Ethiopia: Accelerating Inflation Threatens Growth and Livelihoods – By Keffyalew Gebremedhin
In this piece, I am making a few observations that are prompted by Deputy Prime Minister (DPM) and Foreign Minister (FM) Hailemariam Dessalegn’s implicit denial that the current double-digit inflation that continues to trash livelihoods and Ethiopia’s economic growth prospects would have no impacts on the five-year plan underway and the project to harness the Nile River. His conclusion was, therefore, “So I think we can perform on the ambitious plans that are in place”, despite inflation accelerating to a new high of 34.7 percent in May, up from 29.5 percent in April (Bloomberg, Ethiopian Economic Growth to Beat IMF Forecast, Deputy Prime Minister; www.businessweek.com).
In the Growth and Transformation Plan (GTP), the country’s economy under the base scenario is forecasted to grow at the rate of 10.4 and 11.0 percent for 2010/11 and 2011/12, respectively. However, on completion of its Article IV Consultations with Ethiopian officials on 31st May, while acknowledging continuing “strong growth” during 2010/11 (www.imf.org/external), the IMF concluded that it did not see possibility of the government’s forecast being realized. Therefore, against the backdrop of trends in the world economy and based on the overall analysis of the health of country’s economy, especially the revenue sources, fiscal policies and the expenditure targets, the policy environment and institutional capabilities, the IMF reached the following two conclusions the government continues to dispute:
• It reduced the government’s base scenario projection of 10.4 percent for 2011 to 7.5 percent.
• It took firm position that the cause of the current massive inflation is not only the very high international commodity prices. But also the excessive rise in money supply, which by the end of March 2011 rose 35 percent, against IMF’s projection of 22 percent.
Moreover, this situation persisting the IMF anticipates worsening performance of the Ethiopian economy in 2012. It, thus, brought down growth estimates to 6 percent, down almost by half from the official base scenario of 11 percent. Understandably, these two conclusions have rattled Ethiopian officials. Clearly, it simply means collapse of the major part of their calculation by which government has assumed to prepare the county for a major take off to the middle-income group of countries beginning end of 2015. It is against this backdrop that the DPM felt the need to dismiss those conclusions in London before by invitation only sympathetic audience.
Position of the Ethiopian government: my words against yours!
We need to keep in mind also that this is a time when conflicts in the east are hemorrhaging the country, especially with recent escalations, including in the south down to Kenya’s border that necessitated the two countries officials had to undertake a couple of sit-ins in the last few weeks. This has huge implications on the economy, but also only in lives, resources and the concerned people’s ways of life. At the same time, such distresses within the country also impact on many levels the country’s dream of becoming a middle-income country and a regional player, going beyond the attempt to buy status, like Bangladesh and Nepal, as troops provider for conflict situations in Africa and else where. In addition, by government estimates, 4.6 million more people are in need of help in drought situations.
Ethiopia’s disaster preparedness office requested additional $75 million in humanitarian aid for April and May alone to meet the needs of people in the nine zones of the Somali region; Borana and parts of Bale, Guji, Arsi, East and West Hararghe zones of Oromia region; and South Omo, Konso and Derashe Special Woreda of Southern region, affected by what Oxfam says, is the fifth drought since 2000.
At the moment, international agencies speak of once again La Niña-induced drought and the crises in the Middle East conspiring against Ethiopia; cattle exports have significantly dwindled, as global food and fuel price increases pushed higher the cost of buying foodstuffs and other essential imports (ETHIOPIA: Help “trickling in” for millions needing food aid, http://www.irinnews.org). Incidentally, although drought is known t be cyclical, the GTP policy document does not even mention it among the major risks the country should worry about in its implementation of the five-year plan.
Therefore, without explaining the logic for his bold assertion, on 9 June from the Ethiopian Embassy in the UK
Ato Hailemariam Dessalegn underscored, “Expansion won’t drop below 9 percent in the fiscal year to July 7, 2012, from 11.4 percent this year”, according to Bloomberg. He attributed en toto the current inflation to be the pass through effects of foreign inflations. He thus stuck to his script, i.e. the original GTP forecast, arrived at policy-level in mid- year or spring of 2010, not retouched since.
If nothing else, the question now must be how one could reconcile the DPM’s argument that portrays the double-digit inflation as impactless on government programs. In the policy document, they have identified “the global market price fluctuations” (emphasis added) posing “some challenges to effective implementation of the plan” (p. 123). The concern, thus, is that it is unlikely this trend, which has been in an upward momentum since November 2010, could reverse course sooner.
