ETHIOPIA: helpless victim of twin evils—double-digit inflation and illicit financial outflows

14 Dec

By Keffyalew Gebremedhin

This article deals with two issues. The first part discusses the new data on inflation that was released Tuesday morning and therein too the failure of government to get a handle on the problems and the adverse consequences thereon to the lives of ordinary citizens and the country’s economic future. It also offers suggestions to help address structural problems of the economy and also of the need to free it from all sorts of shackles, as possible ways out of the current morass.

The second part raises serious concerns about the revelations in June by a new study sponsored by the UNDP on illicit financial flows, which includes Ethiopia. To anyone wondering about what this has to do with inflation, my primary defense is the problem of perception of citizens that increasingly is perturbed and discouraged by allegations of corruption and official culpability and the consequences of that on overall economic performance.

This concern is further aggravated by the additional testimony on illicit financial outflows from Ethiopia that was published on December 5 in the advance summary provided in a forthcoming broader global report of the Task Force on Financial Integrity & Economic Development, financed by the governments of Norway and Spain.

A. November 2011 inflation

Ethiopia’s overall inflation for November 2011 stood at 39.2 percent, compared to 39.8 percent last October. While year on year basis the increase is 31.5 percent, the monthly figure reflects a decrease of a mere 0.3 percent, according to the Central Statistics Agency (CSA), which released the data with a delay of two days.

Similarly, the report indicates that food inflation slows down by 1.1 percent to 50.3 percent, although year on year basis it reflects 36.0 percent increase, i.e., since November 2010. However, CSA is reporting declines in the prices of maize, sorghum, pulses, spices and vegetables and fruits, which only translates into this 1.1 percent reduction. On the other hand, non-food inflation jumps to 24.0 percent, compared with 23.4 percent in October, which reflects a monthly increase of 0.9 percent.

The pace of increases in overall prices is reported to be similar to that of October, which means that it reflects across the board rises in most of the items in the price indices. For instance, the total price index of cereals increases from 63.1 percent in October 2011 to 64.8 percent in November; bread and other prepared foods rise to 31.8 percent from 26.1 percent, meat to 40.9 percent from 38.6 percent, other food items to 9.8 percent from 3.7 percent, and potatoes and other tubers to 53.5 percent from 49.8 percent.

On the other hand, the indices for vegetables and fruits decline by 5.4 percent. Also declines are observed in the prices of foods taken away from home to 31.6 percent from 32.8 percent, coffee and tea leaves to 67.5 percent from 76.8 percent, and spices to 71.6 percent from 85.7 percent.

Bear in mind that in August 2011, Ethiopia imported 300,000 tons of wheat at a cost of $94 million to counter the problem of escalating food prices. This is in addition to the 150,000 tons imported in May 2011. Access Capital reported that commercial import of foods constituted 6.0 percent of the country’s imports in 2010, which makes the 2011 much higher. In April 2011, Addis Fortune reported that Ethiopia also imported 12,500 tons of palm oil at a cost of $17 million.

Nevertheless, the season’s most troubling part of the inflation story in Ethiopia on one hand exposes the TPLF/EPRDF’s love of secrecy, i.e., its strong revulsion to practices of international competitive bidding, as has been witnessed on several occasions. It would be recalled that this behavior was one major problem responsible for jeopardizing foreign loan prospects for the construction of Gibe III power generating capacities. On the other hand, this proclivity to secrecy also ended up with the regime’s ranking of 118th out of 142 countries in transparency of government policymaking in the Global Competitiveness Report 2011-2012.

Against the backdrop of publication by the Task Force on Financial Integrity & Economic Development, most crushing is also the fact that Ethiopia, one of the poorest countries on the planet, lost $11.7 billion to illicit financial flows between 2000-2009! This is over 43.0 percent of the total aid of $27.4 billion Ethiopia received during 2000-2009, as reported by the World Bank in the context of its Global Monitoring Report 2011: Improving the Odds of Achieving the MDG (2011). This has put in the minds of people the question why the Meles regime often chooses to go against competitive bidding in international contracts. I would return to that in a moment.

Regarding inflation, in mid-November the National Bank of Ethiopia (NBE) told parliament that it had been tackling the problem by reducing its foreign currency holdings, exercising stringent control over the supply of money, limiting imported inflation, loans and encouraging savings. Important tools as those measures are in the fight against inflation, nonetheless, in Ethiopia’s case they have not been quick enough for ordinary citizens who have been battered by either unaffordable prices or unavailability of goods and services for a long, long time now.

