Ethiopia's Precarious Promise for Prosperity

Sep 30 , 2023.

The recent gathering by the leadership - and the rank and file - of the Prosperity Party (PP) in Adama (Nazareth) could be considered an event of a notable stitch. The setting, known for its warm ambience, played the usual and expected host to an intensive 12-day marathon of political strategising, with the crescendo being their Chairman, Abiy Ahmed, offering messages of hope and optimism.

Such sentiments, while refreshing, appear almost audacious against the backdrop of Ethiopia's contemporary intricate political turmoil.

The Prosperitians' declaration of faith seems to spring out of an idealist's dream. It is a charter of promises, comprising citizens' dignity, shared prosperity, freedom and equality, as well as a commitment to multicultural unity.

Yet, even to the casual observer of politics in today’s Ethiopia, these goals are audaciously ambitious. They shine as beacons in an atmosphere rife with toxic and deadly power-play by the elites in a highly polarised society, where lofty ideals often give way to grounded realities.

For the average Ethiopian, wearied by contemporary challenges, the Prosperity Party's declared convictions might read like a soothing ode to a bygone era. They yearn to return to times when Ethiopia symbolised individual and collective security and economic opportunities.

Indeed, many were grumbling over the narrowed political space for anyone outside the ruling party, the EPRDF; and rightly so. It was a regime with dismal human rights records. Despite historically phenomenal economic growth, official embezzlement and grand corruption were expanding. The lack of accountability and transparency in governance instigated popular rage that led to the changes in government in 2018.

Today's Ethiopia, especially regional states like Amhara and Oromia, seems trapped in a cycle of conflict. If one squints hard enough, the silver lining is the potential peace paradigm in Tigray, a regional state that has tasted the bitterness of prolonged, brutal wars and their consequences. The international involvement offers diplomatic lessons, from the Pretoria Accord to the Nairobi Declaration. Such references should gain prominence, given the poignant human cost where millions of Ethiopians remain displaced from their homes and untold suffering continues.

The Armed Conflict Location & Event Data (ACLED), a meticulous American monitoring organisation, enumerates a disheartening statistic: over 1,700 civilian casualties from political violence just in a mere year beginning September 16, 2022.

Beyond the realm of politics, Ethiopia's economic landscape is undergoing enormous stress. Skyrocketing living costs have cast long shadows over households, particularly those surviving on fixed incomes. For them, the daily struggle against creeping poverty is real. Prices continue to gallop while wages remain static.

The macroeconomic indicators should evoke profound concerns. A burgeoning budget deficit and a relentless forex crunch affect businesses, casting long-term shadows on entrepreneurial spirit. The Birr now faces tumultuous winds against stalwarts like the Dollar and Euro. The ripple effects are palpable: imports become pricier, and local industries, mainly manufacturing, gasp for sustenance. Once a cacophony of activities and promise, the manufacturing sector is now stifled, running on mere fumes due to the unavailability of raw materials, inputs and capital. Another pillar of the economy, the construction industry, which boasted of a robust 20pc contribution to the GDP, is showing signs of fatigue.

However, it should not be all gloom and doom. The fiscal landscape does offer spots of respite.

The fiscal year culminated in June 2023 may have a GDP growth of 6.1pc, if the IMF projection can be any guide. More than double the average growth for sub-Saharan Africa, the optimism comes mainly from the coattails of the service sector, coupled with a buoyant agriculture sector.

While commendable, this figure does lose some of its shine when placed beside the preceding five-year average growth rate of nine per cent. The underpinnings of this subdued growth can be traced to the challenges facing the construction sector, forex constraints, and a tangled bureaucratic setup that often acts as a deterrent rather than a facilitator. An economic analysis reveals patterns corroborating these trends.

While the trade and service sectors exude vitality, the industry's pulse is feeble. The flagging export numbers, declining substantially, are a case in point. The investment scenario is equally perplexing. From a commendable 35pc of GDP, investment rates have plummeted to 25pc this year. Both the public and private sectors have dialled back on capital infusion. If this trajectory holds, Prosperitians might need to temper their growth aspirations.

The spectre of inflation is ravaging Ethiopians. Clocking a staggering double-digit (despite the official figure of 28.4pc, Steve Hanks of Johns Hopkins University has August's CPI at 48pc), the inflationary spiral is a testament to the economic challenges. Though global food prices show a decline, offering potential relief, non-food commodities continue to pinch the Ethiopian wallet.

However, a deeper probe unravels that policy decisions, rather than pure market dynamics, exacerbate Ethiopia's inflation. Fuel price augmentations, selective import bans, and unhelpful and needless administrative decisions have inadvertently stoked inflationary pressures.

Although seemingly within manageable thresholds, Ethiopia's debt portfolio presents a nuanced picture. As of March 2023, public debt loomed at 60.6 billion dollars, growing by six per cent from June last year. A significant portion of this (53.5pc) is domestic — a trend that signifies a discernible shift from external borrowing. This mounting reliance on homegrown lenders, mostly banks and pension funds, can become a precarious tightrope walk in the long run. The nuanced shift in debt composition, from external to domestic, and the subsequent challenges it might pose, merits watchful monitoring.

Debt service, especially for external liabilities, remains a significant drain on the national exchequer. Payments to the tune of 2.1 billion dollars were disbursed in the last fiscal year, and such obligations show no sign of abating. In the six months beginning July 2022, the country paid 1.24 billion dollars in servicing debts to its international creditors.

With budget deficits hovering around four percent of GDP for the past fiscal years, the current fiscal scenario might appear benign, especially when contextualised with global averages.

However, herein lies the paradox. On one hand, Ethiopia's debt-to-GDP ratio, particularly its external component, is far below the 40pc average debt ratio low-income countries are required to sustain. Yet, the increasing dependence on domestic credit, paired with the muted investment rate, threatens to dent the long-term economic prospects.

Historical data underscores this. The high days of an average 10pc growth, up until 2019, were underpinned by robust investment rates — hovering around 36pc of GDP. If it persists, the current downtrend in investment flow could herald growth figures plateauing lower than IMF’s projection.

The gathering at Adama should be more than a political symposium — it was a microcosm of Ethiopia’s present challenges and, perhaps, its aspirations. The Prosperity Party’s pledges, noble as they may sound, will be tested against the crucible of realities on the ground. Abiy’s vision of an Ethiopia steeped in prosperity and unity is laudable. Yet, the path to such a future is complicated, strewn with political and economic landmines.

The Adama rendezvous may well signal a pivotal juncture in galvanising his party base, but the journey to genuine prosperity is bound to prove long and precarious.

PUBLISHED ON Sep 30,2023 [ VOL 24 , NO 1222]

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