Ethiopia economy updates September 2021

The Ministry of Finance of Ethiopia issued a statement indicating that the economy has been in good shape despite global and internal political challenges.

This is indicated by Dr. Eyob Tekalign, State Minister of Finance of Ethiopia who briefed media on Thursday along with the Press Secretary of the Office of the Prime Minister, Billene Seyoum. Below is key comments of the Minister as summarized by PM Office Press Secretariate.

Status of the economy:

– The Ethiopian economy exhibited commendable performance. The economy remained resilient and maintained a stable and promising path. And this is despite the multiple exogenous shocks the economy faced – including Covid-19 pandemic and the global economic downturns, the locust invasions, and the domestic security challenges in the northern part of the country.

– We believe this is the result of broad-based reforms we have been implementing across the economy over the last 1.5 to 2 years. We have been implementing aimed to ensure macro-stabilization, unlock new potentials, and set the foundations for a long-term sustainable development.

– Clearly, it’s difficult to measure the counterfactual. Those who have been diligently following and analyzing the economy know too well, how much of a boost the reforms across the economy have been. How far the economic reforms would have taken us and how much bigger the performance would have been, had it not been to the exogenous shocks we’ve faced. Or how bad the situation could have been? (When one occasionally sees news articles t with a story line of Ethiopia’s economy battered” by this and that and note how challenged the writers are to provide concrete evidence as to the ailment, you realize how remarkable the reform achievements have been)

On the macro-economy:

– we have implemented notable reforms, that have helped us ensure stability, encourage economic activity and private sector development, job creation, and set the institutions and capacity for sustainable growth.

– In the last fiscal year, the economy-maintained growth of 6.1%, despite the notable global slowdown.

– The performance of the current fiscal year is expected to further rebound. High frequency indicators clearly indicate a better performance than last year.

– Export performance, financial sector development, domestic revenue – have also showed notable growth throughout the past two years. Exports are now consistently picking, after close to a decade of stagnation, reaching 3.6 bil USD this year; it increased by 19% from the previous fiscal year. Export performance is an outcome of measures taken in the agriculture and mining sectors.

– Mining exports showed a more than 1000 % increase, and this was clearly a result of a structural bottlenecks we addressed in the sector. This is a notable indication of the economy’s turn around.

– Domestic revenue has showed a notable increase as well. A 20% increase the just ended fiscal year

– The financial sector is also expanding and undergoing a rapid transformation with increasing digitization and financial innovation. Accesses to finance has shown a robust growth. Financial saving has increased by 30.3 %, from 1 trillion to close to 1.4 trillion in June 2021.

– New credits reached 329.4 billion ETB from 271.2 billion ETB in EFY 2012; showing 21.5 % increase.

– The private sector received the lion’s share (over 70 percent.) This is a notable outcome of the reforms, where the government continued to maintain prudent fiscal stance.

On Debt Sustainability:

– The Government has remained prudent and is also taking measures to reduce the risk of distress by including reprofiling and restructuring of debts.
– We have maintained a zero limit on non-concessional loans. We are now focused on completing exiting projects.

– The debt to GDP ratio has showed an 8% decrease since 2019. The June 2021 data shows Debt to GDP ratio is at 50%.

– Debt service to export and debt service to revenue ratio has also improved by 2-3 percentage points annually in the past two years.

– In June 2021, debt service to export is at 24 %, which has come down from 26.40% in 2019. This shows that we are on track, towards our goal of meeting moderate debt distress target by the end of the reform period.

– These are all results of a thorough and coordinated reform measures across the economy.

On the Investment Front:

– We are continuing with the doing business reforms, and notable progress has been made.

– Despite the challenges the country has faced over the past year, FDI has registered a solid growth, reaching 3.9 bn USD. This is a remarkable growth considering all the negative international news about the country, currency convertibility concerns, and security challenges in the north.

– We have overhauled the investment law and procedures to simplify investment and reduce the time and cost of regulatory procedures and expand the investment opportunities. The new investment law and the new commercial code are game changers. They modernize the investments and business institutions to meet the needs of the Ethiopian economy and the international best practices.

– We are digitalizing business processes – from business registration and licensee, to tax payment and construction permits. These measures are expected to further boost investment into the country.

Addressing Structural Deficiencies:

– The Government is also working to address structural deficiencies in the economy including productivity improvements across sectors and reduction of high import dependence.

– Measures are being taken across the sectors including an initiative to substitute key commodities such as wheat and edible oil. Large tracts of land across the country are under cultivation including low land areas, which in the past were considered inarable.

– Agriculture and industrial development policies are being revised to reflect the vision of the country for structural transformation and self-sufficiency. Both policies place emphasis on private sector development and improved productivity.

