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Economists slash growth projections to 0.6 percent

Economists slash growth projections to 0.6 percent

Estimated losses could reach USD nine billion

In the face of the Coronavirus pandemic, where the impact on the economy is not yet known, economists have come up with a grim projection indicating that the Gross Domestic Product (GDP) growth could shrink to 0.6 percent for the current year, The Reporter has learnt.

Three members of the Ethiopian Economics Association (EEA), Tadele Ferede (PhD), Getachew Diriba (PhD) and Lulit Mitik Beyene, teamed-up to analyze the prospects of the Ethiopian economy in the coming months with looming threat of continued, worsening CoVID-19 pandemic in the country. The sever case scenarios show further contacting of the economic growth to 0.6 percent, with total economic loses likely to jump to more than USD nine billion or some 310 billion birr in 2021, amounting to 13 percent of the GDP. The Ethiopian economy was expected to grow by more than nine percent based on the pre-pandemic growth projections.

Our estimates suggest that GDP would be lower than the no-COVID-19 scenario by 310 billion birr in FY 2020/21. Under this amplified (or severe) pandemic scenario, growth would be restricted to 0.6 percent for the period FY 2020/21,” they wrote.

The policy paper, “The economy wide impact of the COVID-19 in Ethiopia: policy and recovery options,” further showed that the USD 3.4 billion response plan and stimulus package the government has proposed, may not be sufficient to mitigate the impacts of the virus on the  Ethiopian economy.

According to the study, in the mild case scenario, the shock to the economy could last for six months, extending from the last quarter of the Ethiopian Fiscal Year (EFY) through to the first quarter of FY in 2020/21. The same duration was anticipated for computing a severe impact scenario with experts opting to concentrate their analysis on considering the role of the government in mitigating the anticipated shocks through reliefs and stimulation packages.  

Furthermore, explaining the scenarios, the experts gauged the impacts on productivity growth of labor and capital, the impacts on Foreign Direct Investments and Remittances, export demand, import supply, transaction costs and the anticipated government interventions.

Based on the analysis, labor productivity growth rate is projected to witness a 6.4 percent decline in the severe cases, while capital growth is estimated to shrink by up to 2.4 percent. However, disturbingly, the blow to FDIs is projected to see a 70 percent decline in 2020/21 FY. Furthermore, remittances are likely to plunge by 60 percent.

Making matters worse, it is also anticipated that demand for Ethiopian goods and services will fall by 50 percent, and even coffee export will likely witness a 25 percent decline. Imported goods and services are expected to decline by 25 percent during the severe case scenario, as transaction costs on exported and imported goods and even on domestically available commodities, are projected to jump by 50 percent.

With anticipated loss of revenue and higher levels of expenditure, the impact of COVID-19 in Ethiopia is expected to widen the public financing gap, substantially. The pre-COVID-19 government revenues are assumed to decline by about 3.3 percent in 2020/21, in the mild cases. In severe cases, however, it is assumed to swell up to 10.4 percent in the same year. Fiscal or budget deficit is likely to grow by 7.3 percent from the current 2.5 percent deficit.

Major sectors like manufacturing outputs could decline by 7.3 percent in 2020/21 and register lesser growth momentum the following year. Worryingly, the agricultural sector is likely to see a 13 percent decline in output (in severe cases) while it might survive a 7.6 percent decline in a mild scenario. The projected impact on each of the sectors of the economy varies with employment, according to the finding. Employment losses are assumed to be higher and employment levels are expected to go down between 8.6 percent and 16.5 percent.

Tadele Ferede (PhD), associate professor of economics with Addis Ababa University (AAU) and president of EEA, joined both Getachew Diriba (PhD), Chief Executive Officer of EEA and advisor of the Ministry of Agriculture, and Lulit Mitik Beyene, researcher and consultant at the World Bank Group and employed a dynamic Computable Equilibrium (CGE) model to capture the short, medium and long term impacts of COVID-19 on the Ethiopian economy.