Domestically, the shortages of goods and services, especially food items and weaknesses in domestic capacities, continue to be increasingly intractable. Food prices jumped 41 percent in the year, compared with a 32.2 percent increase in April, by official admission. This one serious indication of the structural and policy problems the country has been suffering from for a long time. Avoiding that as much as possible, Prime Minister Meles Zenawi has always chosen to attribute inflation in Ethiopia as strictly growth-related. In theory, he is right, depending on the circumstances. Presently, inflation is on the rise internationally; various central banks in the developed countries and in Asia have already cryptically hinted that they are gearing up to raise interest states, save in the US. Moreover, in early June members of OPEC agreed not to increase oil production, choosing to amass more profits from higher prices. Nonetheless, DPM/FM holds that the current double-digit inflation in Ethiopia, which he linked to oil prices and the crises in the Middle East are, “temporary.”
Therefore, the DPM intention appears to be mere a defense of agreed government position, despite the reality to the contrary. In my opinion, this is unwise, which hits me as indifference to reality—for a reason I hate to contemplate. Stating “Ethiopia has stepped up savings through the sale of bonds to individuals,” after “a World Bank official said higher inflation may undermine savings and leave the country reliant on foreign capital to finance investment projects” (Bloomberg, Ethiopian Economic Growth to Beat IMF Forecast, Deputy Prime Minister) is not a credible argument in this inflationary environment.
Of course, it would make sense to some degree if he were speaking about the reason why the government pushed the sale of Nile bonds with utmost urgency in April and May 2011, without even making adequate preparations. In that case, it means that the purpose was to generate premium against inflation as surtax, with the aim of dampening its acceleration. This means that the government was long aware that its price caps & its imports and distribution of commodities have not been working. Even then, it was hyping patriotism. That being the new reality, interestingly Ato Hailemariam Dessalegn indicated on what he based his conclusion, in what sounded that Ethiopia was declaring MISSION ACCOMPLISHED, although the five-year plan still has 50 more months to go on. Here is what he said:
“The whole community has mobilized to buy bonds…This huge savings and mobilization is used for infrastructure development…We are getting loans from China, India, Turkey and South Korea, so all these foreign savings are also mobilized (emphasis added) http://www.bloomberg.com/news/2011-06-09/ethiopian-economic-growth-to-beat-imf-forecast-deputy-prime-minister-says, 9 June.
Incidentally, unless global post-financial crisis economic curricula has fundamentally been altered, in the basics of economics, bond to the originator is debt—in this case the Ethiopian government—as are its domestic borrowings and international loans—irrespective of their sources. It is kind of bewildering that the deputy prime minister and foreign minister should now refer to those debts from the people of Ethiopia, and the governments of China, India, Turkey and South Korea as ‘savings’ to Ethiopia, unless he was misquoted or misinterpreted or his words oversimplified.
It is true in real life of a less transparent state that, when officials try to defend one position they usually open up unexpected Pandora’s box in another area. When that happens, officials get caught in the web of so many problems that early on were covered up or are either shabbily treated or addressed only for their symptoms, instead of their root causes. When this happens, citizens and the rest of the world observe how much the trappings of power in Ethiopia are increasingly becoming noticeable, with pretention becoming tool of choice in statecraft.
Parenthetically, I must add that on May 9 I was gripped with strange curiosity, in reading conclusion of the one-day EPRDF Executive Committee meeting. A news piece on Walta read, the Committee “reviewed the reaction of the people to the renaissance dam and stressed the need to repeat the public drive created towards the Grand Ethiopian Renaissance Dam in other development and good governance sectors by bolstering national consensus” (emphasis added–http://www.waltainfo.com/). This is not news: It was a very clear instruction for more propaganda work, in the ruling party’s top-down tradition. This is extremely difficult to comprehend that people who are so literate in the theories of diminishing returns should count, most of all on sustained patriotism under the country’s present condition of rising dissatisfactions and longstanding distrust between the ruling party and citizens.
For all we know, patriotism is a form of secular faith, whose means of sustenance unto it is of a primordial nature. Thus, mining it for political ends might come back with undesirable outcomes. This is because words alone cannot satisfy man’s material and spiritual needs.
