Sugar Rush Turns Sour

Posted on April 7, 2024April 7, 2024 by Digital Editor

Abebech Tasew, 58, stood at the counter of the Qera Consumer Association last week, her expression reflecting the strain of dwindling purchasing power. As she scanned the prices, Abebech recounted the adjustments she had had to make to her shopping list, drastically reducing the volume of some items.

Sugar topped her list of concerns. Once accustomed to purchasing five kilograms for a little over 300 Br, Abebech now finds herself forced to slash her sugar purchases by threefold due to recent price increments.

“It’s exceeded my budget,” she told Fortune.

The mother of four now sees sugar as a luxury item. She can no longer afford to provide her children with tea sweetened with sugar or enjoy her coffee with the usual sweetness.

“We’ve had to learn to adjust,” she said. “Like everything else.”

Abebech’s reality resonates with many residents of Addis Abeba. The city’s consumers are feeling the pinch of a soaring inflation rate. Over the past two months, sugar prices have surged by over 30pc, leaving many households under financial strain.

Across the city’s 152 consumer association outlets, the price of a kilogram of sugar has spiked from 63 Br to 95 Br. One outlet in Qirqos District, wereda 03, kebele 45, has been receiving less than half of its monthly demand of 13,000Qtl since the beginning of the year.

According to Bezawit Getachew, associate procurement head, the sudden price change two months ago has created a significant imbalance in the market. As people began to shy away from purchasing sugar due to the steep prices, daily sales plummeted by half. Consequently, the association has struggled to accumulate enough funds to make the next round of purchases.

“We’ve only managed to purchase a quarter of the demand,” Bezawit said.

These issues come in the wake of pricing adjustments made by the federal government aimed at revitalising the flagging performance of the country’s six operational sugar factories. However, a myriad of issues continue to plague these factories, ranging from high production costs and foreign currency shortages to security threats posed by armed groups.

A month ago, employees of the Wonji Shoa Sugar Factory, located 110Km from the capital, fell victim to armed resurgent groups, resulting in loss of lives. Despite its capacity to process 1.5 million quintals a year, the factory has been struggling with low sugarcane productivity and a shortage of foreign currency, which has undermined its output to 20pc.

Similar security issues afflict the Finchaa Sugar Factory in Horo Guduru Welegga Zone of Oromia Regional State, located 350Km away from the capital. Suspension of operations in May 2023 left around 9,000 employees idle for seven months following an attack by armed forces that caused damage worth 400 million Br and inflicted physical and emotional injuries on workers.

Mengistu Hailemariam, the general manager, shed light on the challenges of resuming operations. He cited technical problems with machinery in need of repair and inflated costs of chemicals, fertiliser, and spare parts, which have plummeted production to a mere fourth of its total capacity of 9,000tns a day.

“Our recovery is slow,” he said.

Nearly 395Km from the capital lies the Arjo Diddessa Sugar Factory, located in the valley between East Wellega, Buno Beddelle, and Jimma zones in Oromia Regional State. Targeted by an armed group over a year and a half ago, the factory was forced to suspend operations for six months. Despite efforts to resume operations in April 2023, another attack resulted in 900 workers being transferred to other factories, effectively halting production.

Mijena Bekil, the general manager, expressed doubts about the factory’s future, emphasising the unsafe conditions that make reinstating operations untenable.

“It’ll be at least two years before we can consider reopening,” he said.

Ethiopian Sugar Industry Group, overseeing eight factories, was formed in April 2022 with a capital of 115 billion Br. While some factories gained operational autonomy, others remained under the Group’s management. However, constrained by high production costs and debt, over five sugar factories have appealed to the Group for a price increment, with costs soaring up to 400pc.

“Sugar will become a name if nothing is done soon,” warned Weyo Roba, CEO of the Group while presenting a report to Parliament in December. He underscored the pricing disparities are half of what is offered in neighbouring countries and those imported through franco-valuta schemes.

“Such discrepancies are unsustainable,” he cautioned.

Despite efforts by the ruling administration and previous governments to address the country’s sugar consumption demand of close to 800,000tns, annual production has consistently fallen short, hovering at less than half the demand. While officials acknowledge the economic and political challenges, they point to systemic issues such as price rises on spare parts, fertiliser, and fuel, which have compounded the woes facing the sugar industry.

Reta Demeke, the public relations director of the Group, cited security concerns as a major impediment to meeting demand while admitting that the Group has barely managed to meet supply targets in the past year.

“Absence of security is our biggest challenge,” he said.

In a country where sugar consumption per capita is around 10Kg, supply shortages persist, exacerbated by setbacks faced by several sugar factory projects due to funding shortages, climate conditions, and disputes with contractors.

This year’s unprecedented climate conditions have rendered sugar cane cultivation impossible, leaving the Omo Kuraz III plant in the Southwestern Regional State barely producing any sugar. Located 900Km from the capital, with a daily production capacity of 10,000Qtl of sugar, the factory is part of a set of four sugar estates under development designed to process 24,000Qtl of sugar cane a day in the Omo Basin.

The history of the sugar industry in Ethiopia traces back to the 1930s with successive government regimes failing to realise self-sufficiency. Recent efforts to address these difficulties have included the privatisation of eight sugar factories. However, last year’s attempt to privatise four sets of Omo Kuraz, Arjo Dediessa, Kesem, Tana-Beles, and Tendaho sugar factories saw limited success. Ethiopian Investment Holding (EIH) is engaged in renegotiations with interested bidders that were deterred due to issues related to security concerns and access to foreign currency.

Local industries heavily reliant on sugar have turned to imports to meet demand. In 2021, Ethiopia imported nearly 592 million dollars worth of sugar and sugar confectionery, a significant increase from three years prior.

The soft drink industry has shifted to imported sugar, as local supplies fall short. Moha Soft Drinks Plc, requiring over 38,000tns of sugar annually, has completely shifted its production of brands like Mirinda, Pepsi, and 7Up to imported sugar. Similar issues have been faced by Moya Biscuit S.C., a renowned biscuit manufacturer, which relies heavily on sugar for its daily production of 4,000 cartons of biscuits.

To address market imbalances, the Ministry of Finance revised sugar duties over two years ago, reducing taxes to zero for Franco Valuta importers. This move aimed to alleviate shortages, exempting them from tax duties, including customs and excise taxes.

According to a report from the Ministry of Trade & Regional Integration, imports through the schemes in the past eight months totalled 5.4 million quintals, surpassing local manufacturers’ distribution, which stood at half a million quintals.

Kassaye Tiahun, tariff head of the Ethiopian Customs Commission, explained that these revisions aimed to alleviate local market shortages and curb inflation. However, these efforts coincide with a global downturn in sugar production, with prices rising by 20pc this year.

Experts believe addressing peace and security concerns is crucial for revitalising the sugar sector and attracting much-needed investment.

Economist Arega Shumete (PhD) observes significant challenges facing sugar production in Ethiopia, including political factors and corruption. He underscored instances where funds allocated for the expansion of sugar factories were misappropriated by previous federal authorities, hindering production and productivity.

Arega emphasised the vulnerability of many sugar factories to political instability and logistical disruptions due to their geographical remoteness. He is sceptical about the effectiveness of privatising these factories, citing ongoing issues with peace, security, and sector-specific policies. He suggested exploring alternative approaches, such as partial privatisation schemes and the formation of share companies, to attract investment and improve the industry’s performance.

Parliament Rolls Out Red Carpet for Tenants

Posted on April 7, 2024April 7, 2024 by Digital Editor

In a landmark move, federal legislators have enacted a sweeping law that promises to fundamentally transform the residential tenancies market, providing a reprieve for tenants with a precariousness of eviction threats and rent hikes. The legislative overhaul introduces minimum lease periods, caps on rent increases, and imposes taxes on vacant properties, signalling a seismic shift towards what the bill’s authors argue is part of their more equitable housing policies.

Property owners are now mandated to offer lease contracts with a minimum duration of two years, a measure that aims to provide tenants with greater stability and predictability. The law introduces controlled rent increases, curbing the ability of property owners to raise rents arbitrarily in response to market fluctuations. Perhaps most notably, the legislation seeks to discourage property vacancies by allowing city administrations and regional states to levy up to 25pc as annual property taxes for homes that have not been occupied or rented out for more than a year.

“Not renting is dissuaded,” said Gideon Timotheos (PhD), minister of Justice, concisely encapsulating the essence of the law.

