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ASSESSMENT OF ECONOMIC REALITY OF ETHIOPIA

January 2, 2008

As I promised in my previous article, I would try to address the economic reality of the country in this article. My assessment of the political reality will follow soon.

The reason I am writing my positive impressions is not to make the current regime brag about it and become complacent but to emphasise the importance of hard work to win the hearts and minds of the people. When we discuss economic development in Ethiopia, we should always keep in mind that 75% the population live at least a day walk from main roads; only less than 6% of the population has access to electricity and about 3 in every 1000 people have access to telephone (UN human development index). So it is to highlight the mammoth task waiting everyone to shade some light to the people, who own the country and rightly deserve access to civilization.

It is also to remind the opposition to recognise the changes on the ground and prepare themselves accordingly by formulating a better strategy based on what is already done.

THE ECONOMY

There are lots of indications that the economy and infrastructure of the country is going through major changes. You see changes in various ways. A journey that took you many hours to reach to your destination previously appears to have shortened because of upgraded roads in the last few years. Particularly the works in areas such as hydro-electric power, road construction and communication is noticeable and the impact on the development would be substantial.

The roads from the capital to the West, East, South and North are well built making the countryside open for business, investment and development. Access to mobile phone has increased significantly and users of mobile phones are no more localised in the capital but also go as far as the lowland into the desert. This too is bound to change the mindset as well as opening the vast untapped countryside for investment and development.

Like in the past, people are not yet prepared to work far from the capital city. Upon graduation, I myself had done everything possible not to go far away from the capital particularly to the north of Ethiopia due to the conflict that had been going on and lack of basic infrastructures. Now there is a possibility that the labour force and the capital may start moving outside the capital looking for opportunity, investment or employment if life outside Addis Ababa becomes a little bit bearable.

INFRASTRUCTURE

Above all the investment in hydro-electric power is the most strategic development that the country has taken. So far it has developed less than 2% of its potential and less than 6% of the population has access to electricity. Although Ethiopia is a source of major rivers, the development of these rivers has been suppressed for long-time due to lack of money and geopolitical influences. In a paradoxical way, the government in power seems to have the best of both worlds; it has a backing from China to Western countries. The West’s finance as well as the East’s cheap labour and technology have now met in Ethiopia. You see large number of Chinese driving around or walking on the streets which signifies their presence in large number of infrastructure projects. The government is also a kind of lucky that those hydro-electric power projects are not opposed by down-stream countries. In fact power lines to Sudan and Djibouti is being installed to export electricity.

When I say large number of infrastructure projects, I mean about the 4 hydro-electric dams (costing more than 20 billion birr), the thousands of kilometres of roads, the Awash dam for sugar plantation, the mobile network coverage and the new universities in all of the regions which required many billions of birr investment.

When I grasp the full extent, I began to ask where the money is coming from and how the government is managing to fund all these multi-billion dollar projects. These projects such as dams, power stations, roads, communication facilities and universities are expensive. The export of the country has remained almost the same except for few promising shifts towards horticulture. When I dig deeper, I realised that the trade balance has gone over the roof. For example according to Central Statistics Office data, export was about 7 billion birr in 2004/05 fiscal year compared to 32 billion birr worth of import[i]. The trade deficit was more than 25 billion birr and growing year by year.

Since money does not grow on trees, I began to ask everyone I had a chance to engage in conversation as to where the money is coming from to fund all these infrastructure projects but I didn’t get the full picture until I began to Google for Central Statistics Office, UN human development index and IMF publications. What I learnt is this: though the country has a trade deficit about 4 times of its export, money has been flowing into the country from donors’ courtiers as well as from Ethiopians in the Diaspora. I believe the internal as well as external sources of income of the country have grown dramatically in the last 10 years.

INTERNAL RESOURCE:

First, the government is enjoying a windfall of income from the recently introduced Value Added Tax (VAT) [ii]of 15% from every transaction. Ethiopia never had VAT until it was introduced most likely under IMF pressure, 3 or 4 years ago; thus, when you have a cup of coffee or a piece of cake at the local coffee house, you are putting 15% value of the coffee into the government’s pocket. That must have beefed up the government’s coffer significantly.

Second, land prices have skyrocketed because the government is the only landlord in the country and has a tight control over the supply. Price of land is not controlled by demand and supply of market economy. Tight control of the land supply appears to generate a windfall for the treasurer. Now every inch of the land in the capital and major cities has been sold at a premium rate (no one can import cheep land from china :-).

Looking the number of constructions going around and the more than 200 Wannabe real estate developers, land is in big demand and generating a fortune for the treasurer. When I checked further, the Central Statistics Office does not measure or publish the price index of lands and houses but one can easily say land and property prices have doubled in less than 5 years.

On top of these two new found windfalls, the traditional Ethiopian government tax base is still there. In fact some of the tariffs on cars and other “luxury” goods have gone up. More than any other previous governments, I can say, the present government goes extra mile to collect its tax.

EXTERNAL SOURCE

The external resource base of the country has gone up dramatically. As shown in Central Statistics Office [iii]data, the vast majority of government expense is covered through external assistance and borrowing. In the last 16 years, Ethiopia has been enjoying unprecedented amount of assistances (approximately 1.8 billion dollar/annum), debt cancellation and loans. According to the same CSO data, more than half of the government spending is coming from outside the country through assistance and loans. As, of course, the American saying goes – “there is no free meal” and how far it will go and why Ethiopia is enjoying unprecedented amount of assistance is something that I would leave for experts to analyse. But there is no doubt money is not a problem so far and it is flowing in from the West as well as the East. In the long run, dependence over external assistance is undesirable but there is no doubt external assistance can jumpstart the economy as it happened in Europe and Asia after the Second World War.

