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“It was wrong to devalue the birr”

“It was wrong to devalue the birr”

Demese Chanyalew (PhD)

Demese Chanyalew (PhD) is an economist who specializes in the agricultural sector. With his 40 years of vast experience in the profession, Demese was able to demonstrate his scholarly works at numerous stages. A master’s graduate from the Oklahoma State University and PhD holder from the Kansans State University, US; Demese has been able to lead a continental and national research projects. The Comprehensive Africa's Agricultural Development Program (CAADP) is one of the projects he has led as a lead researcher a few years ago. Currently, Demese works as a senior agricultural economist expert, an independent consultant and leads one of the projects in the USAID program. Apart from being an outspoken scholar, Demese is a published author as well. He has written several scholastic articles, journals and books. One of his books: “Ethiopia’s Indigenous Policy and Growth: Agriculture, Pastoral and Rural Development” is a very deep and a well-written book with 900 pages. Recently, he wrote another book: “The Quest for Change” to argue and suggest scientific policy-based solutions for the pastoral and agricultural sectors. Birhanu Fikade of The Reporter sat down with Demese to learn about his views of the Ethiopian economy with regards to the ongoing change in the political environment. Excerpt:

The Reporter: This week on Wednesday, ministers and other officials have convened to talk about the overall performances of the second Growth and Transformation Plan (GTP-II) and they have agreed that the economy is under a serious threat. Do you agree with that?

Demese Chanyalew (PhD): No I don’t. The officials might have their own observations, but I do not agree because economics is not merely about numbers. As an economist, I would like to see the flow of events, activities and outlooks of a given economy. We can see that from a micro and macro perspective. When you see the trends of consumption, the way people live their daily lives, the income and expenditures and the like tell you that the economy has been functioning. We need to be careful here that there are gaps between the status of the haves and have-nots. Our economy has a serious problem with regards to distribution. The investments, government expenditures and similar phenomenon tell us that the economy is on the right track. But of course; recently, during an interview with the BBC, I have mentioned the issue of big investments made by public enterprises in relation to the growing debt burden Ethiopia faces.

As far as I know and as I could find from the reports, the concern is that the debt has come to the point of serious concern. But I never heard any officials saying the country is unable to repay. This is a smart way of explain where we are now. You can’t grow without borrowing. That’s necessary. The question should be how are we managing and utilizing the borrowed money. What does it mean when we say the economy is in danger? By the way in 2015 and 2016, the El Niño induced drought was a major phenomenon that many people were quick to criticize the state of the economy and how it is handled. People still argue that the economy would face turbulences if it continues in a similar path as in the past. But I counter that argument on the basis of three major issues. One is the political conflict that we have sustained until the last three months and the factors to that. The second is the state of agriculture within itself and with the broader economy. The continuity of public and private investments on major developmental projects is essential to consider.

Nearly fourth months ago, I told VOA Amharic Service with confidence that the economy could manage to survive. We have demonstrated to the world that we can manage such political crisis and we showed how the economy could strive during such odd-times. Losing confidence is a very critical challenge for a given economy. In such circumstances, it is difficult to bring investors’ buyers and others to your side. But things have changed for better now. Confidence has been built dramatically among foreign investors and consumers as well. We are having these conversations just days after the departure of Isayas Afeworki, President of Eretria. That might be politics but as an economist the situation gave me a real sense of optimism.

Many have argued their position of saying the economy has been endangered. Among the reasons, the declining trend of the export sector is one. Critical shortage of hard currency and mounting level of debts are also the case for the argument. Currently, Ethiopia is joining the highly indebted countries list as the level of debt sustainability stress shifted from moderate to higher. Debt servicing is another factor which forced the country to pay some USD 688million this half-fiscal year alone. Agriculture is also blamed for the bad performance. Production and productivity is low and for these reasons many have argued the economy is in a great danger.

Yes, we cannot continue as we did so far. I agree. Not because of the reasons you mentioned but mostly because of the high expectations created among the society. Due to that we cannot continue with the existing pace. Shortage of hard currency and gapping deficit trade balances are no doubt problematic to any given economy. By the way, talking huge trade deficits, it’s the US that boasts the most imbalances of trade deficits in the world. But the difference between the US and Ethiopia is that the US has a tradable currency, Ethiopia does not. Partly, it is true that export targets were not met as planned and contributed to the hard currency shortages. Buy why did we fail to meet export targets? It is because, we were wrong when we perceived Ethiopia’s commodities as “expensive” compared with others. We hastily devalued the currency against dollar. Those who pressured the government to devalue its currency are now claiming the measure was wrong too. I wrote in my book criticizing the measure and I still hold my position; it was wrong to devalue the birr.

At times, officials of the central bank were bombarded in the newspapers for not considering devaluation. On the other hand, the low-level export performance of coffee was not entirely related to market situations and prices. Coffee export revenue has substantially declined because of maladministration of institutions and market actors of the country. Exporters and dealers have played a vital role adulterating the export targets. I wrote all about that and I am glad that the new Prime Minister is talking about the same issue. “Evasive sabotage” is widespread in the coffee trading business. Hence, we can be sure that it is an artificial problem which can be managed quickly. We can see what’s happening with the prices of official exchange rates against with the black market rates. The gap is almost closed. The games are played out of the pitch. The pure economic games are shunned by systemic irregularities both within and outside the government system.

Could you say there is enough production to export if not surplus?