His remarks demonstrated the authorities’ determination to address the housing market’s instability, which is characterised by short-term leases and unpredictable rent hikes.

Last week, the bill’s swift passage reached the voting floor within a day of legislative discussions. According to the Justice Minister, it was a move meant to avert potential speculation in the housing market ahead of its voting. The law garnered substantial legislative support, receiving 241 votes in favour, with three abstentions.

Abebaw Desalew, an opposition MP who abstained during the vote, argued that broader economic factors contributing to the housing crisis must be addressed. He believes the new law focuses on rent control without responding to the root causes of the housing shortage.

“Addressing inflation, security problems, and declined productivity should take precedence,” he told Fortune.

A report by the Center for Affordable Housing Finance in Africa released last year estimates that Ethiopia’s housing demand would require close to 486,000 new urban homes each year. It suggests that the minimum average cost for a house is at least 8,000 Br, with the average size at 20Sqm. The high cost and small size of new homes paint a clear picture of a housing shortage.

However, the new law lays the groundwork for the Council of Ministers to introduce a fixed asset price evaluation regulation within the next year, a crucial step that will enable the regulation of rent prices moving forward. Officials expect agreements with current rent prices to be submitted in less than four months.

“The regulation will help dictate rent prices thereafter,” the Minister said, recalling that the law codifies emergency measures taken during the Covid-19 pandemic—such as eviction bans and rent freeze—into a permanent legal framework.

The law applies to all existing lease agreements, including those for public housing. Around 160,000 housing units are constructed annually nationwide. The government contributes close to 15pc through the Integrated Housing Development Program, colloquially referred to as condominiums. Federal Housing Corporation administers close to 24,000 homes, while the housing scheme under local administrations (weredas), which shelters a large portion of the urban populace, has around 360,000 units.

The Ministry of Urban & Infrastructure is tasked with developing standardised lease agreements that comply with the new law. According to Adane Egzie, head of real property, market, and valuation permit at the Ministry, this will provide clarity and a common framework for parties in the rental arrangements.

Rent payments must be made through official channels like banks or digital payment systems, with the Ministry’s officials convinced that transparent records and accountable processes during lease renewals or disputes can be established.

“It’ll provide a level playing field,” said Egzie.

The law establishes new guidelines for tenants and property owners, with the first to provide two-month advance notice before leaving. Property owners must give six months’ notice if selling or transferring the property to a new owner, who would inherit the existing lease agreement if the property is bequeathed. Tenants are shielded from arbitrary evictions but remain accountable for “responsible behaviour.” Homeowners retain the right to reclaim their property under specific circumstances. The law also outlines specific situations where a lease agreement can be terminated without notice, including property damage, criminal activities, illicit businesses on the premises, or repeatedly failing to pay rent.

Husni Ahmed, a young tenant, believes homeowners’ right to terminate a lease without notice for legitimate reasons like property damage or criminal activities shifts the balance of power from tenants. Geremew Tadesse, a property owner who rents three rooms in Qirkos District, echoes this perspective. He welcomed the increased security for renters but acknowledged the strict enforcement.

“Tenants may feel more empowered, while landlords might feel pressured by the extended notice period,” he told Fortune, suggesting that carefully crafted lease agreements will be crucial to address potential disputes the new law could provoke.

“Maintaining a positive relationship is important,” he said.

The legislation delegates considerable autonomy to regional states, allowing them to select the regulatory bodies responsible for enforcing the law, set administrative penalty rates, and tailor additional directives to meet local needs. It empowers regional authorities and introduces specific exemptions hoping to encourage housing supply. Property owners who have recently constructed new houses are exempt from rent control limitations for up to four years, an incentive designed to stimulate the construction and rental of new properties.

The Ministry is mandated with housing policies, national rent data collection, and monitoring. Its head of housing affairs, Tsegaye Mushe argued the law is designed to address the shortage of available rental units and to ensure that housing costs do not consume an excessive share of household incomes.

“The aim is to keep housing rents below 30pc of monthly wages,” he said, claiming the law was inspired by international housing policies in countries such as Germany, China, and Ghana. “It aspires to achieve a stable and predictable rent nationally.”

However, the law’s introduction has not been without its fierce critics.

Real estate experts have raised concerns about its potential unintended consequences. They warn that without a substantial increase in the housing supply, the law could paradoxically exacerbate the problems the authorities seek to alleviate. They argue that wary of the increased difficulty in evicting tenants, property owners may become more hesitant to rent out their properties, potentially leading to a supply shortage and, paradoxically, higher rents in the short term.

Despite the government’s good intentions in promoting rent stability, the success of the rent control measures hinges on accurate property valuations and a well-functioning dispute resolution system, says Enyew Tadesse, a real estate consultant.

“Rent is sensitive to policy shifts,” he told Fortune.

Enyew cites the pandemic eviction bans, which he believes strained landlord-tenant relationships without significantly impacting rent increases. He fears property owners might try to find ways to evict tenants they perceive as “difficult” due to the new law. However, he believes addressing underlying issues like land service disruptions in the capital and reducing title transfer fees would have a more lasting impact on housing problems.

However, the authorities have expressed confidence in the law’s power to promote rent stability and protect tenants from the “unfair” rental market.

Chaltu Sani, minister of Urban & Infrastructure Development, defended the law as a necessary measure within a broader strategy to address the housing crisis, noting ongoing initiatives such as public-private partnerships for building new homes and housing schemes for public sector employees.

The legislation also has implications for the real estate sector, particularly for realtors and brokers.

Naod Amanuel, the general manager of the Betoch online property portal, expressed concerns about the law’s extensive limitations, fearing they might marginalise agents and brokers in the housing market.

“We’re part of the real estate sector,” he said. “It’s not realistic to push us out.”

He advocated for an increase in housing construction as the most effective solution to improving the market dynamics.

City Administration Dials Back House Valuation Rates

Posted on April 7, 2024April 7, 2024 by Digital Editor

Officials at the Addis Abeba City Administration have rolled back a house valuation increase set in place less than a year ago, hoping to stimulate activities in a sluggish real estate market. The initial upsurge in valuations led to a substantial downturn in customer traffic, as many residents found themselves discouraged by the ensuing hefty fees associated with land transfer services.

The decision articulated through a directive signed by Sisay Getachew, head of the Land Management & Administration Bureau, and Gifawossen Desisa, CEO of the Land Holdings & Registration Agency, marks a pullback in the city’s land management and taxation approach.

“We want to alleviate the financial burden on citizens,” said a senior city official.

The revised directive issued last week instructs District officials to adopt updated rates that will reduce fees and stamp taxes by as much as 34pc. The adjustment comes in the wake of a comprehensive study conducted three months ago, which attributed a halving in the number of customers seeking service to the increased rates established under the tenure of the Bureau’s former head, Kenea Yadeta (PhD), in June last year. Kenea has been appointed since to serve as a national security advisor to Prime Minister Abiy Ahmed (PhD).

Elias Ibrahim, the Agency’s senior expert and one of the study’s contributors, noted that while the initial revisions did increase revenues by 400 million Br from the same period last year, they also resulted in a substantial rise in customer complaints and a dramatic decline in service uptake. The number of customers visiting the Agency administering 340,000 landholding files plummeted by as much as half, while those going to the Bureau dropped by 36pc after the rates imposed in June.

“It needed to be revised,” Elias told Fortune.

According to Elias, the previous rates did not consider the double-digit inflation rates reported by the Ethiopia Statistical Services (ESS), reflecting bloated valuations, with condominium units located on the outskirts valued at 47,769 Br a square metre now dropping to 25,080 Br.

“It’s still tough to say whether the new rates reflect market conditions,” Elias said.

The land valuation system is crucial for determining property taxes, collateral values, and the transactional value of real estate properties. However, the limitations in obtaining accurate valuations in emerging economies are well-documented. The International Monetary Fund (IMF) discovered the scarcity of published information and the difficulties in accessing transactional data essential for proper valuations.

Ethiopian experts echo these concerns, pointing to the frequent complaints arising from what they describe as poorly structured and unprofessional valuations.

Melkam Ayalew, head of the property evaluation department at Debre Markos University, criticises the existing valuation process, observing that data from the Ethiopian Statistical Services does not accurately reflect the country’s economic situation.

“I doubt if data from ESS reflects the country’s reality,” he told Fortune.

