Short Circuited Policy Roulette Shock Businesses, Stall Progress

Jul 20 , 2024.

In a volatile economic environment, sudden policy reversals leave businesses reeling and progress impeded. Businesses and investors alike struggle with an environment where predictability is a luxury, and long-term planning has become a near-impossible task.

Abrupt policy changes and their arbitrary enforcement have sent shockwaves through various sectors, from manufacturing to finance. Business leaders are frustrated over the lack of consistency and the adverse impact on their operations and survival strategies. The regulatory zigzagging not only disrupts existing projects but also deters potential investments, as confidence in the stability of the business environment wanes.

A case in point is a recent policy shift by the federal government banning the import of non-electric vehicles, which caused disruptions, leaving tractors, trucks, and field vehicles stranded at Djibouti ports. While the decision seeks to curb urban pollution, it has faced sharp criticism for its lack of regulatory clarity and timing, given the inadequate infrastructure to support electric vehicles. The authorities' abrupt move has notably affected companies, leading to delays and increased costs due to the inability to import essential vehicles.

The authorities have responded by announcing measures to allow the import of vehicles ordered before the ban. However, the lack of sufficient charging infrastructure and ambiguous policies for electric vehicles continues to stress businesses.

In another twist, the Addis Abeba Administration officials have served surprise notices to business owners with large plots housing factories and manufacturing plants. They are informing them of potential interruptions of utilities should they fail to pay “wall and roof” taxes. To broaden government tax revenues, the authorities are determined to exploit even a dormant law that has been unused for close to half a century. The unexpected financial burden on businesses is unimaginable.

A beverage company with one of its plants in a small town faced an undeclared tax on every bottle leaving its plant. The tax, set at 0.50 Br for a bottle two years ago, has surged tenfold recently. In another unfolding, truck drivers shuttling between Djibouti and mainland Ethiopia grumble about multiple checkpoints guarded by local militias extracting money for passage.

These seemingly unconnected episodes demonstrate the critical need for viable infrastructure, law and order, supportive regulations, and predictable policies for businesses to thrive and the economy to expand. Their absence affects economic agents and undermines productivity. On a macro level, economic policy uncertainty - the unpredictability surrounding government actions affecting economic policies - can arise from various sources, including changes in taxation, regulatory policies, trade agreements, and political instability.

The Economic Policy Uncertainty (EPU) index is a widely used tool for gauging uncertainties by tracking and capturing the sentiments and concerns of businesses and markets about future policy directions. High EPU can lead to increased risk premiums, making borrowing more expensive for businesses. Uncertainty also affects consumer confidence, reducing consumption and demand for goods and services and impacting revenues.

The African Economic Policy Uncertainty report for 2023 revealed that global EPUs, particularly those from major economies like China, the United States, and Europe, influence African economic performance, demonstrating the interconnected nature of global and domestic uncertainties.

Ethiopia is no exception. Its leaders' ambitions to reform, marked by rapid growth driven by public investments in infrastructure and industrialisation, have been periodically disrupted by policy shifts, political instability, and external economic shocks, leading to heightened uncertainty for businesses.

One immediate effect of policy uncertainty is hesitation in investment decisions. Businesses thrive on predictability and stability, and when these are compromised, companies often adopt a cautious attitude. The ongoing unpredictability of policies on property ownership, taxation, import and export regulations, and industrial standard enforcement has led to a slowdown in additional investment and expansion. Domestic and foreign-owned businesses are scaling down their investment plans, fearing abrupt policy reversals or inconsistent regulatory enforcement.

Uncertainty is particularly pronounced in sectors heavily dependent on government policies, such as agriculture, manufacturing, and infrastructure.

The manufacturing sector, in particular, wrestles with policy uncertainty. The government's industrialisation strategy, aspiring to transform the country into a manufacturing hub, requires consistent and supportive policies. However, fluctuations in tax policies, import-export regulations, unreliable access to foreign exchange, and labour laws create an unstable environment for manufacturers. This instability deters long-term investments in the sector, impedes productivity, and reduces the competitiveness of firms in domestic and global markets.

The financial sector is not immune to the effects of policy uncertainty either. Banks and financial institutions are crucial in facilitating economic activities through credit provision and financial services. However, uncertainty about monetary policies, interest and exchange rates, and regulatory requirements affects the sector's stability and its ability to support businesses.

Effective governance institutions play a critical role in moderating the impact of policy uncertainty. Governance and smart regulations can buffer against the adverse effects of uncertainty by ensuring transparency, accountability, and consistency in policy implementation and communications. However, the 2023 report revealed that governance institutions in Ethiopia are not easing the effects of policy uncertainty. Weak governance frameworks exacerbated the problems businesses face, leading to an environment where arbitrary decision-making and lack of enforcement undermine business confidence.

No less, cumbersome regulation imposes high costs on businesses and the economy, stifling growth.

Enabling regulation cannot be overstated in its importance. Its essence lies in creating an environment that supports and encourages business activities without imposing unnecessary burdens. Enabling regulation encourages a culture of compliance through guidance, transparency, and collaboration, which are essential for the modern business environment. The imperative for a balanced regulatory environment has never been more pronounced for Ethiopia’s economy.

Classified by the World Bank as a medium- and high-intensity conflict country for 2022 and 2023 respectively, Ethiopia faces a confluence of crises that threaten its stability and development. Political tensions and conflicts, climate change, weak institutions, governance issues, inter-state border disputes, and low levels of human development are the primary drivers of fragility.

Despite these obstacles, Ethiopia is striving to build on a decade of economic expansion that has laid a foundation for future progress. The past decade has seen Ethiopia make strides in reducing poverty and achieving economic growth. Poverty has been declining steadily since 2011, with the World Bank noting a marked decrease due to a robust economy and pro-poor public expenditure policies. The country has experienced one of the highest GDP growth rates globally, leading to substantial increases in per capita income.

This economic boom, however, has not been without its inequalities. The gap between the wealthy and the poor has widened, as evidenced by the rising Gini coefficient.

Ethiopia’s Human Development Index has seen an impressive improvement, reflecting better health, education, and living standards. However, the Human Capital Index has remained flat, revealing that the quality of human resources has not kept pace with economic growth. Multidimensional poverty, which considers various deprivation indicators, has decreased across most regions, though the very poor, particularly in rural areas, have not seen much change in their living standards.

With a large proportion of the population under 35, the country is at the cusp of a demographic bulge and dividend. The authorities have implemented various policies to harness this potential, hoping to empower and integrate the youth into the workforce. However, job creation remains critical, particularly in the private sector. The rapidly growing labour force, combined with low education levels and gender gaps, has complicated efforts to provide productive employment. Young women, in particular, face higher unemployment rates and greater barriers to financial services, training, and land access.

Ethiopia’s story is one of contrasts. Impressive economic gains of past decades have been shadowed by persistent poverty and inequality, a youthful population facing uncertain futures, and a country struggling with natural and man-made adversities. The road ahead is difficult, but with predictable policies and a sound regulatory environment, its leaders can encourage an economy where the private sector thrives to hire millions. The country needs bureaucrats with a service-oriented mindset, providing clear and accessible regulatory information, proportionality in enforcement, and a collaborative approach to engaging with businesses.

PUBLISHED ON Jul 20,2024 [ VOL 25 , NO 1264]

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