Uncertain, But Still Optimistic
Although his administration is being challenged on all fronts, from governance to macroeconomic stability, Prime Minister Hailemariam Desalegn opts to stand on the optimistic side, while presenting the six-month performance report of his administration to the Parliament. His appearance before Parliament was historical for its accepting full responsibility for the loss of lives due to the recent protests in Oromia Regional State. It was a rare expression of regret. On behalf of his administration, he apologised to those who have lost family members.
Externalizing the source of the protest and failing to admit poor handling of the situation would have the potential to lead the whole crisis into a collision between the government and the larger public, according to a relatives government official. Though debatable, Hailemariam has attributed the source of the massive discontent in the region to maladministration, lag in regional development and increasing number of unemployed. Other members of his administration have vowed to compensate survivors of the victims and initiate an inquiry to bring those who used excessive use of force to trial.
In a parliamentary session that revealed the policy and emotional side of the Prime Minister, the macro-economy dominated the discussion. Yet, unlike other times, where the mood swings on the upper side, uncertainty was the prevailing sentiment within the House. Acknowledging symptoms tending to affect the 11pc annual gross domestic product (GDP) growth rate his administration puts forward when it began the budget year, Hailemariam warned that, “reaching to the targeted growth will be a daunting task.”
“An exact knowledge of the performance of the economy could only be found at the end the fiscal year,” the Premier told the 547-strong Parliament, fully controlled by members of his party and its affiliates. “But,” he continued,”all indications show that our economy would continue to record strong growth in the fiscal year.”
However, early signs do not favour his administration, for indications are that there will be shortfalls in the targets.
The unusually long, 34-page report, is not short of deficits. Export revenues in the first half of the fiscal year declined by 6.6pc from the same period last year, with total earnings standing at 1.3 billion dollars. This can only cover 16pc of the import bill. In contrast, compared to last year, the import bill in the first half of the fiscal year increased by 11pc, to 8.3 billion dollars.
It was such disappointing news for the legislators. Even the policy bullets that the administration have long-proclaimed for increasing export volume and import substitution, seem to have helped little. It was only in October, 2015, Hailemaraim told MPs, “we can manage to handle risks that come with price fluctuation in the international market, increasing the volume of export.”
Coffee and seasame, the two staple export commodities of the nation, have seen a 20pc increase in exported volume. But the earnings obtained from their export is far less than planned. Hailemariam has attributed the shortfall to the decline in international commodity prices. The prices of coffee and seasame have seen a 25pc and 40.2pc decline, respectively, on the international market over the past year.
That was not a surprise to the exporting community. Back in November, 2015, a number of exporters of sesame shared their concern at an international conference held in Addis Abeba, about diminishing revenue and stiffer international competition. Factors such as new competitors, including Sudan, which is now producing the same quality sesame crop that used be solely produced by Ethiopia, were among drivers of the decline mentioned in the export.
But a macro-economist disagrees.
“Price is the least [important] factor to impact export revenues”, Alemayehu Geda (Prof.), a lecturer at Addis Abeba University, told Fortune. “Price fluctuation is something that is always there.”
Rather, domestic factors are to be blamed for the shortcomings, said the macro-economist. Logistics, hurdles to deal with customs bureaucracy – the long time it takes, and limited access to finance, are among the list of serious criticisms made by investors as well.
It is an irony for an administration that advocates an increased volume of export as a way of attracting more revenue, ending up with the reverse result. But Hailemariam remains optimistic that the second half of the fiscal year could bring a better result. So does the International Monetary Fund (IMF).
The IMF projected, in its October 30, 2015, report, that, “the weakening of the global commodity prices should have a broadly neutral impacts on Ethiopia, with a lower oil import bill mostly offset by lower agricultural exports.”
With export earnings declining and the import bill skyrocketing, the trade balance of the nation has dived deeper into the red. Hailemariam’s administration seems uneasy running a seven billion dollar trade deficit. And the government’s projection shows a further expanding trade deficit.
“The performance [of the external sector] shows that the deficit is to expand,” he admitted. “But, strain has eased in the second quarter of the first half as foreign direct investmen (FDI), remittances and service exports have shown improvement.”
