IMF report chiding Meles’s economic & financial polices not to see light of day By Keffyalew Gebremedhin
The latest IMF report, synthesized after a staff mission to Ethiopia from 18-30 May 2011, strongly underlines that Ethiopia’s macroeconomic performance “has deteriorated markedly”, according to the Ethiopian Reporter (Amharic) of 28 August 2011. What makes the mission’s observations tough for the government to swallow this time is not mainly what it said—since we already have an idea of the mission’s expressed concerns from the May 31 IMF Press Release no. 11/207. It is rather how the report said it, according to the weekly paper.
IMF’s Executive Board, under the chairmanship of its Managing Director Christine Lagarde considered the report on 26 August 2011. The Reporter has indication through its contacts that the Board has taken a position. However, it is unlikely the Board’s conclusions would be made public, with the government officials insistent on the Mission’s report being shelved away.
As to the reasons for the Meles regime’s fury, the Reporter wrote: “ሪፖርቱ ጠንካራ ቃላትን በመጠቀም የኢትዮጵያ መንግሥትን ክፉኛ የተቸ በመሆኑ፣፣ ሪፖርቱ ብስጭት የፈጠረበት የኢትዮጵያ መንግሥት ለአባል አገሮችና ለሕዝብ በኢንተርኔት እንዳይሰራጭ ያገደ መሆኑን ምንጮች ጨምረው ገልጸዋል፡፡). Unofficial translation:
“Since the language used to criticize the Ethiopian government has infuriated the officials, IMF has been asked not to release the report in any form to member states and the public on the Internet.” Certainly, a member state is within its rights to ask reports for which its concurrence is required cannot to be circulated.
However, such privileges come with a huge price—the knowledge by its citizens in some form and also other countries through their sources that the government has something to hide. Therefore, when it comes to this it is a bad exercise of rights, without any success in stopping others from hearing about its conclusions, or putting their hands on the report itself, as the Reporter is reporting now and I too am writing about it.
Frankly speaking, the fact of the matter is that, as far as what I gleaned from the report through quotes on the Reporter are concerned, I am inclined to think that government has rather become extremely edgy and more jittery than before, say for instance since last May, when the staff Mission and government had serious differences of views.
The government’s reaction seems to be reflection of its worries about inflation running wild and food prices continuing to rise since from 32 percent at the end of May to nearly 40 percent by first week of July. Therefore, with the kinds of comments and observations by the IMF that go into the media, the regime worries that it cannot get its way to say and claim whatever it wants by way of its achievements and get away with it.
For instance, I have tried to compare what is quoted from the report with the May press release, cited above, and with the more straightforward remarks by the outgoing Country Directors to Ethiopia Sukhwinder Singh of IMF and the World Bank’s Ken Ohashi I see nothing new. On top of that, many Ethiopian experts who have been writing on the Ethiopian economy both from home and abroad also share most of it. What then is the regime is trying to suppress in that report? This simple answer is: Nothing in terms of issues, but a lot in terms of EGO!
From the Reporter’s piece, it appears that the central issues are:
(a) Since November 2010, the government’s ‘loose money policy’ has induced persistent inflation, which has affected the lives of millions of people and endangered the future of businesses in the country;
(b) In a country with an interest rate significantly below the rate of inflation, this has created a state of ‘highly negative real interest rate’ that discourages savers and undermines growth;
(c) This situation has immensely benefitted only government-owned development agencies that borrow substantial amounts of money from government owned commercial and development banks at horrendously cheap rates; and
(d) Government control and regulatory polices that of late have misdiagnosed the sources of inflation itself have severely ‘damaged private sector confidence in Ethiopia.’
In addition, the report has also touched upon the short-lived price control measures and the not so carefully planned salary increments to civil servants that made their contributions to severe dislocations in Ethiopia’s macroeconomic performances. This was also bitterly admitted by the prime minister when he held meeting with members of businesses in the Addis Ababa Chamber of Commerce, where he put the blame on them.
The reality, however, it that the report highlights that today Ethiopian inflation is four-fold higher, compared to inflation situations in Kenya, Uganda and all of Sub-Saharan African economies added together, according to the Reporter.
It is clear that in a very strong language unheard of before, the IMF rightly holds the government responsible for the country’s macroeconomic ills, according to the Reporter, citing World Bank sources that anonymously spoke to it. The worries on the World Banks side are that these situations would adversely affect all citizens, but some more than others, especially those that of late have begun to benefit from the poverty reduction measures.
As mentioned above, the report puts all the blame on government’s ‘loose money policy’, which has seriously impacted Ethiopian citizens and businesses. In that respect, it is reported that the Fund is critical of the operations of the National Bank of Ethiopia (NBE), especially its excesses in the printing and distribution of money. It also made criticized the central bank’s policy failure to set appropriate rate of returns to depositors.
The IMF rejected NBE’s attribution of Ethiopia’s inflation as basically originating from foreign inflations, according to the Reporter. It underlined that the main source of inflation in Ethiopia basically is the sum of money printed by NBE, which of late has shown an increase of 42 percent, and the money the banks advance for government operations that have increased by 45 percent. At the end of the third parliament, at least, that much the prime minister has also admitted that money supply grew by 40 percent.
Moreover, the IMF report also severely criticizes government policies that force all private banks to make available 27 percent of their loanable funds, depositors put in these banks at a rate of 5 percent interest rate toward purchases of the Renaissance Dam bonds at a rate of 3 percent—which means at a loss. It considers it unjust.