He advocates for establishing an appraisal institute, bringing together experts and academics to develop structured valuation procedures that could be applied nationwide. He emphasised the importance of comprehensive research in setting valuations due to their wide-ranging implications.

“The entire approach is wrong,” he said.

Addis Abeba’s land valuation system, involving four land grades and 18 subsections with different square meter values, adds to the confusion. The process multiplies these values by the property’s total size to determine the six percent transfer fees, capital gain and stamp taxes. The consequent fees can vary significantly, depending on whether the transacting parties’ reported value or the Bureau’s experts’ estimates are higher.

The recent valuations hike markedly impacted the city’s revenues from landholding services and title deed transfers.

Cherenet Abebe, head of Bole District’s Land Development & Administration Bureau, disclosed that only half of the year’s plan was met. The half-year report of Bole District revealed that with 19,000 digitised landholding registrations, the city earned 240 million Br, including the four-month suspension of services.

Despite this, Tesfaye Chane, deputy head of the Bureau, observed that the city had seen increased revenue from fewer title deed transfers this year. He noted a trend where more properties, especially those owned by real estate companies, were sold without conducting a title deed transfer through the Bureau.

“The rates were applied without sufficient public feedback,” Tesfaye told Fortune.

In September, the Deputy Head wrote a letter instructing Districts to use older valuation rates for title deeds transfer for inherited landholding deeds, as the number of complaints had markedly increased.

According to people familiar with the issue, the valuation increase’s unintended consequences prompt a reevaluation of the policy. Real estate professionals, particularly brokers and agents, have responded positively to the City Administration’s decision to revise the valuation rates.

Melat Tesfaye, a real estate agent at Live Ethio Property Management Company, missed out on three potential apartment sales over the past year due to the prohibitive transfer fees.

“Transfer fees and the credit squeeze have made it tough for the housing market,” she said.

It is an experience Tegegn Tamrat shared. A General Manager of the 500-member network of brokers under Gugu General Broker Plc, he felt the disproportionate impact of transfer fees on buyers of condominiums and lower-value properties. He observed that buyers of high-end properties are less sensitive to transfer fees, while those who are purchasing property but strapped for cash get pushed off easily.

“More than 15 condominium buyers have backed out on me,” Tegegn told Fortune.

Businesses Hold Cautious Breath in Economic Headwinds, Report Finds

Posted on April 7, 2024April 7, 2024 by Digital Editor

Two-thirds of small and medium businesses have no plans for new hires in the next year, according to a survey report by First Consult. The consulting firm surveyed 312 companies across four cities and revealed they are exhibiting “cautious optimism” where few plan to leave their sectors, and 39.2pc view the future with uncertainty due to looming economic woes.

Businesses within an economic climate characterised by a chronic foreign exchange shortage and high inflation rate are forced to turn to the parallel market, where exchange rates are significantly higher. The report also highlights the burden of inflation on consumers, with double-digit price increases forcing households to adopt coping mechanisms like buying lower-quality food items.

In the “Microeconomic Bluebook,” the lack of foreign currency is identified as the most significant obstacle for businesses exacerbated by conflict and stagnant exports. An import-reliant manufacturing subset of the Ethiopian economy faced formidable challenges in accessing raw materials. Rent fees were cited as the second most important factor of production for 44pc of the surveyed firms after raw materials, while only a third of the businesses found success in accessing loans during the reporting period.

Michael Addisu, technical director of First Consult, relayed the growing difficulty newlyweds face due to sharp inflationary pressures in reflecting on the burden of the economic challenges from the consumer perspective.

“Some are reaching out to expat relatives,” he said.

The Microeconomic Bluebook indicated consumers’ diverse coping strategies for the double-digit inflation rate. Most respondents revealed they bought lower-quality food items, while very few opted to purchase in bulk. Prices for onions increased by as much as 200pc year on year in cities like Hawssa city in Sidama Regional State, while Addis Abeba was impacted by a 150pc increase in Teff prices. Adama (Nazreth) in Oromia Regional State and Dire Dewa City Administration were the two other cities reviewed in the report, which also showed significant inflationary pressures.

Despite the current difficulties, there are glimmers of hope. The report coincides with Ethiopia’s implementation of its Homegrown Economic Reform Agenda 2.0 (HGER), which prioritises private sector participation. Experts at the report’s launch panel discussion expressed optimism about the potential of these reforms, particularly when coupled with increased access to technology.

Omar Bageresh, a third-generation coffee exporter, sees the current economic reforms as a positive turning point for the country. He heads B-Agro Coffee Exports and believes that increased liberalization measures have the potential to significantly transform Ethiopia’s economy. He acknowledges the historical challenges of doing business in Ethiopia but expresses optimism that strong private sector engagement coupled with the ongoing policy reforms can propel the economy to new heights.

“There are radical reforms taking place,” he said.

Paul Walter, director of development at the British Embassy, said technology represents a leapfrogging opportunity for Ethiopia’s youth with emerging technologies like artificial intelligence and the expansion of 5G networks. He suggested a growing commitment by the government to open up the economy to more private-sector participation and receptivity to technology, which he expects to empower businesses.

“There are several reasons to be optimistic,” he said.

He also referred to the possibility of debt relief and credit facilities under the International Monetary Fund (IMF) program as important tools for accelerating the implementation of the HGER and bringing about necessary reforms.

“Knowing when to intervene and when to back off will be critical for the government,” Paul told Fortune.

A depleted foreign currency reserve stock crippled by global price increases, stagnating exports, and poor Foreign Direct Investment performance, in addition to the two-year conflict, was also noted as an important challenge faced by firms in the report.

Economist and board member of the Ethiopian Security Exchange (ESX) Tewodros Meknonen (PhD) enquired how firms included in the survey coped with forex rates in the parallel foreign exchange market. Tewodros pointed out that significant foreign exchange exists in the country through the parallel market, as evidenced by the high volume of imports, albeit at much higher rates.

“Their response would inform discussions on exchange rate regime policy,” he said.

Another notable finding of the Bluebook was the number of employees decreasing by 0.32pc during the reporting period.

Nebil Kellow, managing director of First Consult, expects the success of the government’s reforms to depend on thorough implementation strategies that are simultaneously adaptable to emergent phenomena.

He underscored the need to include more micro, small and medium enterprises into the financial fold in a marked shift from the banking sector’s historic catering to collateral-backed large businesses. Nebil considers the willingness to adapt, listen, and learn down to officials at the Wereda and Kebelle levels to be instrumental in ultimately enabling a successful transition to a more liberal economy.

“We have to build a system that works for the underdog,” he told Fortune.

Shabelle Twirls from Microfinance to Macro Bank, with a Few Missteps on Profit’s Tightrope

Posted on April 7, 2024April 7, 2024 by Digital Editor

Shabelle Bank may stand out for its pioneering history as a microfinance institution transitioning to a full-fledged commercial bank. It began with a unique proposition of Sharia-compliant banking services in microfinance. Though rich in its founders’ ambitions, the transition has unfolded, blending milestones and snags, notably as the Bank marked its inaugural year in the commercial banking domain.

Its first year as a commercial entity was marked by a slight downturn in performance. Net profits declined 1.4pc to 19.84 million Br, trailing industry peers Hijra and ZamZam banks, which netted 27.8 million Br and 24.1 million Br, respectively. The profit dip has drawn attention to the hardship of transitioning from a microfinance institution to a commercial banking model.

The London-based financial analyst, Abdulmenan Mohammed (PhD) noted inconsistencies in the Bank’s profit calculations from the previous year, signalling that Shabelle Bank might have understated its taxable profit, which could impact its legal reserves, retained earnings, and year-on-year comparisons.

While reviewing Shabelle Bank’s financial statements, the external auditor, Surafel Akalu Certified Audit Firm, flagged a potential typographical error related to the transition to commercial banking standards. The discrepancy stems from the 2009 microfinance regulation, which exempts such institutions from profit taxes if they do not distribute dividends. Abdulmenan urged for more transparent financial reporting, suggesting that the Bank’s profits as a microfinance institution and as a commercial bank should be presented in two separate statements, considering they represent different operational models.

Founded as the Somali Microfinance Institution, Shabelle Bank was the first to cater to a market segment that preferred interest-free banking, filling a notable financial services sector gap. Its evolution gained a landmark in 2021 when it secured a commercial banking license from the National Bank of Ethiopia (NBE), repositioning it to expand its offerings and reach within the banking industry.

