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PM Hailemariam|Economic Soul-searching

Posted by Ethio Tribune on October 8, 2013

Prime Minister Hailemariam Desalegn

“We won’t let a bomb explode in this country,” Hailemariam said. “We’ll fight Al-Shabaab to the maximum degree possible.”

Prime Minister Hailemariam Desalegn was not happy and is rather worried about the increasing marginalisation of the indigenous private sector from the budding manufacturing industry.

At 13pc, the manufacturing sector’s share of the gross domestic product (GDP), compared to agriculture and services, is very low. This is despite it having grown much faster in recent years. However, much of the resources the state avails through banks it controls goes to investments by foreign nationals, such as those coming from Turkey and China.

Speaking to the local media for the second time and the Addis Abeba based foreign correspondents for the first time since he assumed office of the most powerful executive branch of government a year ago, the Prime Minister was upbeat about the macro-economy. He characterised it as “robust” and with the ability to maintain momentum in high paced growth.

Hailemariam attributed such growth to the increases in productivity in agriculture – 7.1pc – and the services sector, which expanded by 10pc, during the 2012/13 fiscal year. Nonetheless, none of these sectors have grown as much as manufacturing sector, which he reported has grown by 18.5pc during the same period.

But he was much less enchanted by the homegrown Ethiopian private sector’s involvement in the growing manufacturing sector as he was with its expansion in the national economy. Due to what he described as a complete change of narrative in Ethiopia’s image as a land of destitution, foreign direct investment (FDI) is flowing into the country at a higher rate than in previous years, particularly in the textile and leather industries.

“Ethiopia is progressing,” Hailemariam told the foreign media on Friday, October 5, 2013, at a press conference that preceded the one given to local media on the same day.

He offered a list of domestic factors he believes have attracted foreign investors from China, India, South Korea and Turkey. These included “political stability to institutional capacity; and from improvement in services provision to demographic dividend and a low crime rate”. The country is improving and hence it is becoming a new destination for global capital.

He was not as elucidative in his insight to the global economic dynamics as he was forthcoming in his analysis of domestic macroeconomic development.

Yet, he reiterated a global economic slowdown to justify the unmet national target in foreign exchange revenues from exports last year, which hit one billion dollars short of the four billion originally planned. Although the country exported 15pc more coffee last year, a drop in the international market earned it less than the previous year, according to the Prime Minister.

Limited access to finance and bureaucratic inefficiency are bottlenecks in promoting exports, Hailemariam conceded.

Relaxed but assertive in his tone, the Prime Minister framed his press briefings largely with the economy, domestic stability and regional peace; though he appeared carried away when speaking about the opposition leaders’ alleged collusion with political parties parliament outlawed as terrorist organisations. Equally, the Prime Minister was accommodative of the public’s frustration over poor provisions of water, electricity and transportation services in Addis Abeba.

Recognising the public’s bitterness over these inadequacies, Hailemariam pledged that his administration will address many of these issues by the middle of the current Ethiopian fiscal year. But he remained unclear on how he will deal with “some employees of the state owned Ethiopian Electric Power Corporation (EEPCo)”, whom he accused of being “saboteurs”. He was possibly referring to the week the AU’s 50th Anniversary took place in Addis Abeba, back in June, when a sudden power outage occurred across the country and interrupted an address by the President of Brazil. It was an embarrassing moment for the Prime Minister, according to a close aide. There were arrests made of those in the state utility monopoly allegedly responsible, subsequent to the incident.

Hailemariam sounded as uncompromising in addressing questions in relation to opposition leaders’ activities in rallying the public to their cause as he was combative in dealing with Haraka al Shaabab al Mujahideen – an extremist outfit of Al Qaida in East Africa. The group has taken responsibility for the recent massacre of civilians inside an upscale shopping mall in Nairobi’s Westgate district.

“We won’t let a bomb explode in this country,” Hailemariam said. “We’ll fight Al-Shabaab to the maximum degree possible.”

The forcefulness of his body language compounded with his pounding of the table, not only sent clear warnings to those he accused of being in league with terrorists, but revealed a tough side of a man who is largely perceived as being humble.

Where he remained unyielding was on the controversial issue of the role the private sector plays in the national economy. Hailemariam was combative in defending some of his administration’s policies unpopular in the private sector. These include forcing private banks to direct 27pc of their loans and advances to buy cheap government bonds, and a Central Bank directive that restricts 40pc of their loans to the private sector to short term arrangements of one year.

