The New Year has begun with worrying global economic prospects: Ethiopia & China in perspective By Keffyalew Gebremedhin

January 28th, 2012 Print Print Email Email

The IMF and the World Bank are gravely concerned with uncertainties facing the global economy. Both institutions attribute the problems to the massive Euro states’ debts and the adverse consequences thereon to growths in developed and several emerging economies.

In its latest World Economic Outlook, the IMF is of the view that global recovery would stall, risks intensify and as epicenter of the new crisis, the Euro zone economies are foreseen falling into mild recession. Accordingly, the Fund has sharply cut its global growth forecasts to 3.3 percent in 2012 and 3.9 in 2013. In contrast, the World Bank’s forecasts are sterner at 2.5 in 2012 and 3.1 in 2013.

The perspective from the Federal Reserve in the United States is not any different. Fed Chairman Ben Bernanke cautioned on Wednesday that the central bank would keep rates at the present floor rate through 2014, a firm indication that the much-touted economic recovery in the United States is not firming up. It seems owing to that, he has qualified his statement by indicating, “Unless there is a substantial strengthening of the economy in the near term, it’s a pretty good guess we will be keeping rates low for some time.”

In mid-January, Justin Yifu Lin the World Bank’s Chief Economist and Vice President for Development Economics sounded the alarm to developing countries from Beijing, urging them “to evaluate their vulnerabilities and prepare for further shocks, while there is still time.”

Another official in charge of the Development Prospects office at the Bank recommends to developing countries to “pre-finance budget deficits, prioritize spending on social safety nets and infrastructure, and stress-test domestic banks.” Of course, many of them would express their frustrations by muttering ‘easier said than done.’

Consequently, it is now clear that the first unfavorable signs of the 2012 shocks would come in the form of falling growth rates in both developed- and developing countries by as much or more than that of 2008/09, according to a World Bank official in charge of global macroeconomics. His view is that this time, “An escalation of the crisis would spare no-one.”

The adverse impacts of these evolving situations in European economies and finances on Sub-Saharan Africa, according to the World Bank, would primarily affect merchandize exports, tourism receipts, commodity prices, foreign direct investment and remittances — the very sources of their means of importing the essentials for their development.

If this assumption is to hold, the first line victims of this onslaught could be countries such as Ethiopia, whose foreign trade by nearly fifty percent is destined to European markets. Europe has always been Ethiopia’s largest export destination, although steady rises have also been observed in the level of Chinese imports during the last few years.

Picking up the other end of the equation, the January 2012 issue of the Economic Intelligence Unit’s Country Report on Ethiopia points out, “Any significant slowdown in the pace of expansion in China—, a crucial economic partner for Africa in terms of trade and investment flows —would be of particular concern.”

This means that many developing countries must brace up with the reality of scaled down growth performances and expectations. This is because, as discussed above, many economies in the developed countries are heading into recession and are in no position to import as many commodities, entailing also falling prices for those they import.

Macroeconomic policies as source of continuing Ethiopia’s problems

On the inflation front, the World Bank observes, “Declining commodity prices have contributed to an easing of headline inflation in most developing countries. Although international food prices eased in recent months, down 14 percent from their peak in February 2011, food security for the poorest, including in the Horn of Africa, remains a central concern.”

Nevertheless, the threat to Ethiopia is not limited to what is happening in European economies. Decisions and policies contributing to macroeconomic instabilities would still be setbacks for economic growth and the country’s development. Recall that Ethiopian authorities in spring announced that they would bring down inflation to less than 10 percent by last September.

In October, the IMF had to warn Ethiopia and, I must add, proved right in stating, “High and rising inflation and entrenched negative real interest rates also threaten Ethiopia’s macroeconomic stability.” A sign of the continuing instability in Ethiopia’s economy is that, despite some signs of decline in inflation lately, by end December 2011 it was as high as high as 35.9 percent with food inflation at 46.5 percent.

It is very likely that we would see further declines in the inflation numbers. The question, however, is what importance it would be if after another quarter the country is to be back to further macroeconomic disturbances?

In any case, this puts to test Access Capital’s forecast in its Macroeconomic Handbook 2011/12, where it exuberantly foresees, “The possibility of an agricultural transformation involving rising acreage, rising yields, and rising exports [as] a very realistic possibility within the next few years.”

China would make its own adjustments

The current problems facing the global economy would also be source of worries for China. Therefore, Beijing would make its own internal adjustments in response to contraction in its foreign markets and increased consumption at home. This would involve prioritizing its imports, elbowing for new markets and searching for greater scope in existing ones to increase its exports.

This would not preclude the possibility of arm-twisting of its African clientele states, including Ethiopia — dependent on its financing of major projects — to import more goods and services. In 2011, Ethiopia’s imports from China are assumed to have outstripped its 17.5 percent level of 2009/10 (source NBE). This is mainly due to China being the source of loans and the centre of many purchases. Of course, one major difficulty is that, as Europe is the largest destination for Ethiopian exports, Asia remains the country’s largest import market, with China leading the way.

The debt burden is likely to become burdensome for Ethiopia going froward, as experts from the ministry of finance indicated to The Reporter. The worst part of the problem is that the loan negotiations are carried out by people who have no ideas of what risks they are putting the country into. The ministry of finance and the economy has no say, at least, in coordinating the debts. Certainly, it means that they also have no say in knowing what has happened to the monies.