The financial year also saw Shabelle Bank struggle with substantial expenses and a rise in profit taxes from 446,330 Br to 13.35 million Br. Wage expenses surged by 50pc to 187.42 million Br, although still lower than those of Hijra and ZamZam. Other operating expenses also saw a 65pc increase, reaching 281.95 million Br, and the provision for asset impairment soared by 314.2pc to 14.62 million Br.

Shebelle Bank opened seven branches, bringing the total to 50, a strategic move its executives made to bolster its presence nationwide and increase the workforce. Despite the associated costs, Khadir Ahmed, the founding president, remains upbeat about the Bank’s prospects, viewing the current operational expenses as a temporary hurdle the Bank is well-positioned to overcome.

“Higher profits will return in the future,” he told Fortune.

An Axum University alumnus, Khadir worked at the Somali Regional State’s Finance Bureau before joining Shabelle’s management when it was a microfinance institution. He holds postgraduate degrees from Jigjiga and Uganda’s Makerere universities. Under his watch, Shabelle Bank’s liquidity level increased in value but declined in relative terms. Cash and cash equivalents increased by 17.6pc to 853.5 million Br, almost a third of Hijra’s 2.4 billion Br. The cash and cash equivalents to total assets ratio decreased by 0.3 percentage points from 23pc.

Abdulmenan found Shabelle’s liquidity level slightly higher than its operational requirements and urged that the excess liquid resources be used to earn more income. However, Khadir argued that the seemingly excess liquidity arises from deposits moving around through the mobile money platform HelloCash.

“We would still invest if secondary markets existed,” he said.

Abdulmenan’s concerns about Shabelle Bank’s transition reflected the evolution challenges. He noted that the expansion in expenses had overshadowed the impressive revenue growth. He cautioned that the Bank’s management should be wary of this trend, warning that Shabelle’s performance could have been adversely affected had it not been for the absence of financing costs, given its interest-free banking model.

“Executives need to work hard to improve their performance,” he told Fortune.

Shabelle Bank reported a notable increase in income from financing, which rose by 265pc to 192.91 million Br, primarily driven by an increase in markup rates. Fees and commissions grew by 11.1pc to 242.95 million Br, and other income saw a 177pc increase to 51.32 million Br, revealing the Bank’s potential to leverage its unique market positioning to drive growth and profitability.

Ownership structure and shareholder engagement have also played crucial roles in Shabelle Bank’s strategic evolution. With the Somali Regional Government holding a dominant 73pc stake, Shabelle Bank benefits from a strong backing that could support its expansion and operations.

Board Chairman Hassen Mohammed told shareholders who met in Jigjiga town in December last year, the seat of the Somali Regional State, that implementing a core banking system branch module and constructing a building for the central vault were key milestones of the past year. Adopting Sharia-compliant services such as Murabaha and Mudrabah has been recognised as a potential area for growth. According to Yasin Essie Usman, one of the 1,101 founding shareholders, the delay in implementing these services has been noted to impede Shabelle’s expansion, stressing the importance of aligning operational practices with market demands and Sharia-compliant banking principles.

“I hope they advance soon,” he told Fortune.

Yasin expressed tempered expectations about investment returns, acknowledging the investments and operational expenses associated with the Bank’s expansion and transition. Yasin also emphasised the importance of directing more financing towards pastoralists and agro-processors, reflecting the Somali Regional State’s majority ownership and its policies of prioritising the region’s economic preoccupation.

Despite impediments in its first year of commercial operation, Shabelle Bank’s total assets grew by 19pc to 3.76 billion Br, although this remains below the asset bases of Hijra and ZamZam. It also saw a 60.2pc growth in mobilised deposits to 801.6 million Br, although loans and advances, at around 1.88 billion Br, remained nearly unchanged from the previous year. Unlike other commercial banks, the loan-to-deposit ratio does not apply to Shabelle as it financed its operation mainly using contractual liabilities amounting to 2.2 billion Br (1.42 billion Br in 2022/21 plus trade creditors of half a billion Birr.)

According to Kahdir, some financing was obtained from the Somali Regional State’s budget allotted for job creation, which was disbursed as a loan in addition to disbursements from mobilised deposits. The Bank expanded its financial and operational areas despite the wide-ranging shortfalls in the operating environment.

“There was also a massive repayment of previous loans,” he said.

Shabelle increased its paid-up capital by 15.3pc to 594.93 million Br while its return on equity (ROE) improved one percentage point to five percent despite remaining far below the minimum saving rate. The Bank’s capital adequacy ratio (CAR) increased to 32.7pc from 28, well above the regulatory minimum of eight percent and the 26.7pc average for the 16 top private commercial banks.

Zerihun Berhe, manager of the year-old Wello Sefer Branch, said a broader promotion campaign is needed to enable the Bank to compete with veteran financial institutions in the area.

“Competing with the older banks in terms of service is difficult,” he told Fortune.

Ministries at Odds Over Hide Exports

Posted on April 7, 2024April 7, 2024 by Digital Editor

Ethiopia’s leather industry is facing a policy clash between government ministries with officials at the Ministry of Agriculture pushing to remove the export tax on raw hide and skin, while the Ministry of Industry fiercely opposes it. Agriculture officials argue that eliminating the tax will revive struggling producers and suppliers facing economic hardship due to inflation and plummeting prices.

Asmelash Berhe, director of dairy production at the Ministry, observed the environmental waste where hide suppliers went out of business for dwindling demand. He believes it would serve as an alternative plan for slow exports of leather and leather products, which have been irrepressibly declining for the past few years.

“There is a growing demand for hides and skins in regional countries,” he said.

A study backing this argument was submitted to the Ministry of Finance, requesting reversal of the law. Ethiopia’s policy measure on hide exports goes back to 2008, where 150pc tax was levied to discourage export without value addition and indirectly benefit manufacturing and processing industries. Following the study, officials from the Ministry of Industry were asked to provide feedback showing off major resistance.

Signed by Tarekegn Bululta, the state minister, they presented a counter-argument stressing the strain removing taxes would put on local manufacturers. Tarekegn stated that it goes against the import substitution campaign his Ministry is spearheading to incentivise local manufacturers. Leather and leather products accounted for 0.8pc of total merchandise exports that translated to 4.1 billion dollars earnings. However, with 18 operational tanneries, 21 footwear and 25 leather product manufacturers, subpar products have plagued the export earnings dropping threefold over the past five years.

According to Addis Ketema, leather and leather products head at the Ministry, the task of enhancing quality of hides through agriculture extensions and development strategies was entrusted to the Ministry of Agriculture. However, he believes the path officials have chosen is far from his Ministry’s best interest.

Shortage of chemicals, low technology utilisation and quality supply of raw hides and skins are major factors undercutting the leather-manufacturing sector. Exporting raw hide and skin without added value would be the end for the leather industry, according to Ethiopia’s Leather Exporters Association members. They voiced concerns through their president Redman Ashebir, citing the already struggling working conditions of leather manufacturers tethering on the brink of collapse.

“The industry won’t survive,” he said.

Ethiopia has the continent’s largest livestock population, with over 170 million cattle, sheep and goats. Last year’s livestock output includes nearly 2.7 million cattle hides, 8.1 million sheepskins, and 7.5 million goatskins. However, the sector’s potential remains untapped, with nearly 60pc of the production costs arising from the hides’ price.

Operating in a 10,000Sqm land, Batu Tannery Plc, has been a leather exporter for the past 24 years. Tatek Yirga, general manager, said their market demand has declined by up to 60pc where US, China and Europe have been the major destinations for their products lessening their demand.

“The market trend is not on our side,” he said.

Export market has consistently declined over the last four years from 122 million dollars to 32 million dollars earnings. Meanwhile, 737,436 dollars was obtained from hide and skin exports of 4,000tns to mainly Togo, Nigeria and Ghana, in the past five years.

Declining sales and inflation rate are immediate worries for Tizazu WoldeTsadik who has been supplying skins and hides for local factories. He observed a declining demand while a bulk of it is usually rejected by manufacturers for subpar quality. According to Tizazu, inadequate storage facilities have made preserving mechanisms difficult for a meagre profit margin of 10 Br with a hide while quality is usually undermined due to procedural neglect in pre and post slaughter process.