There is adequate production. We don’t have a quantity problem with regards to coffee. Actually, our problem is appropriate payment and valuation for the produces. When they get low-pay, they contemplate to shift crops that could earn them reasonable incomes. If you ask me, what should be done in order to sustain coffee production? I would rightly tell you to leave it to the market to decide. Farmers are producing yet not receiving the right income for their produces. That needs to change. Yes, we might have become a debt-stressed country; but being immersed with feelings of guilt will not take us an inch further. Honestly, I do not care whether IMF or the WBG reports about our debt situations. I care to know what exactly we are doing to the economy. Don’t forget that this country was able to manage a high-level of inflation in the past not because it was advised by the likes of IMF. Surly, indigenous policies and strategies are by far the best tools to measure your success or failure. We might be wrong somewhere. But it is better to have our own homegrown policies. I am not scared of being debt-stressed but worry if the country defaults.

The major political unrests sustained in the past three years basically was the results of economic shortcomings. The government acknowledged that macroeconomic challenges such as unemployment, low-level of production and productivity and failure to transform the economic sectors have contributed to social and political unrests. These issues are still headaches to politicians but what about for economists?

I agree with you and openly write that it is the economy that matters not the politics. We haven’t done much what the economy requires us to do. For instance, you mention low productivity is one of the factors. But what are we saying? If you go to any of the agricultural research institutes, they would definitely tell you that they have all sorts of crop technologies this country might require. Go to livestock sector, they will tell you the same. If productivity is a factor of technology and improved practices, I don’t think we have shortages of that. Though the national average production has been improved, yet it is difficult to find the amount of production as opposed to accumulated technology we have. The other problem with agriculture is that the sector has been tasked to undertake many activities but is not well supported. Politicians have long-lost the game. They regularly convene to talk but if you are about to transform the economy do and try harder. I strongly counter the issue of capacity. They always talk about capacity building which I find it to be nonsense. For how long should you keep wondering about such issue? People get trained for years and before they do anything they leave for some other job. It’s a vicious circle.

You cannot be an upholder of resource based theories all along the decades. Shift when it is required. Agriculture was designed to focus on utilizing labor and land as resources. Capital was left out and we argued for that to be corrected. Capital needs to be injected not only for exportable items but it is required to be introduced for staple food production activities as well. Ethiopia has been importing some 600,000 metric tons of wheat annually which it was not supposed to do so, yet it is a regional center for excellence on wheat. We need to change the status-quo. We seriously echoed that the government should bring capital to agriculture and at some point they did. One of the issues that I have mentioned in my books has got to do with the fate of smallholder farmers. Ethiopian smallholder farmers who could grow into medium and large scale farmers need to be supported by policies and strategies. They need to be provided with larger farmlands. They need to have better access to land that can accommodate such farmers.

The country has close to 64 million hectares of arable land out of the 112 million total land size. Out of the available arable land its only 10 to 15 percent that has been so far cultivated. What does that mean?

First of all, agriculture is at its backward formation in the country. It’s highly concentrated in the highland parts of the country. High-valued crops have been left for highland areas, but land fragmentations and infertility has riddled farmers there and still nothing has been changed.

Let us see some of the potential outcomes in the economy. Fuel has been extracted and has become a potential commodity to be added in the exportable items. In addition to that the new administration gave emphasis to the hard currency situation and pledged to the diaspora to contribute in a reused fund scheme. How do think such things would consistently help the economy and how would such initiatives potentially help curb the shortcomings of the economy?

A few weeks ago, I was in Nigeria and I had the opportunity to meet Nigerian experts. I was tasked to present a paper and I tried to brief the audience with comparisons between Nigeria and Ethiopia. I tried to showcase how Nigeria with USD 2,000 or more per capita income is very well positioned than Ethiopia which has USD 800 (latest per capita income is USD 963), one of the experts downplayed the per capita income notion. He said that it is not a real reflection of the society where half of the 200 million Nigerians are living with. The real per capita income they claim is estimated to be below USD 500. Almost half of the Nigerian population is assumed to be living below poverty line. We need to be careful on that. In fact we are better-off without the oil. I came across with extensive findings that indicated Ethiopia has a rich oil resource. There are numerous evidences documented and I was able to read some of those inside the US Library of Congress a long-time ago. But capitalism is a serious hurdle in this line of business. Those active in the oil business do not let you get into the club so easily. It’s good to have the oil once we know the intricacies of managing it well both locally and at the international scenarios. Change in the administration has helped to restore confidence. As we might notice, Ethiopians in the US are more than eager to receive Prime Minister Abiy Ahmed (PhD). 

If it works, the trust fund that seeks to have a single dollar contribution from at least one million diaspora members will generate USD 365 million per year. It will be wise to form some sort of corporation or any entity that enables diaspora communities to engage as shareholders. Such ways help to finance the likes of Ethiopian Great Renascence Dam project. I think this administration also has to give emphasis for local people too. Local consumption could play a role if the dispensable income of the society is well considered. The government has to do adjustments in the wage brackets. The introduction of minimum wage is essential. The new administration has to give priorities to change the income and wage policy we have so far. It is nonsense to promote foreign housemaids to go abroad while the same government institution defends foreign investors not to pay according to the gains they have generated. That is insane. I have argued for long for the introduction of minimum wage. The household has to be empowered to have a purchasing power and its imperative for foreign investors to have such capable society to spend.

What could be the attainable and unattainable targets from the GTP-II?

I think most of the targets set are not that easy to achieve. I see no problem in being ambitious. But the problem is when you see how they perform in managing the resources; they have to exert a coordinated effort. There is a huge problem in the institutional arrangements. The government spent much of the time in rearranging institutional frameworks. You have to change such daunting matters and I think we have to depoliticize what goes on in that line of business.