper that you wrote on Ethiopian economy. In that paper you referred to the current situation of the economy as suffering from Stagflation: a term used to explain to the appearance of both economic stagnation and inflation. How did you arrive at this conclusion?
Ermias Amelga: Basically it is a careful analysis of the data that led me to this conclusion. Yes, you can ask how we can arrive at this conclusion when both international organizations and Ethiopian government forecast a fast economic growth. In fact, the better question is how these international organizations get these growth forecast and projections wrong sometime; I think the best answer is the misleading nature of the data. You see, economics is not an exact science like physics; your conclusions and projections depend on various variables and assumptions. So, what I did was use their estimation models but with different assumptions. Sometimes, it takes time for these organizations to access the data on the ground as it is unfolding; they have to wait for the data to be collected and verified and before they update their estimations. For instance, if I ask you how many factories have closed down their shops due to the foreign exchange problem in Ethiopia it could be difficult to come up with accurate number; I don’t know the exact number either. But, since I am in the business, I have a fair understanding of the level of impact FOREX is having in Ethiopia and I am better positioned to construct the right assumptions for this condition. Theoretically, we can see that the shortage of raw materials is a crippling problem. Our economy is highly import-intensive; our investment is highly import intensive, so is our consumption. So, the FOREX problem far more debilitating than we usually think. So, it is fairly straightforward to see that economic activity in slowing down in Ethiopia. On the other hand, we have seen persistent increase in the consumer price inflation in past few months. On top that, we have to see the disaggregated inflation figures to understand that the level of inflation in urban centers and towns is much higher than the overall figure which is highly influenced by the basket of goods in the rural areas. Since, the reins have been favorable in past few month cost of living in rural areas in much better than the urban areas.
How do you perceive the economic predicament Ethiopia is in at the moment?
The favorable global conditions to access external loan a decade ago provided an impetus for the government to intensify its involvement in various sectors. Now, we have a state highly stretch between various development projects funded by external loan. While most of these projects are either struggling to reach completion or come to a squeaky stop because of mismanagement of the funds, most of these external loans are approaching their gestation periods. So, there is additional burden of debt repayment hanging over the economy which requires millions dollars every year. This is not limited to the government projects; in fact if you take a look around town you will see a lot of construction projects which have stop their work. In short, we did not have the money; we decided to borrow; we did but our investments are not paying off as expected. So, what are we to do now? In my view, we are not quick to act and remedy the situation the damage is far greater. I don’t know how many factories will close their doors with passing of each month. The construction sectors have fallen 80 to 85 percent; contractor companies, machinery rentals and other related sectors have sustained huge loses in past few years. This easily means close to 100,000 people are out of jobs. Although I don’t have the exact number, I would expect the banking sectors to fill the pinch as well; I expect there won’t be a lot of people servicing their banking loans in time. In general, I feel our condition is best expressed by the medial term CODE BLUE since we don’t know how long it will take for the economy to reach point where it would become difficult resuscitate. We have to ask why we could not access diabetic shots or construction of condominium houses stopped or basic consumer goods like bread and egg have skyrocketed in price in short amount of time.
While addressing the question of how we get here, you argued in your paper that the developmental state model pursued by the government although necessary was stretched to a limit where it ignored the private sector. Can you elaborate?
Back when the current government took power, I believe there was little by way of a functioning economy or a private sector that it inherited from the previous regime. Almost it has to start from the scratch. In doing so, one of things that are required to charter a state led big push developmental path to break free from the age-long poverty trap. At the time, there was no better alternative than to relay on the government to craft the development path and jumpstart the economy. The private sector was particularly absent from the equation courtesy of the previous regime and the political ideology it followed. But, when the new government started to charter the development path, perhaps emanating from its ideology, it was apparent that it has a wrong understanding about the private sector. We also have to understand that whatever little private sector there was at the time was inherited from the Derg regime and this private sector naturally was more inclined to black market operations and informal trading activities. I think this is not entirely the fault of the private sector since the previous regime policies were primary pushing factors to choose shadow economic activities. So, the new government reacted badly to this and developed a wrong attitude towards the private sector. On the other hand, there EPRDF government also has a strong tendency to favor control of any kind. Perhaps, to a lesser extent, the party has paranoia towards groups outside of the party getting stronger and growing. Hence, the end result was the weakening of private sector in Ethiopia. To compensate for this, lack of private sector, the state decided to expand its reach in every sector; it developed ‘I can do it all’ attitude. And hence, the state syphoned bulk of the country’s resources towards its development projects. There were some common characteristic to a developmental state around the world: a strong authoritarian nature and high caliber of bureaucracy. Look, to administer one factory, among other things, you need capacity. Especially, in case of Ethiopia where the government has decided to fill the void created by the absence of a private sector, it needs to have capacity to administer big companies; capacity equivalent to a big multinational company. But, this capacity is quite rear even in developed world. At end of the day, the market and the economy growths more complicated, the government will not be able to control everything. So, slowly the balance between the state and private sector has to be addressed. If you look in the developed countries, the state is not even into utilities anymore; it has become impossible for the government to provide that efficiently. In fact, ultimate goal of a developmental state is to create condition where it will be relegated to an irrelevant actor in the economy.
In your paper you have also talked extensively about financial infrastructure. You argued that unlike the hard (road, power) and soft (health and education) infrastructure, the financial infrastructure is the least developed in the past 20 years. How can you show that?