In fact, this brings to mind the fictitious story of Feminia Daza’s life in the Nobel Prize winning Colombian writer Gabriel Garcia Márquez’s Love in the time of Cholera. The years she spent as prisoner of customs, constantly doubting its worth on account of her entrapment, Feminia comes to realize the meaning of rising above the mundane in search of true love, beyond ordinary feelings and human weaknesses, societal expectations and judgment in the allegorical period of love and cholera. Once she broke those shackles with her own maturity, she sees her liberation and what she has been looking for, acknowledging the reality of her life and the world she lives in. The key here is awareness and reality!
What are the indications that more serious economic problems are in the offing?
In the GTP policy document it is indicated that the off-budget financing requirement in foreign exchange for infrastructure and industrial development for 2011 is about 54 percent of the total, which roughly is about four billion dollars and 63 percent for 2012, roughly five billion dollars. This brings the total off budget requirements in that category in foreign exchange to nine billion dollars. In addition, out of the overall financing of Birr 616 billion, almost 55 percent or roughly USD 20 billion, is required in foreign exchange. In the world of the fast rising inflation, one only need guess extent of value losses the local currency has suffered and what that implies to debts denominated in foreign currencies.
Real interest rate in Ethiopia has been negative for a long-time and more so now. The impact of this has been reverberating throughout the economy. Savings have become unattractive for savers. In spite of this, GTP foresees gross domestic savings rate to jump to 7.4 percent in 2011 from 5.5 percent in 2009. Then it is expected to go onto its upward trajectory to 10.4 in 2012, 12.4 in 2013, 14.4 in 2014 and 15.0 percent in 2015. How could this be real? Evidences that this is less likely are coming together from every direction, as the first year of GTP is winding down, with less than two months remaining. That reality is anchored on the dwindling values of the birr, fewer exports, more exports—a situation that has necessitated the cost of imports, increased resources for debt repayments and debt servicing by government and the private sector becoming real burden.
In other words, the managed interbank weighted average exchange rate of the birr against the dollar has been heading for quite sometime in a downward direction. This is seen across currencies, for instance, relative to the Chinese yuan, Indian rupee, Korean won and the Turkish lira, from which foreign loans are secured for GTP implementation, as Ato Hailemariam Dessalegn indicated in London. The same has been true for a long while against the dollar, British pound, yen and the euro. This situation has morphed into a picture of the country’s balance of payments sinking deeper into negative territory. Of this one, without any need to gloss over unwanted situations, the DPM said, “There is a huge gap between imports and exports and that balance of payment is creating lots of problems at this moment and we have to work hard to generate more exports.”
Unfortunately, even without these messiness many Ethiopians are disappointed that this government keeps on landing on macroeconomic instabilities time and again and always finds it easier to blame others or find excuses to exonerate itself, instead of admitting mistakes and correcting them.
Face the reality; listen to the voices of experience!
Taking IMF’s conclusions into account, the solution for the country is not of finding common ground. It is a matter of taking appropriate measures that benefits the country and protects ordinary citizens from the ravages of shortages of everything, money rapidly loosing value and taking down with it the livelihoods of millions of citizens. At the moment both IMF and World Bank seem seriously concerned by a number of problems in the Ethiopian economy. At a time when the country representatives of both institutions are leaving on transfer and retirement, they have chosen to speak out publicly to share their years of observations. We need to benefit from that.
For obvious reasons, the World Bank is not happy with TPLF’s deliberate politics of battering the private sector. It has worked chaperon for the Ethiopian government in accepting the fact that it cannot do without the private sector. The WB sees that two decades gone, the back of the embryonic private sector is against the wall in Ethiopia. It has done a lot of good for the regime to improve its image, throwing the bulk of their investments in services that have made Addis Abeba glittery, with huge buildings and several hotels mushrooming, as if the economy’s engine has cranked unstoppably.
This has given the impression that the whole country has been transformed. While the TPLF has taken credit for that, evidently the real economy has benefitted little—if one examines industry and the manufacturing sectors. That is an evidence of the regime’s lack of foresight and ability to direct investments to strategic areas, with long-term economic expansion in mind. We have heard of a lot of talk about Korea’s experience as a reference. What Korea did is to bolster the private sector with the chaebol as a system. They made sure that they never gave up on poverty eradication through quality education, fair competitive system and rewarding merit over blood relations and political alliances.
Unfortunately, although in theory committed to all-round development, the ideological developmental state in Ethiopia has made real economic expansion impossible—see the data in the industry sector. Check out why the development of ICT, including mobile phone penetration is lower than Somalia’s. This is simply because of TPLF’s fear of too much information in the hands of the people. For that, its policy choice is one of embracing ‘arrested development.’
