Next Business Challenge for Ethiopia

Aug 3 , 2019
By Asseged G. Medhin

---

The Ethiopian government, following the developmental state economic model, has registered impressive economic growth in the past decade. There is broad agreement on this fact by scholars, business analysts and international organisations like the World Bank and the IMF.

Though this growth may have slowed in the last year, over the last decade, high growth has led to a significant reduction in poverty and improved living standards for many Ethiopians. The country’s massive infrastructure investments are beginning to bear fruit, and the provision of public services such as education and health has increased dramatically. As a result, the population has enjoyed essential economic and social gains. For example, the number of maternal deaths per 100,000 live births fell radically from 1,080 in 1995 to 353 in 2015, and the proportion of people living in poverty fell from over 45pc in 1995 to around 23pc in 2015.

Since 2017, Ethiopia’s economic growth dipped to 7.7pc due to reduced government public expenditure aimed at tackling the growing current account deficit and indebtedness. Another significant peril for reduction of the economy is political uncertainty and a severe foreign exchange shortage. As a result, it has dampened expectations of growth in this concluding budget year.

With the political climate expected to improve and investment recovering, the IMF predicts growth will reach 8.5pc this fiscal year, and the current account deficit should continue to narrow, despite the hiccup in early 2019. Inflation, which currently exceeds the single-digit target, is expected to fall due to an appropriately tight monetary policy.

The facts on the ground, however, are not as rosy as the IMF prediction due to endless emerging risks to the developmental model the country followed for the last two decades. The large external trade imbalance and the public debt burden threatens the economy and remains a constraint for future growth while posing a risk to the medium-term outlook.

This is not surprising to the many economists that have sounded the alarm about the large risk sovereign debt poses to the economy. The measures the government has taken can no longer bring dramatic change, as they are ancillary in nature. Inherent risks would be more aggravated when the government is restrained from public sector borrowing, particularly on non-concessional loans, while protecting pro-poor spending programs.

Most analysts agree that the country cannot continue with the same policies of the past. The question is, therefore, whether Ethiopia is ready for the next business challenge?

In order to balance public borrowing, the government needs to mobilise more tax revenue and raise exports to reduce vulnerabilities. As the government reduces borrowing and limits expenditures, it hopes this will reduce inflation or at least stabilise it. The paradox of Ethiopia’s economy is that inflation has not followed that expected path so far.

The government has to rise to this next challenge. The impact of economic policy and the country’s political ideology has a paramount effect on overall economic growth. Therefore, it is time to accelerate the reforms started to deal with some economic policy issues.

One of these is the introduction of the new legal framework for public-private partnerships. It can play an essential role in strengthening growth by promoting private sector development and the provision of public services while reducing government costs. The opening up of the economy and the removal of barriers to private investment in key sectors is a step in the right direction. I want to stress the value of time in the transformation agenda. To stop the roller coaster and stabilise the economy, the administration has to accelerate the changes outlined in the transformation roadmap.

Prime Minister Abiy Ahmed (PhD) has set a vision in place to reform the country’s economic policy to meet the next challenge. The intention is to support the country’s continued development. There must be a dramatic change in the political framework and economic policy to fit with the ongoing transformation.

The government should work hard to make this a reality by continuing the changes toward a more liberal and free-market economic model, which is the next business challenge.

---

PUBLISHED ON Aug 03,2019 [ VOL 20 , NO 1005]

---