In the face of this behavior of the ዘመነ መሣፍንት (the Era of Princes within government), I share the frustration of those great citizens and experts at the ministry of finance. I am struck by their courage to speak openly to the publicly, which I quote here, as an open call for help:

‹‹በተናጠል የብድር ስምምነቶች የሚያደርጉ ድርጅቶችን የሚመሩ ከፍተኛ የመንግሥትና የፓርቲ ባለሥልጣናት ስለሆኑ መሥርያ ቤቱ ብድሮቹን ለማስቆም ይቸገራል፤›› (Those who lead the offices that individually make loan agreements with foreign countries are high-level government and party officials, because of which it is difficult for the ministry of finance to stop the loans to those offices.”)
Therefore, the responsibility of Ethiopian experts in the eyes of those people is simply to record what they borrow, which the country either ends up paying or seeks relief (of course not Chinese loans), irrespective of whether these loans have been essential and effective in the first place in ensuring national development. The Chinese and the others know this and go to those officials, who in turn tough negotiators become difficult to operate as sort of lobbyists/government officials to benefit for foreign companies.

As it happens, at the moment the Chinese appetite for making up for the losses is strong and may take many forms. Unless Ethiopia carefully reviews whatever leverages it may have, the future engagement with China would turn out to be tougher, since its calculation may be dictated by their need to cut losses elsewhere.

Short of that, it should not come as surprise to anyone if Ethiopia continues to dissipate the few leverages it has had, because of officials whose sole loyalty is to politics that sees not the future, not even the country’s longstanding interests. As a consequence of that, today as yesterday, Ethiopia remains incapable of properly playing its cards with the Chinese, especially after the 2005 election aftermath, as well as with others.

These days, I see heavy traffic of Chinese papers writing on Ethio-Chinese friendship. The one that caught my attention, among others, is the following from the ministry of foreign affairs of the People’s Republic of China:

Bilateral economic cooperation and trade grew rapidly. Ethiopia has become one of the important partners of China in Africa in project contracting and economic cooperation and trade. In January, Minister of Commerce Chen Deming visited Ethiopia. China-Ethiopia package loan cooperation made steady progress. The outcomes of the Beijing Summit of the Forum on China-Africa Cooperation (FOCAC) were implemented smoothly. The two sides are stepping up communication and coordination on the implementation of the eight new policy measures on assistance to Africa announced at the Fourth Ministerial Conference of FOCAC.
In a study that came out in November and in a manner that underlines how much the Chinese have banked because of their relations with Ethiopia, Christine Hackenesch rightly observes:

For the EU as a whole (EC and EU member states), Ethiopia is the largest aid recipient in Africa (EU donor atlas 2010). Aid is the major instrument in European cooperation with Ethiopia and Ethiopia constitutes one of the key countries in reforming the European aid system. For China, in contrast, Ethiopia is not primarily an aid recipient but an important economic and political ally in its new Africa policy. Contrary to widespread assumptions that China primarily engages in resource rich countries, Ethiopia has become one of the largest recipients of Chinese official flows.
The advantage Ethiopia has facilitated for China is not inconsequential or something that should be considered an everyday opportunity. China has gained more than Ethiopia has, the value of which cannot be easily quantified in financial terms.

Most often, when the question of relations with China is discussed, politicians are quick to point out the importance of China in the development of African countries, especially infrastructural development –roads, power installations and etc. Surely, there is no obliviousness in that regard.

As the Chinese foreign ministry has openly stated, the arrangement must have suited China, when it says, “Ethiopia has become one of the important partners of China in Africa in project contracting and economic cooperation and trade.” The point of this article is that the benefits and interests must be balanced as two-way traffic as bilateral relations to make it even better and more a win-situation in practical terms.

As evidence of the present realities that is being disputed here regarding the realities of our relations with China, we have already got a taste of it from the level of Ethiopia’s interest payments on its fast accumulating debts China is owed, as The Reporter recently indicated. Data from the Ethiopian ministry of finance and economic development has shown that even in normal years, China has literally been charging Ethiopia humongous (relative to Ethiopia’s capacity) interest rates on commercial terms on 20-year loans linked to the LIBOR, compared to moderate interest rates from India, Kuwait Fund and others.

I do not mean to offer any consolation in writing the following. I must, however, state that this is not the first time Ethiopia has fallen victim to its foolish designs, by failing to capitalize on its advantages — or forgive the language — for choosing to prostrate before the interests of others.

For instance, when the Soviet Union was Ethiopia’s friend in the 1970s and 1980s, they knew that Ethiopia needed them more than they needed Ethiopia.
Therefore, they imposed extortive interest rates with manipulated exchange rates of the ruble on any loans or in the barter trade the country was involved with them. They even attempted on several occasions to discourage import of goods with better quality and relatively cheaper prices from other Eastern Europe, their sisterly socialist states.

Sadly, today’s Ethiopia has taken few lessons from that. Even where common sense could have been a better guide, the politics of the moment has prevailed, compelling the country to repeat the same mistakes all over again to its detriment — more debts and strengthening Chinese leverage on Ethiopia.

Coming May, the World Economic Forum Conference would take place in the Ethiopian capital. Since the conference’s focus would be Africa, what would Ethiopia’s contribution be, as a host and in the light of its own experiences with china, to help other countries benefit more, especially by avoiding its mistakes and the pitfalls of its experiences?

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