Not that every-thing the IMF or the World Bank say is always right, but it is worth listening this time to them, after a repeat of devastating failed macroeconomic policies. However, this time the IMF is on point. Beyond its displeasure with the rigidity of the government position regarding the causes of inflation, about which the spats have become perennial, IMF’s Country Representative Sukhwinder Singh says, “If you take a lot of resources from the system and keep it for the government, you’re killing the goose that lays the golden egg. We’re not saying the government shouldn’t take a leading role, or the government shouldn’t do many productive things, but it’s a question of balance and speed,” (VOA, courtesy of www.nazret.com).
Similarly, with a heart attached to the country the World Bank’s outgoing Country Director for Ethiopia Ken Ohashi observed on Addis Fortune:
“For Ethiopia to be a thriving nation in the globalised and fluid economic setting of today, it must become a system in which there is a profusion of new ideas, new technologies, and new products. To create such a system, Ethiopia will need more “empowered” children who would not have hesitated to say, “Teacher, we have a problem.”
The government will also need much more feedback, from its own officials, the media, opposition parties, academics, the private sector, and citizens at large. And the country will need to expand the space in which different ideas are debated vigorously, to forge and sustain a national vision and to identify the best policies to achieve the vision. (In the diverse traditions of Ethiopia, there are ethnic groups that are far less top-down and more egalitarian, as Professor Donald Levine has shown in his works. In fact, such traditions can play a catalytic role in changing the dominant tradition of hierarchy.)
I leave Ethiopia with a conviction that it is a country with immense potential. If it succeeds in reorienting its past approach and develops a more bottom-up and open way of achieving collective efforts, I believe that its future will be bright.”
He is not alone: Many Ethiopians, those from afar included, have warned about the rising discrepancy between reality and propaganda in the country. As a professional who has made it his job to study the Ethiopian policy environment, Ken Ohashi has read it right. It shows in the following quote he wrote on Addis Fortune, his last commentary from Addis Abeba:
“A system that is long on top-down discipline and control may be strong in the sense that it is able to impose its will and execute certain kinds of plans well. It may also be stable, for changes are not readily permitted. But it may be “brittle,” as it is short on ability to adapt; it could break down when faced with a major crisis.”
Therefore, pretention is a norm in Ethiopia today. For instance, another revelatory simple case is that the world was made to believe that the public gathering for celebration of 28 May, TPLF’s 20th year in power was voluntary and spontaneous. However, we learn from a news report by the Reporter that was not the case, as the attached story shows http://www.ethiopianreporter.com. There must have been internal party instructions to force everyone out, perhaps under threat of penalty. Had that not been the case, there would not have been any need for such a notification by the City Council’s personnel manager calling for investigation of those that did not show up with the throngs on 28 May.
We all have stake in what is happening to the country’s future. As one of those Ethiopians that have happily supported construction of the Renaissance Dam (RD), I believed then as I do now that this initiative would be the most decisive step in establishing Ethiopia’s fact on the Nile River. I welcomed it mostly believing that its realization would go a long way in redressing historical injustices against Ethiopia’s wellbeing and its national sovereignty. If done right, I still believe it would grant Ethiopia its official title deed on the Nile, same as Egypt’s High Aswan Dam, the basis of its “historic rights” to the Nile.
Nevertheless, my support is based on consideration of the possibilities that Ethiopia could also achieve a greater part of the 48 targets of the United Nations Millennium Development Goals (MDG). After all, resources flows have never been any better for Ethiopia, if everything is used with great care and reasonable efficiency. Of my worries and concerns, I wrote at the time in http://transformingethiopia.wordpress.com:
“When the state is clear where the interests of the nation lie, it could turn them to the benefit of the people with good policies and transparent program auditing capability. Most importantly, program auditing is relatively easier, less time-consuming than auditing accounts. Beyond strengthening the nation’s economy, such an approach would positively impact the domestic economy and also would have positive accent on the problematic Ethio-Egyptian relations, at the core of which is the Nile Question. After all, the responsibility of government is to ensure the wellbeing of its citizens and safeguard the nation’s interests. Unfortunately, there is now a great deal of leakage in the economy that takes away resources from where they should have been put to productive uses. I have in mind poor macroeconomic policies and official and other forms of corruption, about which much has been reported.”