Ethiopia in Transition – The Economics of Abiy’s Prosperity – Abenomics?

The past four years might be the most eventful year for Ethiopia since the turn of the century. A popular uprise stretching from 2014 to 2018 brought radical change to the Ethiopian political system bringing a new administration led by Prime Minister Dr. Abiy Ahmed to the helm of state power.

On April 2nd, 2018, Dr. Abiy Ahmed was sworn in as Prime Minister in what was by all standards a peaceful transfer of power. During his inaugural speech, the prime minister set the tone on what will be the direction of the economy in the years to come.

The premier acknowledged tangible gains made in poverty alleviation; basic infrastructure expansion; and human development over the previous decades and expressed his confidence in his government’s ability to address key challenges of inflation, foreign exchange imbalances, limited access to finance, unemployment; and set the country on a path to sustain broad-based and inclusive growth that will permanently eradicate abject poverty.

He has good reasons to be optimistic. Few countries have achieved the kind of growth Ethiopia has managed over the previous decade and a half. In 2003, With a meager annual output of less than 15 billion USD, the economy was struggling with continued growth fluctuation and economic stagnation. Sustained growth in the following 15 years put the country among the top five economies in Africa with broad-based growth averaging a 10.3% a year growth rate between 2004 and 2018, which is almost double the regional average.

Starting with strong economic fundamentals and widespread support for the reform-oriented administration, there was a significant expectation to deliver miraculous economic transformation.

No Time to Waste- The Homegrown economic reform

As the saying goes there are decades where nothing happens and there are weeks where decades happen. Within weeks of assuming office, the prime minister launched bold measures to widen the space for political participation, free all political prisoners, and accelerated the effort to build independent and reliable democratic institutions to transform the framework in which society and state engaged. His effort to end the two-decade-long war with Eritrea brought him global recognition and made him a recipient of the 100th Nobel Peace Prize.

On the economic front, the new administration launched the Homegrown Economic Reform to address key macro-economic bottlenecks and unlock the development potential of the country and propel Ethiopia into becoming the African Beacon of Prosperity by 2030. 

The reform envisioned addressing challenges across three key categories.

Macro-Economic: open economy to more foreign investment to help correct foreign-exchange imbalances and minimize debt;

Structural reforms: Build government services that are predictable and reliable, and

Sectoral reforms: Expand agriculture and manufacturing productivity, unlock the full potential of tourism and mining, and enable digital transformation through information technology.  

Despite a very optimistic start, however, the country has faced unforeseen challenges that have significantly deterred the focus of the government from advancing its reform agenda.

First, the of the COVID-19 pandemic has brought devastating impacts on public health, humanitarian, and development emergencies that have strained an already limited fiscal space the government had. Concerted effort both from government and partners has softened the blow but it was still overwhelming enough to slow economic growth and detract from the reform drive.

Further, the conflict in the Northern parts of the country made any hope of rapid recovery from the pandemic unattainable. In fact, almost the entire period of Dr. Abiy’s premiership was marred by a significant increase in inter-communal conflict and internal displacement.

To make matters worse following the civil war, the administration faced diplomatic backlash from the international community. This was further exacerbated when the United States of America decided to suspend Ethiopia’s participation in the AGOA which has serious economic ramifications for Ethiopia’s exports and FOREX generation in the years to come. Read more: ACE’s insight. 

So, how is Ethiopia today compared to four years ago?

Despite the challenges, the economy maintained a growth rate amid the pandemic and conflict, a very remarkable achievement for PM Dr Abiy and his administration. According to a report from the world bank, Ethiopia’s GDP growth was recorded at 7% during the first three years.

Figure 1: Ethiopia’s GDP per capita (in $) and annual growth rate (%)
Source: World Bank

Despite the unprecedented level of pressure the economy faced, the country sustained a relatively high growth rate and maintained a steady per-capital growth. However, in terms of addressing the reform goals, the administration’s effort has mostly failed short of the mark.

Ethiopia today is in many ways facing the same problems it did in early 2018.  Issues such as debt distress, inflation, forex shortages, lack of conducive environment for business as well as low level of productivity were at the heart of the reform agenda. A birds-eye view of the Ethiopian economy today shows the same challenges persist.

Ethiopia’s Debt Distress

Addressing the debt distress was a critical part of the economic reform agenda. Exacerbated by State-Owned Enterprises (SOEs) borrowed from local and international lenders to implement mega projects to boost the manufacturing sector and exports. However, due to poor management, inefficient investments, and corruption, these enterprises often failed to achieve their objectives and struggled to service their debt. The reform has not succeeded in reducing the debt stock or the debt risk level. Furthermore, debt servicing has become a significant challenge as the country’s foreign exchange reserve was further challenged by the pandemic and the need for additional public spending.

Figure 2: Ethiopia’s National Debt in billion dollars and External and domestic debt distribution

Source: Ministry of Finance

Although global efforts under the G-20 debt service suspension initiative (DSSI) were a short-term relief for the country, it did not provide broader coverage to significantly alleviate the debt stress.  

The administration’s daring move to be part of the Common Framework for Debt Treatments beyond the DSSI, which aimed to deal with insolvency and protracted liquidity problems of highly indebted countries by providing debt relief that can address debt vulnerabilities and reduce long term macro-economic uncertainties, is yet to materialize. While the Common Framework could potentially address the country’s debt distress substantially, it has failed to materialize due to ongoing political challenges.

Rising inflation

Ethiopia’s annual inflation rate keeps on increasing. Addressing inflation has been a long-term goal of the current and previous administrations. The rise in prices of goods and services has on the poor and people on a fixed income makes the issue more than an economic problem. Despite the efforts, however, the government is yet to find an effective mechanism to slow inflation and create a supply-side push to stabilize prices.  