– We have sharpened our tax policy tool to help engender strong and broad-based domestic manufacturing. The recently announced custom tariff reforms have significantly slashed the tariff rates on raw material and intermediate goods significantly enhancing domestic production capacity.

(Manufacturers used to pass through at least 4 government institutions to get tariff reduction for their inputs by the second schedule A and the process used to takes at least one full year).

– We are also aligning our tax policy to support sectoral development, improve productivity and boost exports. Duty and taxes have been removed on 500+ agricultural inputs and equipment to incentivize the private sector to invest in importation as well as local manufacturing of agricultural machinery, equipment, and inputs. For smallholder farmers, the duty and tax removal make agricultural mechanization services and investments in small irrigation equipment less expensive.

Development Cooperation:

– We are continuing to strengthen our relationship with our multilateral and bilateral partners. Development cooperation inflows reached USD 3.09 billion which is 80% of the plan for the annual year. On the other hand, USD 3.9 billion was committed for new government priority projects and programs which is 90.56% performance as compared to the annual plan.

– Partners have continued to support infrastructure and flagship projects, as well as to address humanitarian concerns across the country.

– Promising discussions are underway with the G20 on the common framework to reprofile some of the debts.

– Furthermore, the COVID-19 Vaccine support from the US government, China and COVAX initiative have been instrumental.

– The Government is working to address the roots of inflation by improving the supply of goods and improving monetary policy framework.

On Inflation:

– Some of the expansionary measures to mitigate the effects of COVID-19 and the ongoing domestic conflict remain challenges to address the inflation gaps. The Government is working on both short- and long-term strategies to address this.

– The National Bank of Ethiopia has just introduced measures to further tighten the monetary stance by raising the reserve requirement ratio from 5% to 10% and increasing the individual lending facility rate from 13% to 16%. NBE stands ready to utilize all available tools at its disposal to ensure price and economic stability.

– We are working to address supply side challenges and improve the provision of basic commodities in the medium term.

– In the short term the government will continue to import and facilitate the supply basic goods.
– Top priority is given to enhancing productivity. Large tracts of land across the country are under cultivation including low land areas. Regions double their efforts building on last year’s success. (These efforts will help address structural deficiencies in the economy).

– We have prepared a 6-month plan for the provision of basic goods including close to 600,000 tons of wheat (over a million for the whole year) and close to 53,000 tons of edible oil for the next two months (both imports and domestic production).

– The new Government structure will fundamentally address the market structure issue by clarifying the mandate of government institutions and strengthening regulatory capacity.

On Forex Availability:

– This has been one of the key reform measures with a clear plan to address the issue from its roots.
– We have learned long that shock therapy and quick measures to improve the exchange rate value have not been positive. So, we are taking a measured approach to improve the valuation of the birr. The rationale for taking a measured approach is to ensure the smooth transition through easing forex supply constraints to the economy, building forex buffers (including through export receipts) and unwinding the expansionary fiscal and monetary policies

– The forex market had showed promising improvements in the past year, with a more than 30% narrowing down of the parallel market premium (though this gain is eroded in the last few weeks due to non-economic reasons, which is being corrected through administrative measures)

– The government is continuing to address the institutional and regulatory gaps in the forex market including streamlining of regulations to incentive forex flows.

– The key agenda here is also to continue the momentum on exports.

On the Cost of the Northern conflict to the Economy

– Conflict is costly. War is the epitome of hell for all involved. Had it not been for thoughtful strategic measures the government had taken early on, it could have had a serious impact on the economy.

– Even now, we are forced to redirect our resources and energy to secure peace, as well as the humanitarian expenses; (this month alone we have spent over 9 billion birrs through NDRMC for humanitarian emergencies). The cost of the humanitarian need is partly lessened as the burden is shared by the broader Ethiopian public.

– There are also major opportunity costs in terms of agricultural output and further social and economic progress. The MoE recently announced that more than 7000 schools are affected by the ongoing conflict.

Looking forward:

The Ethiopian economy is expected to rebound strongly next fiscal year. Notable stepping stones include:
– Peaceful conclusion of the election gives us stability to pursue our reforms

– The completion of the 2nd filling of GERD gives further momentum to the national unity and exploitation of national resources

– The global economic outlook is improving

– The significant enhancement in productivity, the rebound in tourism, the awakening of the export sector, the significantly improved revenue collection capacity, signals a positive trajectory.

– The successful reforms in the telecom, logistics, and energy sectors and the deeper reform of SoEs (and the plan to pool their capacity together) provides a transformative opportunity to unleash further growth.

– The establishment of the capital markets, the new telecom license, the partial privatization of Ethio-telecom and the privatization of 10 sugar estates are the quick boosts to the economy we are expecting in the next few months, which will also have transformational effects across the economy.