Making the Mini-Boom Last

There are lots of indications that the economy and infrastructure of the country is going through major changes. You see them in various ways. A journey that took you many hours to reach your destination previously appears to have shortened because of upgraded roads in the last few years. Particularly the works in areas such as hydroelectric power, road construction and communication are noticeable. Their impact on development is substantial.

Like in the past, people are not yet prepared to work far from the capital city. Upon graduation, I myself had done everything possible not to go far away from the capital, particularly to the north of Ethiopia due to the conflict that had been going on and lack of basic infrastructures. Now there is a possibility that the labour force and capital may start moving outside the metropolis looking for opportunities - either investment or employment - if life outside Addis Abeba becomes a little bit more bearable.

Above all, the investment in hydroelectric power is the most strategic development that the country has taken. So far it has tapped less than two per cent of its potential and less than six per cent of the population has access to electricity. Although Ethiopia is a source of major rivers, the development of these rivers has been suppressed for long due to lack of money and geopolitical influences.

In a paradoxical way, the government in power seems to have the best of both worlds; it has backing from China (cheap expertise and technology) and Western countries (finance). You see a large number of Chinese driving around or walking the streets signifying their presence in a large number of infrastructure projects. The government is also lucky that those hydroelectric power projects are not opposed by downstream countries. In fact, power lines to Sudan and Djibouti are being installed to export electricity.

When I say large number of infrastructure projects, I mean the four hydroelectric dams - costing more than 20 billion Br; thousands of kilometres of roads; Tendaho irrigation project for sugar plantation; mobile network coverage; and the new universities in all of the regions which required many billions of birr in investment.
 

When I grasp the full extent, I began to ask where the money is coming from and how the government is managing to fund all these multi-billion dollar projects. These projects, such as dams, power stations, roads, communication facilities and universities, are expensive. The export items of the country have remained almost the same except for a few promising shifts towards horticulture, which its advocates argue would replace coffee in a few years as the major source of export revenue. When I dig deeper, I realised that the trade balance has gone over the roof.
 

For example, according to Central Statistics Office data, exports were worth about seven billion Birr in the 2004/05 fiscal year compared to 32 billion Br worth of imports. The trade deficit was more than 25 billion Br and growing year by the year.
 

Though the country has a trade deficit about four times its exports, money has been flowing into the country from donor courtiers as well as from Ethiopians in the Diaspora. I believe the internal as well as external sources of income of the country have grown dramatically in the last 10 years.
 

The government is enjoying a windfall of income from the recently introduced Value Added Tax (VAT) of 15pc on the majority of business transactions. Ethiopia never had VAT until it was introduced - most likely under International Monetary Fund (IMF) pressure - in 2003; thus, when you have a cup of coffee or a piece of cake at the local coffee house, you are putting 15pc value of the coffee into the government’s pocket. That must have beefed up the government’s coffer significantly.
 

Second, land prices have skyrocketed because the government is the lone landlord in the country and has a tight control over the supply. Price of land is not controlled by demand and supply of market economy. Tight control of the land supply appears to generate a windfall for the treasurer. Now every inch of the land in the capital and major cities has been sold at a premium rate (no one can import cheap land from china).
 

Looking at the number of constructions going on and the more than 200 prospective real estate developers, land is in big demand and generating a fortune for the treasurer. When I checked further, the Central Statistics Office does not measure or publish the price index of lands and houses, but one can easily say land and property prices have doubled in less than five years.

On top of these two newfound windfalls, the traditional Ethiopian government tax base, is still there. More than any other previous governments, I can say, the present government goes the extra mile to collect its taxes.
 

The external resource base of the country has gone up dramatically. As shown in data from the Central Statistics Agency, the vast majority of government expense is covered through external assistance and borrowing. In the past 16 years, Ethiopia has been enjoying an unprecedented amount of assistance (approximately 1.8 billion dollar per year), debt cancellation and loans.
 

According to the same data, more than half of the government spending is coming from outside the country through assistance and loans. As, of course, the American saying goes, “there is no free meal” and how far it will go and why Ethiopia is enjoying unprecedented amount of assistance is something that I would leave for experts to analyse. But there is no doubt that money is not a problem; it is flowing in from the West as well as the East. In the long run, dependence over external assistance is undesirable but there is no doubt external assistance can jumpstart the economy as it happened in Europe and Asia after the Second World War.
 

The other major source of government revenue is Diaspora Ethiopians. The official statistics of remittance from Ethiopians living abroad is above 500 million dollars per year; some say unofficial remittance that is going through private hands could be significantly higher.
 

These are the two major new sources of extra money that is being pumped into the country; it is good. Of course, about 400 million dollars could be generated from the current favourable coffee price but the faster growing exports are chat and flowers, which account around 90 million dollars and 60 million dollars per year, respectively.
 

