Productivity, Ethiopia’s Achilles Heel

April 6 , 2019 . By Eden Sahle

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Last weekend, I met a car importer who has sent his only daughter to study neuroscience in the United States. Her annual tuition fee is 20,000 dollars, a hefty fee considering how hard it is to get foreign currency in Ethiopia.

The importer turned to the black market, buying a dollar for about 40pc higher than the official rate. It is not just his daughter’s academic opportunities that he is trying to support through the black market but his business as well. The amount of time it takes to open a letter of credit cannot meet his business needs, forcing him to go to the informal market.

What is notable here is that he is not a bad person. He is not doing something to better profits but to fulfill a necessity - to ensure that his daughter gets proper education and that his business is running. This is what the foreign currency shortage is doing to citizens that otherwise would prefer to play by the rules.

Because such upstanding individuals are turning to the informal market,  the black market is thriving. It is not strange to be asked to buy or sell foreign currency on the main streets of Addis Abeba. The strict rules and regulations for foreign currency to not remain within circulation have only proven successful in the formal sector.

The urgency to bolster the foreign currency reserve comes in a challenging macroeconomic environment. From inflation to elevated debt levels, foreign currency shortage is one more predicament. It requires a serious reconsideration of policies to improve the competitiveness of the economy.

Productivity is Ethiopia’s Achilles Heel. The nation suffers from an economic policy that has been designed to keep the private sector at bay. This was so that the government could directly influence the direction of the economy. But the government has never been, and perhaps will never be, as productive as the private sector, since its enterprises are not made to compete.

Add to this a lack of checks and balances, project delays and poor outcomes, then we have the Ethiopian economy. The export sector is nowhere as important to the nation as the remittances, tourism revenues, aid and grants.

Ethiopia has a narrow base of export products. Coupled with persistent and widespread poverty, as well as massive debt over half the value of the economy, and unemployment continues to generate heavy pressure on the fiscal stance. The government believes that it had to spend highly to stimulate the economy, a strategy that worked until resources were distributed more and more unfairly.

There has been a change of heart with the EPRDF, and an admission that the economy is not performing well. There have been key policy announcements that can help in this direction. The most talked about is perhaps the intention to open key economic sectors to domestic and foreign investment through privatisation of major state enterprises, such as Ethio telecom and Ethiopian Airlines. This is a commendable move if it is reinforced by the opening up of the sectors the state enterprises engage in competition.

The strategy shifts understandably require time, but this should not mean it is a matter that could be put on the back burner. The incumbent must implement institutional reforms and regulations as reasonably quickly as possible for the productivity of the nation to improve.

These transformations need to be accompanied by a more flexible exchange rate policy. This may not mean opening up the capital market right away but removing directives such as the one that requires foreign account holders to surrender 70pc of their foreign currency revenue if they do not spend it within 28 days.

Undoubtedly, politics drives economic development. Hence, development is at the hand of political will to bring economic strength. Changing the foreign currency regime and allowing foreign competition will lead to challenges in the short term, and this requires decision making by a courageous administration that can persuade the public of the truth, that it would be for the long-term macroeconomic stability of the nation.

The proper pressing measures should be maximising foreign currency revenues while managing the reserves in a manner that curbs inflation without discouraging investment, and by creating new jobs and achieving economic development. This is no easy task. There will be many challenges and resistance, but the government has to be well aware that there will not be any shortcuts.

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PUBLISHED ON Apr 06,2019 [ VOL 19 , NO 988]

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