“There is this view among policymakers that the profits private banks declare has a margin that is higher than anywhere in the world,” said an economist who once worked for the government, but now works as a consultant. “They want to redirect some part of these profits to areas where the government has policy priorities and believes it encourages national savings.”

Indeed, Hailemariam confirmed this claim during the press conference, where he appeared to have come of age in his composure, declaring that – “this country can’t continue with only services and without producing and manufacturing”.

His administration’s policy of redirecting funds of private banks to the coffer of the state owned Development Bank of Ethiopia (DBE) has funneled a little over 20 billion Br over the past three years, according to industry sources. The highest buyer being Awash International Bank (AIB), with 3.6 billion Br. The bonds yield only three percent in an annual interest rate of deposits mobilised from the public with five per cent interest.

The financial sector is hard hit by this policy and its leaders have petitioned the Central Bank to reconsider, so that the interest rate the bonds yield at least covers their costs, according to a senior official of a private bank.

However, where the toughest challenge to the administration’s policy of state driven growth comes from is in international multilateral organisations, such as the World Bank and the IMF. One such voice is Jan Mikkelsen, resident representative of the IMF, who believes it is difficult for Ethiopia to achieve its goal of joining the middle income group of countries in the absence of a strong and efficient financial industry.

“The GTP says the government and the private sector are partners; and the latter is in the driving seat,” Mikkelsen said back in June 2013, when launching IMF’s regional economic outlook. “How would it be so, if it doesn’t access finance?”

His remarks were perhaps prompted after looking at the share of loans and advances from state owned banks, in 2012/13, amounting to 83.4 billion Br, claiming 65.3pc. This is as opposed to the 44.5 billion Br private banks gave out during the last Ethiopian fiscal year. The private banking sector was compelled to buy government bonds with funds equivalent to 27pc of these loans and advances, a decision industry leaders complain erodes their deposit base.

It was here where the ideological Hailemariam has emerged at the press conference, arguing, in the debate over what constitutes the private sector, that  the millions of Ethiopians engaged in agriculture, the mainstay of the economy, are not included.

Last year alone, 14 billion Br worth of loans were advanced to farmers across the country to buy fertilizer. In so much, its addition in the ratio would bring the share of the private sector much higher than what critics would argue, according to the Prime Minister.

Hailemariam pointed his fingers at his critics claiming that implicit in their criticism and pressure to prioritise state financed mega projects – considering expertise and impact on growth – targets the Great Ethiopian Renaissance Dam (GERD). While almost all other projects are financed through loans, particularly coming from China, it is the GERD that requires internal financing, thus subject to international concern over its completion.

Again, alike his first press briefing back in June, relations with Egypt and its concerns over the impact of the dam to its livelihood claimed a prominent place, last week.

“Nile is central to our bilateral cooperation with Egypt,” Hailemariam told the international media based in Addis.

He, however, dismissed as “hearsay” and “wishful thinking” claims from the panel of international experts that the dam may suffer design problems.

“They [the panel of experts] have unequivocally confirmed that the dam is safe,” Hailemariam said. “We want to make it clear to our friends and foes. We’ll not pause on the construction of the dam.”

Such was the tone he employed when declaring his administration’s resolve not to revise major and mega projects, despite a growing concern within the administration itself that the stock of foreign currency will remain a serious impediment to realising the GTP. In July 2013, the country had just 2.3 billion dollars in its foreign exchange reserve, sufficient enough to cover only two months of imports, according to data from the IMF.

“It is a painful problem,” said a high ranking minister in the administration. “We have no other choice put to pursue our path with whatever is available.”

Although Hailemariam echoed a statement Sufian Ahmed, his minister of Finance & Economic Development (MoFED), once made in that the issue of the foreign exchange reserve will remain a painful state of affairs for the country for the next 20 to 30 years, he said his administration does have fallback plans. One is to encourage revenues from remittance, which he disclosed earned the country 200 million dollars more than the 2.5 billion dollars obtained in 2012/13, while encouraging the export of manufactured goods in textile and leather as another policy priority.

It is here Hailemariam is dissatisfied to see a fewer number of local businesses engaged in the manufacturing sector, whether what they produce are export substitutes or generate foreign currency from exports.

“We’ve made finance available to them,” he told the media. “If there is any businessperson in the manufacturing sector with a problem of finance, let them come and see me.”

(Addis Fortune)

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