Addis Abeba Hide Suppliers Association, an umbrella for over 100 suppliers, has been advocating for duty-free advantages for the hide market. Birhanu Abate, president of the association, indicates that it has been a long-standing question of suppliers. The quality of the piece falls short of the standard required by discerning tanneries, while, Birhanu indicates that the hide exports won’t require any efforts to struggle through pre and post-preservations.

The Ministry of Finance has yet to respond to the conflicted parties.

Mulay Weldu, tax policy director of the Ministry, stressed the social and economic impacts on both arguments need to be thought out before considering a decision. He said potential gains from exports of raw hides and skins and its effect on the leather industry will be assessed along with availing sufficient supplies for domestic manufacturers.

Another line of request surfaces from the Livestock Development Institute. An advocate for dairy and meat product exporters, the Institute has also asked for the re-consideration of the tax on behalf of meat exporters that gravitate towards including hide and skin in their portfolio. Last year, 93-million dollars worth of meat made it to the export market with Saudi Arabia, UAE, Qatar and Oman being the top destinations.

Gezahegn Dugase, market and investment head at the Institute, said the hides and skins are an afterthought for the eight exporters usually wasted with a low price.

“Meat exporters should also be allowed,” he said.

Experts weigh in with caution and warn against a full removal of the tax on raw hide and skin exports. Solomon Getu, manager at a tannery in Uganda, is reserved about completely removing the export tax recalling a similar policy implemented decades ago that allowed hide exports. He argues it resulted in minimal revenue gains and discourages domestic value addition through leather processing.

Solomon cites Uganda’s measures when faced with similar industry struggles, where authorities completely banned raw hide and skin exports which helped revive their domestic leather industry. However, Solomon does not advocate for a complete ban in Ethiopia. Instead, he proposes implementing temporary policy revisions allowing limited hide exports for a period of six months.

The expert stressed addressing the immediate concerns of domestic leather manufacturers. He believes the industry can be better equipped to handle a potential increase in raw hide exports if equipped with latest technologies, improved transportation and preservation methods.

Central Ethiopia Rues: Welqite Town Parched for Relief

Posted on April 7, 2024April 7, 2024 by Digital Editor

Welqite town in Central Ethiopia Regional State simmers with its 250,000 residents. There, the most precious commodity is not gold, but a simple jerrycan brimming with lifeblood—water.

Rukiya Hassen, 14, rises two hours before dawn, rushing to queue at the Yonas Hotel. It is one of the few places where residents can quench their thirst – for three Birr a jerry can. She has to load five of them onto a horse-drawn carriage and hurry back home in Bekur district before school starts. With a seven Birr round trip from the hotel to her house, fetching water is Rukiya’s every other-day routine before school starts.

“Somebody has to get water,” she said.

Rukiya is one among the many residents who line up at the hotel, once at dawn and again in the afternoon, to secure water. In Welqite, running water is a luxury afforded mainly by the wealthier residents, as taps flow only once or twice every couple of months. The cost of installing a small water pump can exceed 50,000 Br, while excavating to reach underground water sources can cost even more, depending on the depth.

This leaves many at the mercy of subsidised offerings by businesses who dig deep to meet their demands.

Water shortages turned tragic in February of last year when protests erupted, resulting in clashes between residents armed with jerry cans and security forces, leading to three fatalities, according to a report by the Ethiopian Human Rights Commission. The incident remains etched in the memories of residents, serving as a reminder of the ongoing struggle for access to this essential resource.

Abdu Abjuko, a 23-year-old handyman at the Hotel, vividly recalls the tense Thursday morning when the underground well dried up, triggering increasing restlessness among the residents. As tensions escalated and more people marched toward the town hall, Abdu claims security forces responded with heightened aggression. He observed an abrupt halt in business activities and the increased presence of security personnel patrolling the streets.

“I was nervous,” he told Fortune. “The town became eerily silent the following week.”

The prevalence of heavy security in the town has become a fixture, as tensions periodically erupt into violence, especially since the establishment of a new regional state in the city seven months ago.

Central Ethiopia emerged as the fourth offshoot of the former Southern Nations, Nationalities & Peoples Regional State. The latest administrative structure has forced the Welqite City Administration, juggling a 640 million Br budget, to address growing infrastructure demand and competing political interests.

Welqite is supplied from two water reservoirs. Boze Bere, located 27Km from the town, can collect around a million cubic meters of water and needs four additional pumps to be at full capacity. The smaller one Tatesa, can store around half a million cubic meters but is powered by only a single pump.

According to Wonde Amde, the newly appointed head of Welqite Water Service Utility Enterprise, most water intended for the reservoirs is siphoned off midway by illegal channels. He accents the significant problem posed by illegal pipelines, exacerbating the town’s water supply issues.

Wonde observes that the limited water that reaches the reservoirs usually lacks the power to reach residents’ taps due to frequent power outages and ageing water pumps.

“Half an hour of a power outage leaves the town dry,” he said.

To address these issues, Wonde said a special task force will be formed soon to properly determine the exact degree of illegal water lines, as the Utility’s 13,000 registered customers are clearly below the real demand. The town plans to implement a medium-term strategy aimed at providing water to residents at least every three days. However, it requires substantial capital investment, nearly half of the city’s budget.

“There is a clear mismatch,” Wonde told Fortune.

Meanwhile, the town spanning 7,260Skm struggles to maintain the operation of its five water pumps. Replacements are lacking, and there is insufficient budget allocation for fueling the generators in three districts (Weberye, Addis, and Bekur) which are further stratified into six kebeles.

Welqite serves as a vital trade corridor connecting Jimma town in Oromia Regional State with Addis Abeba. It is also the largest of the five city administrations within the Gurage Zone in the regional state, with 84 million Br of its budget appropriated from the treasury.

Endale Tiyu, head of the finance bureau, reveals their plan to boost revenue collection by nearly 200 million Br in the current year. This increase aims to fund crucial capital projects.

He acknowledges the obstacles posed by fluctuations in construction input prices, which prompted a reevaluation of cost estimates for ongoing projects. However, he believes in persevering with these projects rather than abandoning them altogether.

“It’s better than terminating the projects,” he said, underscoring the significance of maintaining momentum in infrastructure development.

The financial strain faced by the administration to purchase 200ltr fuel daily for the pumps in the Tatesa water reservoir adds to the woes, according to Endale. To address this issue, he reveals that they have reached out to federal authorities, urging them to facilitate the purchase of electric transformers.

With water supply identified as the city’s foremost priority, Endale reaffirms the administration’s commitment to ensuring access for all residents: “It’s our number one priority.”

Following recent meetings between officials from the Zone and town administration, a comprehensive action plan has been devised to tackle the acute water network problem. This plan encompasses 19 tasks aimed at addressing various aspects of the issue. Key initiatives include doubling the town’s electric supply to 400KV, mandating that hotel developments incorporate underground water development into their projects, repairing primary water pipelines, and fixing two electric transformers.

Girma Niqbeshewa, the head of the Welqite Administration Secretariat, attributes the water shortage to systemic managerial inefficiencies that have accumulated over the years, as well as pervasive infrastructure issues. According to him, the Water Enterprise has struggled even to meet its basic financial obligations.

“It has not even been able to pay salary to employees,” Girma told Fortune.

Recognising the urgency of the situation, he underscores ongoing efforts to modernise the Enterprise’s practices, with a focus on enhancing income-generating capabilities and updating tariff management systems. He stresses the imperative of implementing streamlined operations, which entails enhancing staff discipline, clarifying stakeholders’ responsibilities, and cracking down on illegal water usage intended for the reservoirs.

Girma expresses concern over illegal actors exploiting the water supply, exacerbating the woes faced by the water infrastructure.

“The integrity of the supply system needs to be safeguarded,” he said.

Escalation of political tensions in the region has diverted the focus of city officials towards maintaining peace and stability, instead of prioritising infrastructure development. Recent clashes between polarised groups resulted in fatalities.

Opposition party members underscore the complex interplay between political dynamics, governance structures, and socioeconomic development in addressing the multifaceted challenges facing the area.

Mohammed Abrar, chairman of Gogot for Guraghe Unity & Justice Party, attributes many of the issues to the unresolved advocacy for self-autonomy over several decades. He said the new structure lacks the legal framework, infrastructure, and investment climate to effectively address the needs of residents.

“It has had detrimental effects on economic activity,” he said.

Business closures have become a recurring occurrence over the past few years, driven either by protests against the new administrative structure or by concerns over property damage during conflicts. This atmosphere of tension has cast a pall over once-vibrant markets, leading business owners to tread cautiously in their operations.