Fortunately, there was good rain in the last four years. Farmers are in a better position to feed themselves; and this has been the biggest blessing of God for a single draught in a 12-year period would lower gross domestic product (GDP) by seven to 10pc and increase poverty by 12pc to 14pc, according to the United Nations (UN) development index. Economic modelling by the World Bank suggests that the inability to mitigate the effects of rainfall variability reduces Ethiopia’s potential for economic growth by a third, with obvious consequences for reducing poverty.
 

In simple words, when the cycle of draught is pushed farther apart, the economy and the country will be in a better shape. The money coming from the Diaspora and donor countries appears to be the fuel behind the high level of spending on infrastructures, more so than what the government gets from exports. 

A relative absence of war, four good consecutive rainy seasons, better commodity prices, high level of inward investment in areas of flower, construction and mining, money remittance from the Diaspora and foreign assistances coupled with land sales and new windfall from VAT have put the current government in a better position than its predecessor. These are the facts that cannot be disputed.

However, politicians can argue whether this government got it lucky or earned it through sound planning; I do not wish to be part of that debate.
 

Of course, some short-sighted politicians may dismiss it as propaganda but I am a firm believer that knowledge is power. Understanding what is actually going on in Ethiopia is beneficial for everyone, particularly to the opposition force in the Diaspora. It is on these facts that the political programme and strategies need to be formulated, not on assumptions, denials or hearsays.
 

It is easier to dismiss everything as propaganda but denial of the government’s strength and good fortunes that the government is enjoying would only lead to a misguided political strategy that will fail, again.
 

Though these capital injections are very good to stimulate the economy, create job opportunities and expand the infrastructure for further development, the gap between the haves and have-nots is increasing at alarming rate. According to a report by the UN released in 2006, 23pc of the population live below one dollar a day.
 

Prices of goods and services have gone through the roof. Like the highly publicised price of chilli (berbere), the cost of everything has gone up at least five fold. When I left the country two decades ago, one could have excellent meal of kitfo for five Birr; it now costs 35 Br at the same place I used to eat. Egg used to be five for a Birr, which is now on sale one for a Birr or three for two Birr. Everything else is expensive and anything below one Birr seems to have no real value.
 

Ironically, it is these places which sell a meal for above 35 Br that are busy, and sometimes there are not enough seats available to serve new arrivals, particularly during lunch and dinner hours. This is a worrying development since it a sign of a false economy; the spending could probably be sustained through a large sum of money that is being transferred from government banks to private “investors” and the money coming through remittance and donation.
 

On the side of have-nots, there are those that have fixed incomes: civil servants, pensioners and employees of private companies who earn as low as 150 to 200 Br monthly salaries with families to feed. There is a kind of underlying imbalance in the economy which is worrying. Like the global “sup-prime crunch”, the economy may face a big difficulty if one of the three sources of cash from abroad dries up.
 

It is also interesting to see how the dynamics in the economy have changed dramatically. Before I left Ethiopia, the main problem was supply-side constraints. You would go to a bakery at 9:00a.m. and there was no bread left to buy. Now you can go to a shop at the same time and they are full of the stuffs you need. The price rise has nothing to do with demand and supply, with the exception of land that is in the government’s hand.
 

As I looked around, there is no shortage of supply of anything. Vegetables, grains and other food items are fully available on shelves but at a price at least five times more expensive than what they were a few years back. These are the most worrying developments for low income families in the country. They can only window-shop but cannot afford to buy them.
 

It used to be farmers who struggled to feed themselves a decade ago when there was shortage of rainfall; but now urban dwellers are in a position where they cannot feed themselves twice a day. From this observation, I can see that the value of Birr has been depreciated significantly as the market opens itself for inflow of currencies and goods from abroad. A dollar was exchanged for 9.30 Br (in the parallel market) and a Pound was heading to 19.50 Br a month ago.
 

Things may be cheaper for someone who is coming from abroad and for families who have children abroad; for the people who are earning their income in Birr, life has become an uphill struggle even after a significant pay rise for pensioners, teachers and medical doctors.
 

According to the official statistics, the consumer price index (CPI) recorded an annual inflation of 19.2pc on national level and 26.6pc in the capital.
 

Unless price increases are not controlled through increasing supply, improving productivity coupled with tight fiscal and monetary policy measures, inflation might eat up whatever gain is registered in the economic front. Particularly large transfers of money from government to the private sector through lending have created a false sense of “paper millionaires”, for they do not ask themselves how much they owe the banks.
 

Ethiopia has never had an economic boom, the term bust is not yet known. The mini-boom we are seeing today could lead to mini-bust unless some of the corrective measures are taken immediately.