Prior to approval by Parliament, the government conducted its
traditional public canvassing to obtain public
support for the GTP. Attention was drawn to three
essential matters; equitable growth, savings and
investment, and national consensus.
In its endorsement of the GTP goals, the public has more or less shown
a high degree of unity. At the same time, there was
a concern about not knowing the social or economic
costs of achieving the goals. The way the concerns
were articulated may be different but people were
asking how savings can be improved while prices are
ever increasing. Whether the gap between the rich
and poor can ensure sustainability or national
consensus is also another area of concern.
These concerns increased as more government expenditures were disclosed
including the Great Renaissance Dam to be built on
the Abay River, raising expectations of inflationary
pressure on the economy. In addition, economists as
well as international financial institutions such as
the IMF and World Bank Group (WBG) have expressed
their deep concerns about economic overheating. Many
feared excess money supply and government
procurement, exposed to risks posed by
non-competitive markets, can exacerbate inflation
and lead to wasteful rent-seeking practices.
The government also seems to agree, albeit partially. It declared
non-competitive markets as the main challenges of
meeting the goals. Recently, after declaring that
there is too much money for the good of the economy,
it promised to cut down the money supply to 3.9pc
In addition, the Prime Minister’s recent reference to the value of
adequate preparation prior to large ventures,
implying programmes such as Universal Rural Road
Access Program (URRAP), a programme that aims to
connect all the 18,000 kebeles, through 71,000Km
all-weather road network, may be deferred until
adequate planning and organising ensures timely and
effective delivery of GTP goals.
Indisputably, the government is taking the public’s concern seriously.
Meanwhile, the Great Renaissance Dam, after being
catapulted by a brewing Nile politics on to the high
stage of the Middle Eastern political crisis,
offered the political leadership an opportunity to
mobilise the public into internalising its national
concerns. Government came with the glorious public
challenge “to put our money where our mouth is,” so
to speak. Buying the Millennium Bonds to finance the
cost of the dam would simultaneously address the
three issues of mobilising savings for investment,
curbing inflation and unifying the nation to take
responsibility for its own betterment.
This looks like too tall an order for one dam. However, in spite of
introducing the Development Bank Bonds as early as
March 2010, at the time when inflation was down to
single digits, the government was hardly successful
in diverting either savings or expenditures from
business and households into government bonds. Not
until the prospect of the dam redrew the financial
landscape a few months ago.
Although high national sentiments may be sufficient to justify
investment in the dam, the looming threats of
inflation and acute deficit must be tackled
simultaneously lest sentiments go astray and
socioeconomic costs lead to consequences unbearable
to society. Such unbearable consequences usually
come in the form of diminished assets from
institutional insolvency or much reduced real
income. Mostly to households but not much less to
There is a high possibility that the issue and purchase of bonds will
lead to reduced inflation, increased savings and
more effective monetary policies.
Money exchanged for bonds is diverted from the market, where it was
chasing disproportionally less goods; fuelling
inflation. Provided sufficient bonds have been
issued and purchased, disinflation sets in. The
decision to buy bonds also triggers a bandwagon
After a critical mass has been achieved, many follow the early buyers
which will help neutralise the rational expectation
of inflation prevalent during high price levels.
Households reduce hoarding, spend less and start
saving for another day.
In rural Ethiopia, most put their savings from rare surplus earnings
into expensively bought livestock. Many times these
savings again get liquidated when crops fail and the
markets are flooded by emaciated cattle that are
sold at prices much lower than they were bought at.
The opening of 100 branches recently by Commercial
Bank of Ethiopia (CBE) has provided ample solace for
millions as was witnessed by billions of additional
savings mobilised from these new branches. Bonds
with par values starting from 500 Br serve as an
alternative to the brick and mortar branches, which,
otherwise, would have taken years to reach out to
more of those sections of society which are not
served with any banking.
Wide public acceptance of bonds as a means of storing value will also
improve the effectiveness of monetary policy
instruments across all the classes in society.
Change in interest rates for instance will
proportionately affect both small and large owners
of government bonds.
At the same time, businesses, small or large, access more loanable
funds for long term investments in an economy of
price stability. This, in turn, will increase the
supply of goods and services and apply a downward
pressure on prices, at least for investments with
short gestation periods. As inflation is thus to be
curbed without raising the interest rates, the
viability of flourishing businesses will not be
The value of bonds, offered last year by the Development Bank of
Ethiopia (DBE), amounts to 15 billion Br, an amount
merely 3.5pc of last year’s GDP. The performance
figures were not released. Despite the low volume
issued, however, the performance is expected to be
In contrast, Kenya had a national debt of nearly nine billion dollars,
about 30pc of its GDP, composed of 80pc bonds and
20pc treasury bills. Confidence in Kenyan government
bonds might be the envy of any central bank, with
187pc performance on both treasury bills for short
term operations as well as a 30 year denominated
savings and development bonds. But the Ethiopian
financial context differs much from that of Kenya,
like the national goals.
Similar confidence in government bonds, however, could be achieved or
even exceed expectations by experimenting with
rearrangement of existing economic organisation
coupled with government expenditure programmes.
Organising small urban and rural bond holders into
cooperatives that will mature into mutual funds
could be one instrument to facilitate savings.
Arranging for medium bond holders to form large
share companies that will utilise the opportunities
created by the GTP could be another option.
Incentivising firms to incorporate as share
companies, instead of limited partnerships or sole
proprietorships, for small asset holders to invest
their bonds could give the economy a huge boost.
Mutual funds and loan arrangements need only expert advice and
institutional support to do so. However, promotion
of the agenda with high hopes of the future is
One strong criticism on government is that the delayed return from its
large expenditures is not proportional to the
current social burden, except for those stakeholders
that benefit directly during the process, such as
construction contractors. An immediate solution to
this problem may be downsizing projects in such a
way that they get completed in time for the
community to appreciate the return.
But the suggestion to organise bond holders into companies which will
participate in the GTP projects can also be an
additional solution. Part of the projects' budget
may be used to make up for financial equity short
falls. Mainstreaming competition in the sector
through promoting the creation of as many companies
as possible would also be beneficial.
Tax and establishment cost incentives can be provided by the government
to encourage firms in equity financing. This will
help absorb small assets from the public and allow
equitable gain from economic growth. No less
important for social stability, large businesses
directly benefiting from large government
expenditures would be more accountable from the
plurality of shareholders.
Yet, the fact remains that the effect of government bonds on
sustainable growth is a topic to be debated in
greater detail in Ethiopian economic policy
dialogues, thanks to the introduction of the Great