It is indicated, even if this measure temporarily strengthens the government owned development and commercial banks, it does not mean it is free of other dangers that would affect the overall economy. This is, in a country where the embryonic private sector and the small shoots of a budding middleclass are targeted as hunted animals, the growth of the private sector is heading against the wall. This could be seen initially with privately owned financial intermediaries stifled over time. As a policy measure, this would also have serious ramifications for the development of the financial sector in the country.
This indicates that the Meles regime is concerned only about ensuring its control over government owned banks, as its money fountain. It knows that it cannot get its way in the privately owned banks, although it has made its first inroads, commanding the direction of 27 percent of their assets at this very moment. Could this be an overflow of Meles’s ideological and visceral hatred of the private sector, he could not overcome, even if after 2001 or around he had claimed to pursue ‘white capitalism’?
That is why it has increasingly become difficult to make sense of Ethiopia’s economic and financial policies that have long lacked anchor and clear direction. Yes, there is a great deal of efforts and some successes to in attracting foreign investors. But domestic investors are being denied of opportunities to develop and compete with foreign investors. This is detrimental to the national economy’s growth and competitiveness of domestic investors.
Amongst consequences of these adverse actions is that the economy has grown only by 7.5 percent in 2010/11, instead of the 11.4 percent the government has targeted, according to the report. I see the rationale for IMF’s new growth targets of the economy at 6.5 percent on annual basis for the period from 2011 – 2015. They are reduced growth trend indicators, due to problems discussed above, but not necessarily statements of facts.
Last December, in a commentary entitled Driving Economy at Max Speed without Overheating It Key to Steering GTP Eyob Tesfaye, an Ethiopian macroeconomist close to the government, acknowledged:
“In its current shape and form, the financial system is not considered a growth catalyst because it is incapable of allocating resources efficiently and effectively. With a distorted allocation of resources and a fragile financial system, it is hardly possible to ensure sustained growth, let alone bring a fundamental economic transformation.
Basic reform measures, such as unabashed cleaning of the balance sheets of banks as well as the introduction of a standard liquidity and reserve management, are nonexistent. It makes little sense to put a racing engine in a car with flat tires. Ethiopia’s capacity for growth has certainly increased over the past seven years. Policymakers, thus, believe that it is possible to register an annual growth rate of between 11pc and 14pc; the popular argument is that Asian countries, such as China, grew by more than 11pc for long periods.
Why not Ethiopia?
The breathtaking growth some Asian countries have seen was based on productive growth, high savings, a robust private sector, a vibrant financial sector, and high quality education. Although Ethiopia has made economic progress, it needs faster and further growth to create more jobs for its increasing population, better infrastructure and quality of education, as well as high savings to overcome abysmal poverty. Addressing the issue of prevalent supply constraints, running the economy within its maximum speed limit without overheating it, and mobilising sufficient resources to finance development efforts are the essential factors to realise the GTP objectives” (Addis Fortune, 12 December 2011).
Reflecting on Ethiopian reality, the problems of youth unemployment and the country’s future growth path, Eyesuswork Zafu, President of the Ethiopian Chamber of Commerce and Sectoral Associations and CEO of United Insurance, expressed serious worries about the future of the private sector in Ethiopia in an interview on the Reporter (English) of 27 August 2011. He disclosed:
“Well, that the private sector is the engine of growth is mentioned in the Plan [Growth and Transformation Plan]. And this has been said so many times by so many people that it is becoming more or less a kind of cliché. It has lost its meaning and significance. For me I still see a very serious and threatening crowding out of the private sector. The GTP is mostly talking about the government doing this and that. Government must make or take affirmative actions so that the private sector will have a chance to grow and have share in generating employment. I do not believe the private sector has received the kind of attention it should. The government has to put indicators it is going to use what it has done positively to help the private sector. In this country there is confusion even as to who represents the private sector. There is a need for planners to be aware of this. And there isn’t much in the GTP for the private sector. It is much about the government and some foreign investors or investment. The domestic sector is not likely to have its legitimate share. But when it comes to contribution of funding to projects like the Renaissance Dam, it is the private sector that took the front row. And had the private sector been made stronger, the contribution would have doubled.”
Dr. Wolday Amha, Executive Director of the Association of Ethiopian Microfinance Institutions, and a close adviser to the government was asked in an interview (Ethiopian Reporter (English), 20 August 2011) why inflation has become so persistent in Ethiopia. His response is brutally frank, exposing the economy’s lack of appropriate policy leadership and anchor. Here is what he said:
“With little efforts, it has been made possible to significantly increase saving and deposit. If the government takes concerted efforts to put the inflation at bay, it [the inflation] could as well be controlled. But I don’t see that would come to pass. It is not merely the monetary measures or policies that the National Bank of Ethiopia takes that will do away the inflation just by themselves. It should rather be the concerted efforts of all government agencies that could curb the inflation. If the central bank takes some measures to mitigate the inflation while the Ethiopian Revenues and Customs Authority (ERCA) comes up with some new tax system or that the Ministry of Trade (MoT) introduces new regulation that may give way to rising inflation, the right job is not done at all. As such a task undertaken to curb the inflation may entail political risk, an institute led by the prime minister or a higher authority, which will put in place prudent and concerted efforts all focused on curbing the inflation, should be established to do away with the prevailing inflation. As the basis for the fulfillment of the GTP is saving, the saving culture should be sustainable. And for that to happen, utmost concerted efforts comprehensively focused on curbing the inflation should be exerted while more has to be done to nurture the slowly but surely growing saving culture. And the policy should be more consistent than the one that frequently changes to meet some needs here and there.”