The other major source of government revenue is Diaspora Ethiopians. The official statistics of remittance from Ethiopians living abroad is above 500 million dollars per annum but some say unofficial remittance that is going through private hands could be significantly higher.

These are the two major new sources of extra-money that is being pumped into the country, which is good. Of course, about 400 million dollars could be generated from the current favourable coffee price but the faster growing export is Chat and flowers, which account around 90 and 60 million dollars per annum respectively.

Fortunately there was good rain in the last 4 years so the farmers are in a better position to feed themselves. This is the biggest blessing of God. According to UN development index report “A single draught event in a 12-year period will lower GDP by 7%–10% and increase poverty by 12%–14%. Economic modelling by the World Bank suggests that the inability to mitigate the effects of rainfall variability reduces Ethiopia’s potential for economic growth by a third—with obvious consequences for reducing poverty”[iv]

So the contribution of God to the national economy cannot be underestimated. In simple words, when the cycle of draught is pushed farther apart, the economy and the country will be in a better state.

Therefore, though the income from export hasn’t gone up, the money coming from Diaspora and donors’ country appears to be the fuel behind the high level of spending on infrastructures.

In conclusion one can say a relative absence of war, four good consecutive rainy seasons, better commodity price, high level of inward investment in areas of flower, construction and mining, money remittance from Diaspora and foreign assistances coupled with land sales and new windfall from VAT have put the current government in a better position than the previous one. These are the facts that cannot be disputed. However, politicians can argue whether this government got it lucky or earned it through sound planning could spark endless arguments and I do not want to be part of it.

Of course some short-sighted politicians may dismiss it as propaganda but I am a firm believer that knowledge is power. Understanding what is actually going in Ethiopia is beneficial for everyone, particularly to the opposition political forces in the Diaspora. It is on these facts that the political programme and strategies need to be formulated, not on assumptions, denials or hearsays. It is easier to dismiss everything as propaganda but denial of the government’s strength and good fortunes that the government is enjoying would only lead to a misguided political strategy that will fail again.

Though these capital injections are very good to stimulate the economy, create job opportunities and expand the infrastructure for further development, the gap between the Haves and Have-nots is increasing at alarming rate. According to UNR-2006, “23% of the population live below 1 dollar a day and 77% below 2 dollars a day”.

Price of goods and services have gone through the roof. Like the highly publicised price of Berbere/chillie, the cost of everything has gone up at least 5 to 7 times. When I left the country, one could have excellent meal of Kitfo for 5 birr but now it costs 35 birr at the same place I used to eat. Egg used to be 5 a birr, now it is about 1 a birr or 3 for 2 birr. Everything else is expensive and anything below 1 birr has no real value. The most surprising thing is those places which sell a meal above 35 birr are busy and sometime there are no enough seats in those restaurants. This is a worrying development since it a sign of a false economy since the locals cannot afford it. The spending is sustained through a large sum of money that is being transferred from government banks to private “investors” and the money coming from third country through remittance and donation.

On the side of have-nots, there are civil servants, pensioners and employees of private companies who earn as low as 150 to 200 birr per month with families to feed. So there is a kind of underlying imbalance in the economy which is worrying. Like global “sup-prime crunch” the economy may face a big difficulty if one of the three sources of cash from abroad dries.

INFLATION

Before I left Ethiopia, the main problem was supply. You would go to a bakery at 9 AM and there was no Bread left. But now you can go to a shop at 9 pm and the shops are full of the stuffs you need. So the price rise has nothing to do with demand and supply except that of land which is in the government’s hand. As I look around, there is no shortage of supply of anything. Vegetables, grains and other food items are full on shops’ shelves but at a price at least 5 times more expensive than what they were few years back. These are the most worrying developments for low income families in the country. They can only window-shop but they cannot afford to buy. It was the farmers who used to be struggling to feed themselves when there is shortage of rainfall but now urban dwellers are getting in a position where they cannot feed themselves twice a day.

From this observation, one can conclude that the value of birr has been devalued significantly as the market opens itself for inflow of currencies and goods from Diaspora and donor countries. 1 dollar was close to 9.50 birr and a pound heading to 19.50 birr a month ago. So everything may be cheaper for someone who is coming from abroad and for families who have children abroad but for the people who are earning their income in birr, life has become an uphill struggle even after 100% pay rise for pensioners, teachers, doctors etc.

According to the official Central Statistics Office, consumer food index annual inflation is 19.2% on the country level and 26.6% in Addis Ababa.

“… the 19.2 percent increase in the country level Food index was observed due to a rise in the indices of the regions namely: Addis Ababa 26.6 percent, Afar 23.9 percent, Amhara 21.9 percent, Benishangul Gumuz 17.6 percent, Dire Dawa 19.2 percent, Gambela 18.8 percent, Harari 19.5 percent, Oromia 18.8 percent, SNNP 15.2 percent, Somali 2.5 percent and Tigray 19.4 Percent”[v]

Unless price increase is not controlled through increasing supply, improving productivity coupled with tight fiscal policies, inflation might eat the economic activities. Particularly large transfer of money from government to the private sector through loan has created a false sense of “paper millionaires”, since they do not ask themselves how much they owe the banks. Since Ethiopia never had an economic boom, the term bust is not yet known. The mini-boom we are seeing today could lead to mini bust unless some of the corrective measures are taken timely.


[i] http://www.csa.gov.et/text_files/national%20statistics%
202006/external_trade.pdf

[ii] http://www.imf.org/external/pubs/cat/longres.cfm?sk=17018.0

[iii] http://www.csa.gov.et/text_files/national%20statistics%
202006/Publicf.pdf

[iv] http://hdr.undp.org/en/media/hdr06-complete.pdf

[v] http://www.csa.gov.et/text_files/CPI_docs/CPI-Jul_07.pdf

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