The Meles regime may now be hoping that its recent decision to raise the amount of capitalization of private bank’s to ETB 500,000 ($29,000) would bite substantial money out of circulation, thereby reducing the effect of excess money supply as cause for inflation. Unfortunately, if the regime does place its hopes on this alone it would only delude itself. This is because all halfway solutions applied to date, including curtailing money supply, have in fact worsened the condition of the patient, instead of ameliorating it.

This is one evidence that the reasons for near permanence of double-digit inflation in Ethiopia could be multiple factors, chief of which is the economy’s structure, about which many experts have also made good observations in this past year. What that means, among other things, is failure to facilitate conditions for manufacturing, as a step toward transformation of the economy. Successful manufacturing could lay solid foundation for industrial development. In Ethiopia, industrial development has in fact vegetated for decades, bracketed in the current decade between 9-10 percent growth rates.

(i) What & whose economy?

The latest joint UNIDO /UNCTAD report (Economic Development in Africa Report 2011: Fostering Industrial Development in Africa in the New Global Environment , which came out in the summer clearly indicates that manufacturing value added (MVA) per capita in Ethiopia in 1990 was just 8.0. In 2010, this figure moved to 9.0 and Ethiopia’s MVA compound annual growth rate from 1990-2010 was stuck as pathetic 0.3. It is reported that there are over 30 large and mid-size firms in the country (2010 data), their equivalence in value being half of Ethiopia’s total exports. Most of these firms, according to CSA’s 2010 report on manufacturing, are in the production of foods and beverages, tobacco, apparels, leather, wood works, paper and paper products, non-fertilizer chemicals, basic iron and steel chemicals, etc.

In 2008-2009, gross investments in these firms, both private and state, amounted to a paltry ETB 149 million, of which the share of the state is only 6.0 percent, according to CSA. The total number of persons employed by these firms was 148,817, of which 105,367 were in privately owned firms. This is neither given acknowledgement, nor guidance provided to the private sector using various incentives available to the state, instead of threats and shutting them out.

Not surprisingly, even looking to the future with the lens of the five-year growth and transformation plan (GTP), it is planned to establish ten sugar factories, two (?) fertilizer factories, and expanded metal works and engineering outfit, etc. The problem is that in a state that values political loyalty more than qualifications and performance, as confirmed by none other than the chief executive and leader of the party in power, all these futuristic plans happen to be state enterprises, to be funded by the state to end up with deficits for lack of able management, possibilities for profitability, innovation and expansion. The employees in these outfits, would rain or shine get paid their monthly paychecks.

(ii) Mortal hostility to the private sector

In GTP, as usual, the role of the private sector has been mentioned again and again. For this, one only needs to turn a few pages into the GTP Policy Document. Overall, it states “During the planning process, strong commitments, and participation of the private sector, development of development partners, civil society organizations and the public at large are demonstrated at all levels.”

Nowhere in this document or in the GTP Policy Matrix is there any indication how the private sector can hand-in-hand with government play its role to get the country out of the depth of its misfortunes. I cannot blame the private sector if it has lost confidence in the country’s political leadership, whose state of mind changes like the weather that is pummeled by climate change. Having closely observed in this past two decades nice words about the private sector, the outcome has been determined goal of weakening it. Another two decades previous to this, at least, the military regime made no secret of its ideological conviction in nationalizing private properties and denied any roles to private capital, until it found its role was distributing poverty.

In countries like Ethiopia, there is ample role for government. In the early phases, it is a must that growth and development be steered under the guidance of the state, for mobilizing resources and trained manpower, joining hands with the private sector. This is no advocacy for developing countries to entertain the dream of nanny states. In the first place they can not afford to feed from cradle to grave. Worse, when they fail in such a costly adventure they begin to exercise heavy-handed politics, depriving citizens their rights and freedoms and businesses possibilities to do what they can do best–create businesses, employment, research and innovations, growth and development. This would be lost when the state becomes the main actor in businesses.

If we leave the political behavior of the state aside for a moment, the major problem in manufacturing, according to the UNIDO/UNCTAD report, is the size and distribution of the existing firms, which, like in other African countries, is skewed towards micro and small firms. These are characterized by low size mobility, like a body pushed into a child’s shirt, constrained from growing and becoming large firms. That is a major problem our country is facing, of which the present uncontrollable inflation is an expression of the long pent-up demand.