Birhanu Kiflu, a lifelong resident and businessman in the Merkato market, notes that the security situation has only recently begun to resemble some semblance of normalcy, particularly in the last two months.

He observes cross-country drivers and passengers contribute significantly to the town’s business activity by making brief stops. However, Birhanu reflects on the reluctance of businesses to operate in the city due to security concerns, exacerbated by the presence of special security personnel whose wages are partially funded by businesses.

“No one wanted to risk being here,” Birhanu told Fortune.

Birhanu feels that the taxes imposed by the Administration do not align with the level of infrastructure development, with several projects suspended or delayed for years. He observes that water scarcity has worsened over the last five years, despite calls for reform and the establishment of a new regional structure. He attributes this stagnation to a bureaucratic regional administration that has historically prioritised group identity preferences over addressing the population’s urgent needs.

“There is a significant problem in governance,” he said.

Findings of ‘The Impact of Ethnic Heterogeneity on the Quantity & Quality of Public Spending,’ a working paper by the International Monetary Fund (IMF) over two decades ago, suggested that the technical efficiency of public expenditure decreases in ethnically heterogeneous societies. This study underscores that allocating funds for purely public goods becomes less technically efficient as the population becomes more fragmented along ethnic lines, even when keeping other socioeconomic and demographic factors constant.

Some residents of Welqite remain hopeful for significant improvements in the infrastructure and economic activity if peaceful conditions persist over an extended period. Mohammed Awol, a transporter and part-time security guard at the town jail, notes a recent campaign that has addressed activists spreading false narratives and causing disruptions. He believes that sustained peace can pave the way for development in the city.

Mohammed acknowledges the lag in infrastructure development, citing the deteriorating conditions in the correction facility where he works. However, he remains optimistic, asserting that where there is peace, development inevitably follows. Although the water scarcity issues plague the town, Mohammed continues to rely on alternative sources such as the Wabe River on the outskirts to meet his water needs, highlighting the persistence of difficulties despite the desire for progress.

Experts emphasise the complexity of political and administrative capacities required to address the infrastructure needs of urban populations effectively.

Adem Kedir, a lecturer in urban governance at Addis Abeba University, underscores the importance of having a comprehensive database that captures both qualitative and quantitative aspects of a population. Such data according to Adem serves as a foundation for formulating long-term policy targets tailored to the specific cultural, economic, and political dynamics of the urban environment.

Adem points out that no single political structure can be deemed ideal for infrastructure development. However, he stresses the significance of long-term planning to achieve meaningful outcomes.

He suggests that a mayor, when empowered with sufficient resources and support, can effectively serve as a manager within a well-functioning bureaucratic system. However, he acknowledges that many towns in Ethiopia have evolved organically, with regulatory bodies emerging much later than the initial establishment of urban settlements.

“Infrastructure development has struggled to keep pace with population growth and density,” he said.

Adem advocates for a public engagement-intensive approach that nurtures the emergence of an administrative framework shaped by residents’ shared challenges and aspirations. He believes it will align governance structures more closely with the needs and priorities of urban communities, ultimately facilitating more effective infrastructure development.

A Week of Illness Turns to Sharing Others’ Burden

Posted on April 7, 2024April 7, 2024 by Digital Editor

My recent encounter with illness proved to be an enlightening journey, opening my eyes to a new perspective on life’s fragility. While I have faced health issues in the past, this recent bout brought forth a medley of ailments that tested my strength like never before. It is human nature to swiftly forget the pains of illness once we have regained our footing. However, the experience was a relentless onslaught.

It began with a tonsil issue, igniting a chain reaction of discomfort that rendered eating and swallowing a daunting task. A subsequent gastric ailment compounded the struggle, leaving me unable to absorb much-needed nourishment, leading to a vicious cycle of discomfort and malnourishment. My joints throbbed with an intensity that was agonising.

With each passing day, my strength waned, and my appetite diminished, making it challenging to adhere to prescribed medications. It was not until I reintroduced solid foods that I began to regain strength, albeit at the expense of shedding seven kilos—an unintended weight loss that proved beneficial in hindsight.

The road to full recovery remains ahead, requiring steady progress after enduring such a relentless barrage of ailments. But I am grateful for the ability to carry on with my daily routine, with a newfound appreciation for the mundane moments of health I took for granted. The significance of well-being is best grasped in moments of upheaval.

This journey of illness also served as a poignant reminder of those enduring far greater trials. Whether it is chronic illness, life-altering disabilities, or incurable conditions, countless individuals face difficulties that overshadow mine. I recall the harrowing ordeal of a young woman in need of life-saving surgery, whose family struggled to afford the necessary treatment. Despite the community’s rallying support, her fate remained uncertain until a group of compassionate professionals provided a lifeline, restoring her health and vitality.

Sadly, not everyone is granted such reprieve. Many suffer silently, burdened by illness and the financial strain it imposes on their families. The repercussions extend beyond physical pain, disrupting livelihoods and exacerbating socio-economic disparities, particularly for those in lower-income brackets.

My heart aches for those who quietly succumb to illness, unable to access affordable and accessible healthcare—a reality prevalent worldwide. In developed G8 countries like the US and UK safety net health provisions offered by the states like Medicare, Medicaid and NHS may not go far enough to address the needs of all. In a study carried out in 2024, CEO World Magazine’s Health Care Index analysed the overall quality of healthcare systems across various countries.

The UK and US ranked 34th and 69th respectively echoing the limitations in their public health systems. Cuba ranked much higher at 27th in a table topped by Singapore, Japan, South Korea, Taiwan and China as top five which surprisingly all came from the South East and Far East. The same publication cites the 12 countries with the worst health care in the world. I was relieved our country was not on that list though it may not be conciliatory with the reality on the ground which has a lot of room for improvement.

The limitations in healthcare systems are also felt in developed countries, leaving many without adequate support. It is a sobering realisation of the disparities that persist, despite advancements in medical care.

My brief encounter with illness compelled me to approach life with greater empathy and mindfulness. It is easy to overlook the struggles of others. But a simple gesture of kindness or inquiry can make a world of difference to someone silently battling their demons. It is a lesson learned from childhood friendships and chance encounters that shaped my perspective on compassion and solidarity in the face of adversity.

The profound impact of compassion, empathy, and knowledge in our lives is exemplified by my childhood friend. He was not only academically brilliant but also deeply curious about science from a young age, leaving an indelible mark with his remarkable acts of kindness. Encountering an unconscious person in distress, he sprang into action with remarkable calmness and decisiveness. Using a simple bottle of Fanta as a makeshift remedy, he revived the stricken individual, demonstrating not only his resourcefulness but also his profound empathy for those in need. He had reserved pocket money for the less fortunate, showing what could be done when intelegent mind meets gracious heart.

In another instance marked by campus unrest in the 90s, his compassion and foresight shone through. Tracking down friends with rare blood types, he orchestrated a vital blood donation effort, saving lives in the process. Through these selfless acts, my friend illuminated the path of kindness and empathy, leaving an enduring legacy that continues to inspire. His commitment to helping others, coupled with his deep understanding of science, serves as a powerful reminder of the transformative impact of compassion in our world.

I am reminded of the profound impact of empathy and altruism—a lesson imparted by a dear friend and echoed in the collective efforts of communities coming together in times of need. It is a testament to the power of humanity to uplift and support one another in the darkest hours.

Geopolitical Waves of Russia’s Ukrainian Foray from the Black Sea to the Red Sea

Posted on April 7, 2024April 7, 2024 by Digital Editor

In a world increasingly defined by convoluted geopolitical dynamics, the echoes of Russia’s invasion of Ukraine reverberate far beyond its immediate borders, stirring a cauldron of strategic recalibrations and diplomatic manoeuvrings.

At the heart of Moscow’s justification is a claim steeped in national security concerns, primarily spurred by the expansionist tendencies of Western military alliances and policies perceived to be led by the United States (US). The Kremlin’s diplomatic outreach has been robust. It aims to frame the invasion as a pragmatic defence of Russian sovereignty against the backdrop of NATO’s presence near its borders.

Despite widespread condemnation, Russia has engaged in a sophisticated diplomatic campaign to articulate its position, leveraging historical grievances and security imperatives to court international understanding, if not outright support. Russia’s diplomatic narrative emphasises the existential threats posed by NATO’s eastward expansion, portraying its military actions as a last resort in safeguarding national security. While contentious, the Kremlin’s position on Ukraine reflects a deep-seated apprehension about Western encroachments.