Rapid exchange rate adjustments to bridge the gap between official rates and parallel market rates so far has been a futile exercise that only fueled a rapid increase in the price of goods and services across the economy. Due to the rapid devaluation of the birr, the exchange rate against the dollar has almost doubled over the past four years.

Figure 3: Average annual general inflation at country level (%)

Source: National Bank of Ethiopia and Xe.com

The current very high inflation rate, particularly for imported commodities, causes a huge burden, particularly for households with more limited resources. While the government acknowledges the problem, it has yet to put together a concrete plan to curb the crisis.

Ethiopia’s foreign currency shortage

Despite a concerted effort to increase export and improve foreign exchange management, the shortage of foreign currency remains the Ethiopian economy’s Achilles heel. Among the major success of PM Dr Abiy’s administration is the notable increase in export revenue, after close to a decade of stagnant performance, which was more impressive as it happened at a time when the global supply chain was hampered by the adverse impact of COVID-19 on the sector. Export has increased by 35% between 2018 and the end of the fiscal year 2020/21, reaching USD 3.6 billion, with coffee and gold export accounting for 43.7% of the total export in 2021.

While external reasons (a strong rise in world coffee and gold prices) contributed to the improved performance, a significant increase in the volume of gold, flowers, fruits/vegetables, chat, and power made the export performance cross the USD 3 billion mark.

The country is on pace to replicate a strong performance this year with USD 2.52 billions exported over the first eight months of the 2021/22 fiscal year, according to the Ministry of Trade and Regional Integration.

Remittances and FDI flows showed a declining trend towards the end of the fiscal year; because of the COVID-19 pandemic. FDI and remittances showed a table flow as well. In 2021 remittances have recovered totaling USD 5.2 billion per year and accounting for 24% of total foreign exchange inflows. Ethiopia also maintained strong FDI inflows of USD 3.9 billion, with a significant share of USD 850 million coming from the telecom license sale as part of the privatization program.

Figure: total export in $billion

Source: National Bank of Ethiopia

Investment and FDI flows

Enhancing economic competitiveness by reforming restrictive legislation and cutting down bureaucratic red tape were key areas where major reforms were implemented. In particular, opening a significant portion of the economy that was previously restricted and significant Intellectual property rights protection regulations were also introduced.

To improve market competitiveness and expand access and improve the quality of telecom services in the country, the plan is to liberalize the telecom market with the sale of licenses to two new operators and partially privatize Ethio-Telecom. However, the government has only succeeded in sealing just one license, and partial privatization is yet to materialize.

Due to the continued impact of COVID-19 and conflict across the country, it is not yet clear how impactful these different reform processes have been in creating a conducive investment climate for private sector investment.  

Humanitarian crisis

What was a hopeful start for millions of Ethiopians at the beginning of the administration’s reform drive has turned into a dire situation quickly. At the beginning of 2022, 23 million people, are estimated to need humanitarian assistance due to internal conflict, displacement, drought, and the socioeconomic impact of COVID-19. Nearly 4.23 million people are living in displacement across Ethiopia.

The required resource for humanitarian response has put a significant strain on the government’s fiscal standing. The humanitarian situation in northern Ethiopia alone requires more than USD 1.1 billion to deliver much-needed life-saving supplies.

The multitude of crisis has impacted lives and livelihoods at every level. The conflict, in particular, has wiped out a significant share of hard-earned development gains and infrastructures accumulated over the previous decades of sustained growth.

What is Next – Rescue, Recovery, and building a New Foundation

The Ethiopian economy still faces similar challenges as it did back in 2018 with further complicating factors added due to the pandemic and conflict in the northern part.

The current administration has secured another term in office following a landslide victory last year, extending its time in office at least until September 2026. Taking the lessons from the past four years, the next four years should focus on rescuing those who have been exposed to economic shocks due to the pandemic and conflict, reforms to create an environment for rapid recovery, and charter a new path toward the goal of inclusive prosperity.

Rescue

The first goal should be to rescue citizens hard hit by a combination of COVID, conflict, and inflation. Without a coordinated effort of the leadership of the government, many who had skipped poverty has fallen back and a significant portion of the society remains highly vulnerable to sliding back in.

The government should aim to provide citizens caught in the crossfire of the conflict with the necessary support to restore their livelihood. Parallelly, major investment is needed to restore essential infrastructure and utilities to their pre-war level and facilitate economic recovery.

Restoring private businesses, particularly micro, small and medium enterprises, will be an essential support to revive private enterprises and local economies.  

Further, the rescue effort should aim to address the root causes of these shocks and build resilience to withstand future calamities.  

Reform and Recovery

In many ways, the reform agenda was aimed at addressing key persistent challenges to create a foundation that will spur growth in the years to come. As the same challenges continue to persist, the government should prioritize a second economic reform agenda that will build on the success and shortcomings of the first to find sustainable solutions for the critical constraints in the economy.

The pandemic has exposed different vulnerability points in the economy and the reform. Thus, the reform should be complemented by a strong economic recovery plan that can rebuild back from the different impacts of the pandemic. Targeted interventions are needed to bring key macroeconomic drivers back to their pre-pandemic level and ensure continuity in the growth path.

Building a New Foundation

The Government’s Ten Years of The National Development plan has come at a time of crisis. Unfortunately, the plan had not recognized some of the emerging challenges of the economy and some existing challenges, which were exacerbated by the pandemic and the conflict.    

Thus, the government should see the medium-term plan with a goal to build on the reform and emergency plans and build the economy of the future from physical and technological infrastructure including roads, bridges, and broadband to investment in social development in education, health, and social protection to realize prime minister  Dr. Abiy’s goal to turn Ethiopia into an icon of prosperity by 2030.

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