Unimaginative, Policymakers Brew Billion Dollars Deficit

Oct 28 , 2023
By Selome Getachew

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Ethiopia confronts an intriguing policy paradox in generating foreign currency. It is in a whirlwind of a policy dilemma. The federal authorities have brewed a 3.2 billion dollar trade deficit in the first quarter of 2023 for lack of imaginative policies. They should find this a bitter cup to swallow, argued Selome Getachew(sol_get@yahoo.com), a certified manager and Bridge Investment Consultancy's founding managing director.

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Ethiopia confronts an intriguing paradox in foreign currency generation policy. It witnessed a sobering 3.2 billion dollar trade deficit in the opening quarter of 2023, a trend no exception for over a decade. Its export potential in primary goods was considered immense, yet it barely scratches the surface of its international trade aspirations, mainly serving domestic consumption.

The populace, approximately 70pc, leans heavily on agriculture for substance, making it the cornerstone of the country's economic structure. Contributing a significant 34pc to its GDP, this sector beams with potential. The aromatic beans of coffee, the prized export, remain an essential source of foreign currency. A recent study commissioned by USAID revealed an estimated 8.27 million bags of 60Kg were produced, registering a modest growth of 0.2pc year-over-year (YoY).

Globally revered as a staple for productivity, coffee is second only to oil in the trading hierarchy. Birthed in the Ethiopian highlands, coffee and diverse bean varieties like Green Mung Beans and Sesame seeds are central in global trade circles. Yet, challenges abound.

The Ethiopian export mechanism appears to be in a stranglehold of dilemma, leading to a perpetually deepening trade chasm. A laser focus on ramping up foreign currency seems to overshadow other pressing matters.

The National Bank of Ethiopia (NBE) has thrown a series of directives into the mix, with its authorities hoping to recalibrate the foreign currency equilibrium. A quintessential example is the recent directive, where the central bank tweaked the foreign currency usage. Exporters can retain 50pc of forex earnings, a ratio improved from the 30pc imposed much of last year.

The aftermath witnessed a flurry of activities. Exporters offloaded goods in the export market at rock-bottom prices, pinning hopes on future gains through imports. A new cohort thronged the licensing bureaus, causing a surge in coffee exporters. The ripple effect was noticeable - while local coffee prices skyrocketed, the global market declined.

The banking industry, fully aware of the risks tied to the export domain, seems fixated on foreign currency earnings, often at the cost of prudent decision-making. Massive loans, constantly running into billions, are earmarked for the export sector. The unintended consequence is diversion and misappropriation, exacerbating the crisis.

While the coffee export landscape struggles with its inherent limitation, policymakers at the federal government have loftily set their sights on a two-billion-dollar export ambition set for 2022/23.

However, this may be a bridge too far, given the current global prices for coffee. Several factors hobble the coffee momentum - the absence of improved seeds, disease outbreaks and sub-optimal post-harvest practices, and above all, coffee's uncontrolled local market price. Climate anomalies, in particular, have been a thorn in the side of coffee growers. As erratic rain patterns cause devastation, many farmers are veering towards khat cultivation, lured by its short-term economic perks, albeit with long-term environmental and public health repercussions.

Despite such an intricate backdrop, there is a conspicuous absence of a cohesive long-term vision from policymakers. Their playbook seems overwhelmingly centred on beefing up foreign currency coffers. Regulators at the Coffee & Tea Authority, in partnership with those at the Central Bank, rolled out the "Export Coffee Contract Administration" in early 2020, anchoring a minimum contract entry price. Add to this a directive issued in the same year, clamping down on coffee stockpiling. A relentless chase for foreign currency, often at the expense of durable sectoral growth, becomes the order of the day.

Policymakers are in a reactive mode, constantly responding to foreign currency riddles. The pressing need of the hour should be a paradigm shift - from quick fixes to a comprehensive and long-term strategy. The domestic economy is an inflexion point. The export sector can be a beacon for the broader economy. Policymakers are unlikely to chart a path of economic triumph short of sustainable growth blueprints, encouraging innovation, and promoting collaboration.

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PUBLISHED ON Oct 28,2023 [ VOL 24 , NO 1226]

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