Q. What sort of role should government play in the management of the economy?

The main role of the government will be regulatory activities that facilitate the development of the total economy. The other one is the role it has to play as an actor in economic development itself.

In a situation where the market economy is functioning, there are moments when the market fails to serve its purpose for a short period of time. The government has to fill that gap in a well managed way, meaning that we have to be sure that there is no other actor that can fill the gap and then measure that gap. We should be able to know whether we can fill the gap in terms of resources and capacity. If we do not have the capacity and the resources, we will end up distorting it.

We have to know exactly when we have to withdraw from playing the role of filling the gap. When we know that the gap can be filled by other actors, particularly the private sector, we have to withdraw and then find another area where there is a gap.

Q. What do you mean by “[when] there is no actor that can fill the gap”?

Our economy has gone through this experience. For instance, let us take the situation of [electric] power. Because of the rapid economic growth, we have been facing power shortages. If any actor was to have responded, the signal has been there for a very long time. The economy has suffered a power gap, and this might continue as the economy grows very fast.

The natural thing is to expect the private sector to fill this gap. And it (the government) is [expecting the private sector to do just that]. With this anticipation, the government has put in place a proclamation that allows the entry of the private sector into the generation of power from any source in this country. To this date, I do not know of a single private company that has responded to play this role in terms of generating a single megawatt of power. The choice, then, would be either to wait and see the shortage continue, not only as an ordinary shortage, but as a crisis, or the government can go into this in a measured way and then wait for the moment when the private sector can fill it (the gap).

That is why the government is forced to invest in power generation. Otherwise, we could have used this money for some other purpose. This might be the case for some years to come, because, for any foreign direct investor (FDI) to come in and invest on a very large scale in the power sector in Africa, they might think it is risky. For a local investor to be able to jump into this sector, the resource requirements are very huge. The only player that can shoulder the responsibility is the government. The same would apply to some other sectors where the government thinks that there is a market failure.

Q. Can sugar be one example of this?

It could be one example, but there is a difference with the absence of actors in the sugar sector. The development of the sugar sector is a very capital intensive industry. If one wants to develop a sugar manufacturing plant of the size of [the plant in] Tendaho, [Afar Regional State], the requirements might be to invest on the order of six billion Birr to seven billion Birr, which is like investing in a medium size hydroelectric power generation plant.

But we can see some private actors coming into this sector. It is not as difficult as it is in the other sectors. Particularly, it would be the government who would be required to invest, to be able to fulfil the demand of the local economy and to sustain our exports as well.

Q. In relation to the management of the economy, how should monetary and fiscal policy instruments be used?

It depends on the level of the development of the subsectors. In Ethiopia, these instruments are managed as much as the facts on the ground allow. Some instruments may not serve [the sectors] as much as we would wish, but most of the instruments help us to manage the economy.

If the government is out to mobilise resources and if we decide to use the interest rate as an instrument (due to the level of development in the financial sector itself and the behaviour of individuals who have money in hand), it may not respond as much as we would like it to. If the government increases the interest rate, say by 10pc or so, I do not think that the response of those who are holding the money would be to put it into the bank.

If you do it the other way around, it is the same. People have been saving in a situation where the interest rate was negative in real terms. Deposits were expanding when we had inflation that was by far greater than the interest rate that the banks were giving.

These problems do not have anything to do with the government’s failure to use this instrument. It is the nature and structural characteristics of the economy at this stage. These types of instruments, at this stage, are not effectively assisting us to be able to monitor the financial sector and the monetary sector, in general.

On the fiscal front, it is going very well. Most of the instruments are working right, and we are seeing a response according to our needs. The only thing we have to do is to improve our tax enforcement capacity and collection. The expenditure side is managed well.

Q. Some argue that introducing the lending cap has affected the private sector in terms of getting loans. As you mentioned earlier, the government would intervene in the economic management if there was no actor in the market. Do you not think that the introduction of the lending cap increases the role of the government in the management of the economy while putting a restriction on the private sector?

I do not think so. The lending cap has, in general, been put on both the private sector and the public sector to be able to serve the growing demand for money. As the economy grew every year by over 10pc, in nominal terms, it also increased the total amount of money circulating in the economy.

The amount of money that has been put aside for lending has been increasing every year. We are also giving the chance to [secure] a growing money supply. From my own experience and from the discussions I have had with private actors, I have not come across a single private sector investor who has suffered because of the absence of a loan.

In the service sector, some might have had a problem, because each individual bank looks into not only the total investment but also what investments can pay them back. The banks themselves have used some rationality in terms of allocating their resources, because they do not have an infinite amount of resources now. That is why our growth has not been affected in a situation where we have introduced this cap.

Q. The economic growth is characterised by low savings, low investment, and high credit financing. There is also high unemployment. Where do you say is the source of growth?

You have to see the structure of the economy. The growth we are witnessing is not ordinary growth; it is quality growth, because the growth primarily comes from real, sustainable sectors that have been in place for a very long time. We have not achieved this growth with shortcuts from sectors like mining, where you get the benefit for a short period of time.