In any developing economy, while the hard infrastructure and soft infrastructure are considered as the bones and muscles of a human body, respectively, the financial infrastructure is largely thought of as the bloodstreams or circulatory system. Hence, it stands to reason that a functioning human body needs a circulatory system that fits its bones and muscles. So when a country thinks about development it has to also think about how this development can be facilitated by allocating its limited financial resources. The late Prime Minister, Meles Zenawi, have also dealt with this issue extensively. So, what has happened in Ethiopia with regard to the financial infrastructure is financial repression by design. Using the human body analogy, we are trying to sustain a body with a strong bone and muscle structure using a frail circulatory system. For example, if Ethiopia’s economy is an athlete and although this athlete has a well-built muscular body he could not run far if his circulatory is weak. The other option that is not supported by the science is for the government itself to take over the financial allocation role and channel financial resources to where it is most effective. So, in Ethiopia case, the government actively redirected funds from the private sector to government projects using various instruments like the 27 percent NBE Bill. Nevertheless, most of the funds redirected to government projects were not effective. So, the strategy was wrong as a financial strategy and currently we are reaping what we saw.
With regard to the GTP plan, one of the issued raised at the time when it was announced was its ambitious nature. This ambition is best captured by the absence of strong financial plan for some of the flagship projects. How do you think this has worked out, so far?
I really don’t have words to express how I feel about this. In short, laying down a development roadmap without any feasible financial plan is like creating a mess deliberately. Patriotism is a very noble gesture; I have nothing against it. But, it is merely a catalyst; we need real hard work on the ground. So we have to think long and hard about what we are doing. There are real questions and demands on the ground; we need to tailor our investment and resources to areas which can address these demands. You see, when people think of Ethiopia, we make the mistake of think of about the agrarian economy alone. That is in my opinion is not only wrong but futile. We have now 20 million urban population; it needs jobs and output to consume. This force has already shown that it could be destructive if it is catered to. So our investment should be directed to addressing these shortcomings.
The main policy recommendation of your paper is first and for most to pursue an aggressive privatization policy to jolt the economy back to its previous growth trajectory while implementing some serious economic reforms. So what will be the gains from this privatization process?
In my paper I call privatization, the magic bullet to the Ethiopian economy. We are luck in sense that we have a sort of magic bullet to overcome our economic problem and transition to the health economic growth trajectory. So far, the state has spent a lot of money on development projects most of which are yet to pay their dividends. On other hand, most these spendings were financed by foreign debt which we have to start paying shortly. In meantime, there is a debilitating FOREX problem country is facing. Now, the way, I see it, the economy is in its death-bed and it needs to be revived before talking about anything else. This requires an infusion of foreign currency nominated financial resources to resuscitate the economy. However, while doing that, one also needs to take care that the infusion also will not the country. To do that, the simplest thing is liberalizing the exchange rate regime, where eliminating the shadow market premium and there by the accumulated excessive demand. Look, currency is a very illusive asset. No matter how efficiently it is controlled there will always be a room for illicit financial flow. So, infusion of foreign currency, without liberalizing exchange regime will take us back to where we were. Like any commodity currency has price which is set by the market. But when states try to control the transaction and price foreign currency just like other commodities will find a way to leave the economy. We also have seen examples of Venezuela and Zimbabwe; they have tried to control until last time where local currency replaced by foreign ones. To the reverse, if we eliminate the big spread in shadow markets, we can put an end to smuggling of our export products via our borders. Proper estimation has to be made regarding the real foreign currency need of the economy. If we take my estimation, I projected we need 4 billion dollars in the first year and 2 billion additional for the second year as well. So, to the economy, the government has to first sell the State Owned Enterprises (SoEs) under its wings and generate the needed foreign currency to jumpstart the economy. According to my estimations, Ethio telecom alone could be valued at 15 to 20 billion dollars.
But, export earning generating capacity in the general is said to be a structural problem. Do you believe reforming the system will improve these existent structural problems?
Now, as told you before, the foreign currency we generate form SoEs will be pivotal to revive the economy. Then since we know our exchange rate regime is the problem we reform that. After the reform, the economy would expect some huge inflows in the immediate period. On third level, we could expect a growth in the export of goods and services since they will become competitive in the international market. This will be additional foreign currency. But, largely implementing this policy reforms will be a mindset problem. We are certainly not the first or the last people to do this; the world has done this a long time ago.
You also assert that failure of manufacturing sector to take off is also something that needs to be investigated deeply; and suggested accordingly revisiting of other option in the economy to generate the needed foreign currency. What do you mean by that?
Any development strategy emanates from the national factor endowment of the nation. So those with oil or knowledge craft their strategy accordingly. Coming back to home, we also need to carefully asses our national factor endowment to determine what we can do more efficiently. If the Ethiopian economy was a human being, we can say that it is a 10 years old economy. In fact, I believe EPRDF received an economy which is three months old. So, this ten year old boy ranks very low in parameters like technology and capital. One thing that is clear is that the type of factor endowment required to make manufacturing work might be missing. On top of that, if you consider the industrial shades the fact that most of these shades were made for FDI and not local investors is another problem. On the other hand, the overwhelming focus on export oriented products and not import substitution is another issue. Here edible oil, iron ore and others consumer products needs parks. Also, there are opportunities which have not been exploited in sectors like mining. In fact, most do not know the actual mining resources Ethiopia has under its belly. So, what I am saying is one need to consider the dynamic nature of a country’s factor endowment and set industrial policies, accordingly. Then industrial policies will become progressive incremental and dynamic through time. On the other hand, if we have FDI, this will considerably shorten the time of learning. This has nothing to do with nationalism feeling. The right nationalism is development of the nation.