An ongoing El Niño-driven drought, reportedly affecting over 10 million Ethiopians, is where Hailemariam sees a major culprit behind the pressure the macro-economy is feeling. The drought is the worst in 30 years, according to the United Nations. A government outlay of 380 million dollars, complemented with 237 million dollars of donor support, could manage to fill only about half of the resources needed. Yet, aid workers continue to warn that the worst is not over, with a shortage of food stock, estimated to reach over 1.5 million tonnes, continuing to haunt the country.
“In areas affected by the impact of El Niño, crop and livestock production have been severely affected and hence there would be reduction in total agricultural productivity in these areas,” Hailemariam noted in his report.
But declining exports and expanding trade deficit are not the only concerns of Hailemariam. An even stronger worry comes from the way the macroeconomic pressures could translate into consumer prices. Monthly inflation figures have already reached the double digit threshold. Aggregate inflation for December, 2015, is reported to be 10.1pc and a major contribution to the increment comes from the food component.
“The government is doing its best for the inflationary pressure not to hurt low income earners through safety-net, job creation, housing construction, transportation provision and supply of consumables,” remarked Hailemariam. “Our import of wheat will also play its part in stabilizing the consumer market.”
Considering the already pressured external sector, however, the administration’s journey ahead may not be as smooth as the Prime Minister may hope. As exports decline, the reliance will be on private transfer, loans and aid. Each of these has been experiencing its own pressure over the past year.
Informal transfer is suppressing private transfer, which has increased by 1.1 billion dollars in the one year from 2012/13. A hugely constrained foreign reserve of less that two-months of imports, means that the hit of the informal transfer has not been easy. Ethiopia’s debt burden has already reached 56pc of GDP. Last year, its external debt stock amounted to 18.2 billion dollars, according to the National Bank of Ethiopia (NBE). The central bank projects that this will increase by 30pc at the end of this year. Similarly, the aid venture is discomfiting with the focus being on Syria and Iraq, as well as the massive immigration to Europe.
Most of the loans coming from China are too expensive in comparison to other lenders, and hence will create a pressure on the economy, Alemayehu projected. He compared this with loans from the World Bank (WB), which, he said, are less burdensome.
The IMF recommends reducing vulnerabilities, which will require adjusting monetary, exchange rate and public investment policies. None of these seems to be plausible for the administration, though.
“It is important to maintain the stringent fiscal and monetary policies of the past six months,” Hailemariam proclaimed, dashing the recommendation of the IMF.
The government is investing a lot on capital goods for public investment programmes and the return on these investments could come only in the long-term, Alemayehu said. The tricky part is that developing infrastructure to support export industries requires substantial imports of intermediate and capital goods, according to the macro-economist.
“Because the export responses takes time, foreign reserves have remained under pressure,” said the IMF in its latest report.
Coupled with weaker foreign demand for exports and dwindling foreign exchange reserve accumulation, further deteriorated by the resource need of the humanitarian response to the drought, it is highly likely that the road ahead for government will be bumpy.
The Premier’s hope seems to come from the aggressive push his administration is putting in the expansion of industrial, agro-processing parks and rural transformation centres. Industrial parks in Hawassa, Adama, Meqelle, Kombolcha, Dire Dawa, Jimma and Bahir Dar are all in the pipeline. An executive decision has also been made for one at Debre Birhan to pass to a feasibility study level, Hailemariam disclosed.
“The important task now is to win investors over to get into the industrial parks,” said Hailemariam. “And we have started to see positive results.”
Experts, however, argue that the volatility in Oromia and other regions, bureaucratic inefficiency, and widespread corruption could stand in the way of the administration’s search for investors in well-capitalised, skilled and advanced manufacturing plants. The Prime Minister does not seem to agree, however. He was rather emotional and firm in his tone.
“The government is committed to maintain the hopefulness created over the past years with aggressive action against chains of corruption and violence,” he warned.
With the economy nose-diving into disequilibrium, though, the balancing act for the administration is certainly tough. The impact this would have on the administration’s planned reform efforts, remains uncertain.