Published On  Jan 29,  2012






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Global Slowdown Brings Mounting Tail Risk to Domestic Economy; High Time!




Sitting at the helm of a sprinting economy is not always blissful. As far as the fundamentals are true, officials, such as Sufian Ahmed, minister of Finance & Economic Development (MoFED), a member of the nation's macroeconomic team who steer the countryís wheel, might have seen more joyful days. Their ecstasies were short-lived, as gaps in nutrition are inherent in nourishing an untamed beast - the market.

Bringing years of experience to the table might be helpful in being able to steer well, as might the soft and diplomatic management style typical of Sufian.

Moving through five posts within the last 18 years, with an average service time of 3.6 years, Sufian might be one of the more stable government officials, less Girma Birru, former minister of Trade & Industry (MoTI), now Ethiopian's special envoy to the United States.

Since he assumed the driverís seat in 2001, the Ethiopian economy has seen continuous but consolidated growth. Getting out of the dustbowl of idleness in the aftermath of the Ethio-Eritrea war, the economy has entered a growth trajectory, driven mainly by infrastructure investment. Yet, traditional problems persist, challenging the distributive impacts of growth, inequality expanding with each day.

Even worse, inflation continues to erode incomes to the extent that even middle-incomers are being pushed away from the routines of basic consumption. Contracting purchasing power is giving fixed-incomers a hard time just to survive, as long as incomes follow behind prices at larger margins. No quick fix recommended by the soft minister and his comrades at the MoFED in the past has managed to ease the escalating prices.

To add insult to injury, forced investment of private bank resources in government bonds has dried up the credit market, with banks pushed down a cyclic path of illiquidity. It is only after it was too late that the central bank reduced reserve requirements by five percentage points, which, eventually, provided a little relief for the financial sector. But, that has not been enough to unlock sizeable resources to sustain the growth that Sufian was applauded for in the last eight years.

Notwithstanding the developmental state policy, which prefers growth over controlling inflation, all projections show that Sufianís task in the year ahead will, indeed, be difficult. External shocks related to the slowdown in the global economy, mild recession in Europe, and a decline in demand for commodities in emerging countries, such as China, will place considerable burden on the rather vulnerable economy of the country. Even if many pundits guesstimate the recessionary impacts of the European debt crisis, only official affirmations from the World Bank and the International Monetary Fund (IMF) bring differing attitudes towards consolidation.

Both institutions, often denounced as agents of neoliberal agenda by the Revolutionary Democrats, have indicated that global growth will be far lower than previously expected. The global economy will grow at marginal rates of 2.5pc and 3.1pc in 2012 and 2013, respectively, estimates the World Bank, projected by the IMF. However, both institutions see that the expanding sovereign debt stock in Europe, protectionist fiscal tightening in Asia, and declining investor confidence will continue to challenge economies of developing countries, including Ethiopia.

Therein lies the bad news for the movers and shakers of local policy, not to mention the gurus at the MoFED. Saving the local economy from the negative externalities of a bumpy economic ride in 2012 will, certainly, be a headache for them, as it requires thoughtful policy revision.

A thunderously hard landing is foreseeable for the economy, as long as the state is not ready to cut repetitive public investments, argue critics. Heavily politicised fiscal policy continues to spoil macro economy as it is followed with massive monetary backing. Fiscal conservatism is of high demand, especially in the crisis years ahead, they claim.

That does not hold water for Sufian and his colleagues. They focus on bridging the productivity gap between agriculture and services through the aggressive provision of infrastructure. It is where the immediate potential for growth resides, they seem to believe.

Rhetoric aside, though, the return on investment from the massive public investment in infrastructure has remained marginal. Largely driven by the expansionary fiscal policy that the government has opted for, inflation has persisted as a major systemic hitch.

As fortunate as the foreign exchange earnings of the last year may have been, it has furthered the rise. Compounded with political unpredictability, the factors have made the market insensitive to quick fixes.

It is upon such systemic putrefaction that the gloomy global predictions lie. What ought to be worrisome to Sufian and his colleges in the macroeconomic policy team is the fact that the current recession originated from the real economies of developed nations.

It obviously will be transmitted to every corner of the world, swifter than the financial crisis of 2008. Yet, the transmission lines might differ between economies.

Exports, remittances, official development assistance (ODA), and foreign direct investment (FDI) will be the channels of the likely deceleration in Ethiopia. At stake are, therefore, sectors that provided a huge resource base for the growth of the economy in the past year.

Total exports to Europe, for instance, earned 1.1 billion dollars in 2010. Remittances amounted to 661 million dollars in 2010 for the nation, whereas it witnessed an ODA of 3.8 billion dollars in the same year. Net FDI was close to 184 million dollars, in 2010.

Indisputably, any factor that affects such a huge resource base will impose its shadow on the growth prospects of the nation. It cannot be neglected, even by the inflexible experts at the MoFED.

The recession in Europe could reduce Ethiopian export revenues. This, in turn, will affect the foreign exchange earnings of the nation, bringing back the traditional forex crunch to the scene. A downward spiral in remittances will compound the effect.

It may seem that the existing surplus could serve as a buffer, but, ironically, the inflationary pressure needs the reserve to rapidly be used up. Striking a good balance will be exigent for  Sufian et el.

Also on the horizon of the crisis are aid cuts. Swamped with mounting sovereign debt, governments of developed nations are cutting their aid commitments.

Even if Ethiopia has skipped the cuts of most countries, there is no guarantee that commitments will be fulfilled. If not postponed, projections show that commitments could be delayed. That will have a significant impact on the economy, wherein foreign aid accounts for as much as 30pc of the federal governmentís budget.

Uncertain of the global economic situation, most multinationals will also review their investment plans. Such a revision might be prospective for countries such as Ethiopia, that are new entrants on the radars of most multinationals.

The solid growth of the past years helps in these terms. However, a cash strapped financial sector in the developed world will deprive multinationals of essential resources for investment. As projections show, the net effect will be a slowdown in FDI.

It is high time for Sufian and his colleagues to align their macroeconomic premises with the coming tide. They need to take bold steps to prioritise their public investment plans along the lines of conservative resource estimation.

Fiscal policy revision will be essential within the ongoing Macroeconomic and Fiscal Framework (MEFF). Easing public investment coupled with prioritisation will help maintain stability along with growth.

Diversification of export destinations away from the spoiled centres of Europe will also be essential. Financial incentives can be deployed to encourage exporters to enter into non-traditional markets.

Aside from helping to stabilise foreign exchange generation, such an effort will have lasting benefits for the economy. Certainly, it will save the economy from the vicious cycle of forex shortages.

Determination to implement these measures, assisted with reactive monetary policy, can reduce the pain from the train wreck of the global slowdown. For the soft minister and his colleagues, the job will involve balancing domestic policy priorities and externalities. Failing to live up to such an expectation will indeed be costly for them, economically if not politically.





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