Primarily, the growth comes from smallholder agriculture. Whenever we talk about growth from agriculture, we are talking about beneficiary families of 12 to 15 million household farmers. That means money is going into the pockets of these people.

In the urban areas, the growth that has been achieved with small and micro enterprises (SMEs) is [part of the process of] equally distributing money. This makes it quality growth.

The private sector is an emerging sector. In its totality, I do not think, at this stage, we have witnessed much skewed income.

Q. Have you achieved structural change in the economy?

Sure, we have to see structural change within each sector and from one sector to another. Within agriculture, it used to be excessively and predominantly peasant agriculture. The production was for home consumption and whatever was leftover was sold in the market. The farmer does not take into account that he has to produce for the market.

Now there has been a shift over the last few years. Farmers in the cash crop area produce for the market, even in areas where production used to be for home consumption alone. That is why we have increased our exports. They have started to produce certain commodities, which can fetch better prices and buy other products for their own daily consumption. This is a structural shift within agriculture. Stage by stage our farmers will be commercial smallholder farmers. This is the transformation we are witnessing.

Between sectors, we are seeing a shift in the annual growth rate of agriculture and industry. During the last five years, the industrial growth rate per annum was 9.8pc against the growth of agriculture which was about 9.5pc. This is the sign of a shift.

The growth in the service sector is over 13pc. All this represents a very clear shift, and, maybe, at the end of the coming five years, the balance, in terms of the share in total gross domestic product (GDP), will be in favour of the industry and service sectors.

Q. How sustainable is rapid economic growth fuelled by an expansionary fiscal policy, while maintaining a low inflationary rate. For how long can this be maintained? 

Speedy growth can be sustained, because we are not doing it for the first time in the world. There are other countries that have done it at a much faster pace than we have done it. If we have to learn, we have to learn from the techniques they have developed, and we have to make it applicable to our circumstances. In terms of exports, for instance, we are trying to sustain 20pc to 25pc export growth annually.

To determine whether we were on the right track, we looked into the experience of Korea. They have managed to increase their exports on average by 48pc annually for 16 years beginning in 1963. China, with a strong economic base, has consistently registered rapid economic growth for over 20 years.

But there are certain challenges when it comes to our situation. Our savings has to be increased and we have to use different instruments to support domestic savings. We also have to be able to mobilise foreign resources in the sectors that make a difference.

The most important force is mobilising our own people, every beneficiary in this whole system. If I were asked this question 10 to 15 years ago, I would simply have given you a possibility picture, but now I tell you because we are doing it.

Q. How do you intend to encourage people to save more, taking into account the situation of this country?

Traditionally, we are not good savers. In some societies, their savings capacity is very high, and this could be because of their culture or the instruments they have put into place. Some 50pc of disposable income goes into savings in some societies. Ours is in the range of five per cent to six per cent. This has to be studied first, and we are doing that, instead of simply sticking to the traditional way of encouraging savings.

Q. While trying to encourage export competitiveness, how would you address externalities like the depreciation of the Birr?

The Birr, when we think of its relationship to other commodities, remains a commodity. It has to sell itself among the others. An exchange rate in one country, to be in the right balance, has to be related to the trading partners’ inflation.

For instance, if the inflation of our trading partners is very high and ours is very low, the exchange rate we have would make us competitive. We have to play the right balance. Otherwise our products will not be competitive enough on the international market in terms of export, and whatever we are importing would be artificially cheap. Every time, the exchange rate has to adjust itself to these situations, and, as we are living in a market driven world, we have to do this.

Q. The balance of payments crisis is not something that will be solved in Sufian Ahmed’s lifetime, he once said. Have you given up on this issue? What are you doing to address it?

There is some truth in what he said. It is not very easy to overcome a trade balance deficit and a balance of payments problem in a very short period of time, for countries like Ethiopia. It is a structural problem.

At this early stage of growth, the total exports we make will not be able to cover the bill for our total imports, in terms of trade balance. We currently have close to two billion dollars worth of exports, but our imports may be six billion dollars or seven billion dollars. What he is referring to is that this gap will continue to be there for some time.

But what this gap looks like and how we will address it is a different issue. The first thing we have to look into is what would be a sustainable balance of payments deficit compared to the total GDP. If we have a 50pc deficit with our total GDP, that is not sustainable. Even 30pc is not sustainable. Our balance of payments deficit has to be in the range of 15pc to 16pc of our total GDP. If we manage [to get] it around this [range], I think we can sustain the whole macroeconomic situation.

Q. Do you have any specific plan to achieve that?

One is increasing exports. If we put in place 20 textile mills of the Ayka type (the recently inaugurated Turkish plant) and expect exports of 100 million dollars annually, our exports would be two billion dollars from only one subsector. It is a matter of encouraging investment and supporting productive sectors to increase our exports.

The other [method] is to encourage import substitutive industries in a competitive way, because most of the products we import are industrial products, in addition to petroleum. These are capital intensive, but we have to particularly support the private sector in producing these industrial products.