Parallel to its military exertions, Russia has embarked on a strategic economic offensive. In response to Western sanctions, Moscow has sought to de-dollarise its trade, aligning with countries like China, India, Brazil, and Saudi Arabia in a concerted effort to challenge the Dollar’s hegemony in global commerce. This economic shift, part of a broader Russian strategy to counterbalance Western influence, signals a significant realignment in international trade dynamics, with potential long-term implications for global economic stability.

However, the unfolding saga is not confined to the European theatre. Its repercussions are felt in distant regions, notably the Horn of Africa, where Ethiopia finds itself at a geopolitical crossroads of shifting alliances and emerging challenges in international relations.

The Middle East, too, has witnessed a recalibration of Russian foreign policy, particularly in relation to the Israeli-Palestinian conflict. Once viewing Israel as a crucial ally, the Kremlin has shifted its perspective, advocating for a Palestinian state within the 1967 borders, with East Jerusalem as its capital. The policy shift, contrasting with prior Russian positions, shows Moscow’s intent to challenge Western geopolitical interests in the region aggressively.

Another arena of Russian assertiveness is the Red Sea corridor, where Moscow has deployed warships in a purported mission against piracy. While presented as an effort to secure maritime routes, this move can broadly be interpreted as an attempt to bolster Russian influence in a strategically vital region, directly challenging Western and, particularly, United States interests.

Ethiopia appears to be in a precarious position amid these global chess moves. A landlocked and aspiring for maritime access, its leaders are caught in the whirlwind of shifting alliances and regional tensions. The United Nations Convention on the Law of the Sea (UNCLOS) provides a legal framework for landlocked countries to access the sea, yet realising such rights hinge on cooperative relations with coastal states.

Ethiopia’s ambitions for a maritime corridor, apparently essential for its economic development and regional integration, face obstacles not only in logistics and legalities but also in international diplomacy. The geopolitical upheaval, illustrated by the Russian invasion of Ukraine and its global repercussions, adds layers of complexity to Ethiopia’s quest. Relations with neighbouring countries, each with its own strategic interests and alliances, are crucial.

Ethiopia’s foreign policy, particularly towards Somalia and Sudan, demands a nuanced approach that balances national ambitions with regional dynamics and the overarching shifts in global power structures. Reports of Ethiopia’s potential territorial aspirations, as expressed by Kenyan politicians about regions like Marsabit and Lamu, add another dimension to the diplomatic challenges faced by Prime Minister Abiy Ahmed’s (PhD) administration. Whether established or not, such assertions underline the sensitivities involved in regional relations and the importance of maintaining a diplomacy-first approach to addressing border and access issues.

The recommendation for Ethiopia to reassess its foreign policy, especially about the Red Sea and its coastal neighbours, is timely. A strategic reorientation towards building stronger alliances and a realistic appraisal of geopolitical shifts could enhance its position in a rapidly changing world. The country’s engagement with Somaliland and the broader Somali political landscape, alongside its position on the Sudanese border dispute, should say a lot about pursuing national interests and contributing to regional stability.

The interconnectedness of global events has never been more apparent. The fallout from Russia’s invasion of Ukraine extends beyond the immediate conflict zone, influencing international relations, economic strategies, and regional geopolitics. The challenges are manifold for countries like Ethiopia, situated in strategically important but volatile regions. Navigating these challenges requires a balanced approach considering the evolving global landscape, regional dynamics, and national interests.

Why Have Inflation Forecasts Been So Wrong?

Posted on April 7, 2024April 7, 2024 by Digital Editor

Last year, following the Great Inflation of 2021-22, central banks, leading academics and international institutions issued a smattering of post-mortems. Yet even before the ink was dry on their analyses, inflation forecasts were being revised down almost as fast as they had been revised up during the two preceding years.

For example, in June 2023, the US Federal Reserve’s median projection for core year-on-year personal-consumption-expenditures inflation (excluding food and energy prices) in the fourth quarter was 3.9pc, with the Federal Open Market Committee’s projections ranging from 3.6pc to 4.5pc. In the event, it was 3.2pc.

Before addressing what forecasters are missing, two clarifications are in order.

First, central banks’ inflation forecasts are no worse, and may be somewhat better, than private-sector forecasts, on average – which is what one would expect, given that they tend to have better access to data and more expertise. Second, inflation forecasts have not obviously gotten worse. Yes, the International Monetary Fund (IMF), among others, has noted that inflation forecast errors were 2.5 and five times larger for 2021 and 2022, respectively, than the average for 2010-19. But, the levels of annual inflation in 2021 and 2022 were 1.3 and 2.5 times larger than the 2010-19 average, and the changes in annual inflation rates were 2.6 and 7.1 times larger.

The benign interpretation is that the shocks got bigger, not that inflation forecasting became less competent. But an obvious rejoinder is that forecasts do not particularly matter when the variable being forecasted does not change much. We still need to know why forecasts continue to miss the mark.

Two factors are now well-documented.

First, forecasts underestimated the demand impact of massive monetary and fiscal easing, alongside high spending multipliers associated with significant pandemic-related transfers to households. Second, major demand stimulus hit just as supply chains were under major, unexpected strain, owing first to the pandemic and then to Russia’s invasion of Ukraine. Shocks are, by definition, difficult to predict, and they were particularly large in 2020-22.

But, the forecasts also had a more fundamental flaw: they lacked realistic representations of price and wage setting. Large shocks differ from small shocks in that they change key features of the transmission mechanism. For example, firms tend to change prices more frequently when faced with large shocks. According to the Fed, during the second half of 2021 and again during the second half of 2022, firms updated prices twice as often as before the pandemic.

Large shocks may well have been the reason. But firms also find it more straightforward to raise prices when others are already doing so, and the combined pandemic and energy shocks probably were an effective coordination device for price increases.

Wage setting is different from price setting. According to a 2009 European Central Bank study, firms tend to change wages about one-third less frequently than prices. Wage growth did pick up throughout 2021-22 as workers quit at record rates (a trend that closely tracked wage pressure). But the models underestimated how long it would take for tight labor markets and large price increases to feed into wage setting. Those delays prolonged the underlying inflationary impulse without necessarily magnifying it in a cumulatNotablyImportantly, many factors that pushed up prices were “one-off” adjustments in response to supply and demand shocks. They called for more significant relative price changes than would have been the case if there had been a shock to trend inflation driven by persistently excessive aggregate demand. This was most evident in the major energy price shock in 20preciselywas exactly that: a relative price shock partly reversed in 2023.

Similar dynamics played out in the prices of goods that were closely tied to energy prices or were immediately affected by major supply-chain strains. These, too, reversed – as we saw with car prices and container freight rates.

There is a vibrant debate about whether firms abnormally raised their profit margins in recent years. A recent Fed study finds that nonfinancial corporate profits rose to 19pc over gross value-added in the second quarter of 2021, up from 13pc in the fourth quarter of 2019. But once prices have risen and profit margins are high, they are less – not more – likely to rise further than before the large price adjustments.

Normalising energy prices, supply chains, and profit margins contributed to the faster-than-expected decline in inflation in the second half of 2023.

The Great Inflation will be as transformational for central banks’ models as the 2008 financial crisis was. Back then, the models were adapted to include a more realistic mapping of financial impacts. Now, we need a more realistic treatment of price and wage setting. Specifically, three changes are in order.

Most importantly, understanding inflation requires analysis at the sectoral or sub-sectoral level, ideally in a way that also reflects supply-chain linkages. This will make forecasts even more complex, but there is no way around it. Considering disaggregated data is essential to identifying and disentangling the relevant changes in supply and demand and their persistence. Individual sectors sometimes significantly affect aggregate inflation, with house prices in the US being a prominent example.

Second, forecasts should account for the level (or size) of shocks to capture non-linearities, especially for profit mark-ups. Lastly, forecasts should regularly re-examine changes in circumstances and assumptions. During the Great Inflation, important changes in the US included the major boost to aggregate demand (from monetised fiscal transfers to households), the higher frequency of price adjustments, given the size of the combined supply and demand shock, and the high number of recently refinanced mortgages that locked in low rates.

Fed Chair Jerome Powell, paraphrasing Winston Churchill, recently called forecasters “a humble lot – with much to be humble about.” Though they will have learned many useful lessons from the Great Inflation of 2021-22, remaining humble may be the best way to avoid being humbled again.

