Ethiopia economy declines 11 percent by COVID-19

The economy of Ethiopia will shrink between 5.6 to 11 percent as a result of coronavirus (COVID-19) pandemic, stated a paper by the renowned Addis Ababa University Economics Professor Alemayehu Geda.

“The government has estimated the growth of GDP for the year 2019/20 to be to be 9 percent. …If we take the government growth figure of 9 percent, the 2019/20 GDP of the country will be Birr 2.044 trillion. With this information, the effected of the 11 percent economic shock is to reduce this GDP by 227 billion Birr. In the best-case scenario of a 5.6 percent decline in GDP, this will be Birr 114 billion, and in the worst case scenario (with a GDP contraction of 16.7 percent), this may go as high as Birr 341 billion,” the paper released today stated.

His paper stated that with partial lock down of the country as part of its mitigation strategy of COVID-19, 2.5 million private sector workers and self employees will be vulnerable with a total of 2,5 billion Birr income loss.He indicated that the damage by COVID-19 is a very large negative shock to the Ethiopian economy, which is expected “to significantly reduce income of household and aggravate the level poverty”.

In the worst-case scenario (i.e., assuming the effect of crisis may last for the coming three quarters) total exports may decline by 24.3 percent (the annual exports falling from $2.8 billion to $2 billion). In the best case scenario, where the effect is assumed to be limited just to the first quarter of the new fiscal year (July to September 2020), exports are expected to decline by 8.1 percent.

“… the most likely condition that the economic shock may last at least for the first and second quarters of the year 2020/21, exports are expected to decline by about 16.2 percent. Oil seeds export leads this, by a decline of 25 percent. This is followed by pulses, coffee and leather and leather products, which are expected to decline by 21 percent. Similarly, the last quarters of the current fiscal year (March to June 2020) is expected to witness a decline in exports of about 16.2 percent,” the paper stated.

The only positive development for oil importers such as Ethiopia is the decline in price of oil by about 50 percent since the crisis. This may also lead to a reduction of the country’s import bill significantly, at least by 30 percent.

professor Alemayehu stated that the most important items in the country’s import bill are capital goods (about 35 percent of imports), followed by consumer goods (30 percent, of which 20 percent are non-durable) and “semi-finished goods” (17.2 percent, of which fuel alone is 14.6 percent).

“This pattern shows how Ethiopian imports are strategic imports that are difficult to reduce, in particular through price effects such as devaluation. With these pattern and assumptions about the COVID-19 effect, import value in US$ terms may decline by about 12 percent in our average scenario of the shock lasting for two Quarters of 2020/21. Similar decline is expected in the final quarter of 2019/20 too,” he noted.

In the best case scenario, the effect of the COVID-19 being limited to the firs quarter only, import may decline only by 6 percent. In the worst-case scenario where the COVID-19 is assumed to last for three consecutive quarters, imports may decline by about 18 percent.

As that of exports, this disruption is estimated to lead to an average annual decline in volume of imports by 21 percent for Ethiopia as that of other countries with strong ties with China, according to the paper.

Balance of payment
The paper stated that on average, Ethiopia’s debt services have increased significantly over the past few years, becoming almost US$ 2 billion per annum in the last three years.

“This is about two-third of our merchandise exports and nearly a third of exports of goods and non factor services. The COVID-19 effect will raise this figure to 38 percent,” it said.

Worsening poverty
Using the official poverty rate of 22 percent, about 26 million of the estimated 108 million population of the country live below poverty line, according to Professor Alemayehu. “This is quite an understated figure because it is computed using Birr 20 per day per adult (that is a salary of Birr 600 per month) as poverty line. It is obvious that it is difficult to live with this money in today’s Ethiopia,” he stated.

“If we revise this to one of the smallest and more reasonable international poverty lines (Birr 40 per day, or about Birr 1,200 per month; that is a US$1.25 a day), about 79 million of our people (73 percent) are below poverty line. Multidimensional poverty rates of the country generally corroborate this latter figure.”

Notwithstanding the use of different measures of poverty line, on the average, the COVID-19 economic impact is estimated to increase the number of poor by about 28 to 35 million people (or on average, by 31 million people) in the fiscal year 2020/21. “Even using the official poverty line, the pandemic will more than double the poverty rate from 22 to 55 percent of the population,” Professor Alemayehu noted.

Advice to government
The paper urged the government to help businesses engaged in service and industry to by making every support possible to make sure that the firms are running at least at half their capacity and half the work force, despite the partial lock-down.

“This may be done using new shift-system. Such support should be accompanied by encouraging import substations /re-direction of the service and industrial sectors to serve the domestic market as well as the health sector. This needs to be done in consultation with stakeholders. Appropriate incentive schemes also need to be in place for the purpose, according to Professor Alemayehu.

He also advised the Government of Ethiopia to shift non-food production activities to food and basic and essential goods production, to the extent possible, is also another policy direction worth considering.

Further more he suggested the following macroeconomic and financing policy directions:
– Engage in expenditure switching. This may also include provision of some public sector activities thorough private sector or public-private sectors partnership.

– Credit provision for small business and the self employed and sharing the wage bill of private sector firms through provision of credit is important.

– Full monetization of the COVID-19 related financing is highly inflationary that hurts the poor and leads to macroeconomic instability. Hence, need to be avoided.

– Partial monetization and financing the deficit through external loan/aid is feasible. However, part of this money needs to be used for imports of food and essential goods or their domestic production so as to implement this policy in a stable macroeconomic environment.

– Devaluation policy is inflationary without any help in exporting and addressing the balance of payment problem that we will be encountered. Hence, it needs to be avoided.

– Interest rate policy is ineffective and need to be avoided. Instead, selective credit policy is effective to accomplish what interest policy might accomplish in developed economies, according to the paper by Professor Alemayehu, ‘The Macroeconomic and Social Impact of COVID-19 in Ethiopia and Suggested Direction for Policy Response‘.