The Economic Consequences of Legal Behavior

Posted on April 7, 2024April 7, 2024 by Digital Editor

Many thriving societies, such as Germany and Japan, adhere closely to the letter of the law. However, as the United States has done throughout its history, allowing for a certain degree of latitude for individual interpretation can foster creativity, enhance efficiency, and stimulate economic growth.

The way people navigate traffic can tell us a lot about their respective cultures. Recently, while walking to my office in midtown Manhattan, I stopped at a red light when an elderly woman with a walking stick caught my attention as she cautiously looked both left and right. When she saw that no car was close enough to hit her – assuming they adhered to New York’s speed-limit laws – she gave me a puzzled look and crossed the street. I felt a bit foolish.

Such an incident would be unthinkable in Japan. Years ago, on the first night of a weeklong visit to Tokyo, my young, jet-lagged children, who had lived only in India and the United States, were amazed by the law-abiding Japanese. Peering out of our apartment window at midnight, they observed a man standing alone at a crosswalk. Even with no cars in sight, he waited patiently for the light to turn green.

While these normative differences may seem trivial, societal attitudes toward the law can significantly affect a country’s economic performance. Whereas the New Yorker’s actions could be interpreted as aligning with the spirit of the law, the Tokyo pedestrian adhered to its letter.

A system that emphasises the spirit of the law gives individuals discretionary power, leading to potential misuse or abuse. When individuals have latitude to decide how to behave, they might, for example, choose to disrupt traffic. This is evident in the streets of New York and, to a greater extent, in my hometown of Kolkata (formerly Calcutta). While the city is gradually adopting the Western model, during my youth Kolkata was a pedestrian’s paradise, where crossing the street required no more than a simple hand gesture.

It is crucial to understand the strengths and weaknesses of both systems.

Japan’s remarkable transformation from a low-income economy to one of the world’s richest countries can be partly attributed to its law-abiding culture. Adherence to the letter of the law fosters better organisation, which fuels economic growth and overall development. Consider, for example, an orchestra. Without a conductor to guide them, the musicians onstage may still make music, but it would not be the Salzburg Opera.

The same is true for many other aspects of daily life.

In a 2002 paper I co-authored with Jorgen Weibull, we argued that punctuality is not a genetic trait but a behaviour cultivated through coordination. Sticking to a fixed schedule becomes valuable when everyone is expected to do so. It is reminiscent of the stag hunt game described by Jean-Jacques Rousseau in his “Discourse on Inequality,” in which two hunters could kill a stag by cooperating but only a hare if they go it alone.

Contemporary Japan is known for its meticulous punctuality culture. What is overlooked is that, barely 100 years ago, Japan was known for its sloppiness with respect to time. Japan’s ascent coincided with the normative transformation from tardiness to punctuality.

Sociologists have emphasised the crucial role of social and institutional embeddedness in driving economic development. Simply put, in addition to its trade, fiscal, and monetary policies, Japan’s remarkable rise over the past century has been facilitated by a social transformation which enabled its economy to grow at an unprecedented rate.

Nevertheless, the New York model, where individuals are given leeway to interpret the law, has its merits. After all, pedestrian traffic lights are designed to facilitate smooth traffic flow and occasionally allow pedestrians to cross. When the road is empty, ignoring the red light does not run counter to the law’s purpose. It facilitates what economists call a Pareto improvement, whereby some people are better off without hurting anybody else’s well-being.

While enacting laws that accommodate every individual’s unique circumstances and preferences is not feasible, leaving laws open to some degree of individual interpretation can encourage creativity and enhance efficiency. This approach, which cultivates a culture conducive to technological and artistic innovation, has enabled the United States to become the world’s growth engine and magnet for talent.

To be sure, attempting to bring about a normative transition from adherence to the letter of the law to realising its spirit could backfire, producing cacophony in the proverbial orchestra pit. Economists and legal scholars can play a crucial role in facilitating such a shift while mitigating potential risks. This cannot be achieved through precise policy prescription – that would be self-contradictory. The key to achieving this is in the realm of ideas that John Maynard Keynes emphasised. We need to be aware of the two distinct modes of law enforcement, and, despite the risks, the surprising advantages of moving from following the letter of the law to the spirit.

As the British conductor Charles Hazlewood observed, individual musicians need to follow the conductor’s instructions for good music. Great music, however, relies on “trust” and “personal freedom for the orchestra members.” They need space for judgment and creativity.

Financial Sanctions Need Global Governance

Posted on April 7, 2024April 7, 2024 by Digital Editor

As Russia’s war against Ukraine enters its third year, Western governments are finding it increasingly difficult to muster the funding Ukraine needs to defend itself. The European Union struggled to reach a 54 billion dollar aid deal in February, and the United States remains deadlocked over its 60 billion dollar funding package. Calls to use Russia’s assets to fund the Ukrainian war effort are growing louder.

At stake are some 300 billion dollars in central bank reserves, which Western governments – including the EU and the US – froze immediately after Russia invaded to punish Russia and limit the resources it could use to finance its aggression. The sanctions against Russia triggered by its 2014 annexation of Crimea were far less extensive than those imposed in 2022. It was a radical move. The last time comprehensive financial sanctions were imposed on a major country, with broad – though not universal – international acceptance, was in the 1930s, against Italy and Japan.

The US now wants to take an even bolder step, confiscating Russia’s assets and transferring them to Ukraine. Its argument is straightforward: Russia should be made to compensate Ukraine for its illegal and highly destructive war. Russia’s central bank reserves would fulfil – at least in part – Ukraine’s valid claims for war damages. But, even if the US – with the support of the EU and the G7 – manages to craft a plausible legal argument for confiscating Russia’s reserves, it is not clear that this would be the right move.

Seizing Russia’s assets would represent a significant escalation, jeopardizing Western dominance in the international monetary and financial system and establishing a dangerous precedent in international law.

Financial sanctions are a weapon that affects a country’s external monetary sovereignty and its ability to manage its currency, reserves, and payment system. Like any other powerful weapon, they should be deployed in accordance with international legal principles and transparent governance. To this end, the G7 and the G20, together with the international financial institutions, should create a multilateral framework to govern financial sanctions’ use.

Such a framework must recognize the US dollar’s critical role in the international monetary system, as both a vehicle currency and a reserve asset. The Dollar’s dominance – its international liquidity and acceptance remain unmatched – means that countries are willing to limit their monetary sovereignty for the convenience of using the greenback. Today, approximately 80pc of international trade transactions, and 60pc of global payments, are carried out in Dollars.

There is little reason to expect this to change any time soon. As then-US Treasury Secretary John Connally famously put it in 1971, “the Dollar is our currency, but your problem.” With the US and its allies embracing financial sanctions to achieve geopolitical objectives, Connally’s dictum might be even more valid today, with implications that extend well beyond the war in Ukraine.

Some countries and regional blocs – such as the BRICS, which now comprises Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates – are pushing for alternative payment systems less reliant on the Dollar. The China-led Cross-Border Interbank Payment System (CIPS) and Digital Currency Electronic Payment (DCEP) system are intended to act as an alternative to the Western-led Society for Worldwide Interbank Financial Telecommunication (SWIFT) platform.

While the emerging alternative monetary and payment systems would not replace the existing architecture – at least not soon – they could lead to fragmentation of rules, standards, and even institutions, causing even more international tension and instability. What a peaceful and prosperous world requires are shared institutions and rules.

The prospect of former US President Donald Trump’s possible return to the White House in 2025 makes a system of global governance of financial sanctions all the more urgent. Regardless of who is in charge in 2025, countries that depend on the US dollar for saving and borrowing, invoicing and settling trade transactions, must be able to trust that their assets will not be seized or frozen, and their ability to make international payments will not be curtailed on a political whim.

A multilateral framework governing financial sanctions would allow for their use in extreme situations, such as when a country violates international law by launching an unprovoked invasion of another sovereign’s territory. As was the case with Russia, this can serve both to punish illegal behaviour and curb perpetrators’ capacity to continue engaging in it while deterring similar behaviour by others.

But such a framework would also establish conditions that must be met before sanctions could be applied—beginning with the requirement that a clear breach of international law has occurred—so that they are not imposed on flimsy grounds. It would also include mechanisms to ensure accountability for violations. Only then can the global financial system continue to function in a way that benefits all countries that depend on it, not just those in charge.

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