It has now confronted Ethiopia in bad ways—as obstacles to its future development. With the story of economic growth overplayed in recent years, in the end what the country would reap is only to keep running fast to remain in the same place in this competitive environment. The high doses of political theatrics and nationalism that is being invoked from time to time may have worked for a while, but the laws of diminishing returns also apply to it, rendering it incapable of quieting the strong undercurrent of pessimism, distrust and rejection that have set on the nation for a while now.

In the circumstances, I do not blame members of the business community in Ethiopia for being nervous, as if the end of the world is arriving soon. They are distrustful of the regime; they do not want to commit to put their capital in more productive sectors of the economy. Many speak of the Ethiopian political and economic environment being frightening, where even the law is designed to seek favorites. How could the economy’s structures change in such a situation and our country advance?

The issue here that needs addressing is the country’s growth and development. It takes more than a few good seasons of high volume exports or seasons of good harvests. First and foremost, it means demonstrating capability to find solutions to the problems of the huge unemployment in the country; it means ensuring income generation for millions whose numbers is fast growing; God knows the number of the unemployed, the underemployed or unpaid or underpaid, lacking injera on the table and deprived of human pride that labor offers. How could poverty be reduced, without such concrete and tangible measures?

If the regime does not have eyes to human sufferings, it should, at least, look into the economy’s performance closely. INo dismissal of officials would do the job, as if that were the miracle gear of a super racecar the shifting of which would boost the engine. What Ethiopia needs now is for the regime to be done with tired political excuses and ego massaging that are being used as cover-ups not to face the real challenges.

The fact remains that Ethiopia’s economy has become terribly sick; it can no longer endure this endless lashing and bleeding by double-digit inflation. Unfortunately, those obsessed by politics and power have not shown the requisite capability to see and solve the problems of double-digit inflation, which since 2005, except for brief periods, have been more the norm than the aberration.

The fact remains, however, even the operations of government owned businesses and endowment funds—of which EFFORT is the giant—although much privileged have found it is no easy go. By a recent admission of EFFORT that came out in August, it could not believe it that it hass found it increasingly difficult to become profitable, to which I would revert in a moment. Unfortunately, most state owned enterprises operate in deficits. Lately, all of them attribute the problem to the slackening in the global economy, although the prime minister argued the 2008 financial crisis and its fallout had no impact on Ethiopia.

Clearly, the growing sense of despair within the domestic business community with no links with the politicians, the situation is undoubtedly testing patience, or some contemplating flights of both individuals and their resources. Some are already exploring South Sudan, if it were not for the conflict situation.

The sign of desperation became manifest when the private sector, as Addis Fortune put it, began to feel aggrieved “not knowing where to go to be heard or even if there exists an authority for appeal.” The end result of this is that last month many pleaded with British diplomats at sort of a problem hearing session, according to the paper to help them find solution. Put bluntly, it badly reflected on the political leaders in the country, whose presence has lost meaning. Under normal conditions such a role by a diplomatic mission would have been seen standing counter to the sense of a self-respecting country’s independence and a nation’s sovereignty.

All said and done as regards inflation, it seems the inevitable conclusion that the government has either chosen to raise its hands up without meaning to do so, or is still bent on continuing to make things worse, further burdening the country with more foreign debts, as if that would solve the problems at hand. To make it tastier, they would as usual blame the so-called rent seekers, who they say are responsible for the problems in the first place.

Of this, Addis Fortune, in its popular column, The Fine Line, last April wrote, “The Revolutionary Democrats are unable to come to terms with the impact of their macroeconomic policies on fuelling the economy, thus facing the inevitable curse of inflation. Instead, they find it convenient to put the blame on a couple of powerful businessmen for causing all the malaise in the market, gossip noticed.”

What is knowledge or intelligence, if at all solutions that we see them applying are the same tired things all over again, as does NBE or the ministry of finance, after the declaration by the prime minister in parliament how everyone in his government saw the light in finding out that the culprits were foreign currencies in the NBE vault?

It is time to look into those areas the government has so far most dreaded—those are the measures that loosen up the economy. For instance, the five major problems Ethiopian businesses as respondents to surveys by the World Economic Forum for its 2011-2001 Global Competitiveness Report identified in order of severity: access to financing, foreign currency regulations, inflation, inefficient government bureaucracy, tax regulations and corruption.

Others add the land policy, which the government constantly asserts would safeguard it as the common property of the people. The problem is that the people resent the fact that, against the constitution’s provision and without any national conversations, farmlands are being commercialized to foreigners in half to a full century shy of a year, which is no different from a permanent handover. This is because there are two laws in Ethiopia: one that is applicable to all and none to those in power, especially where their interests are involved. This has adversely affected national attitude; it has had negative impact on politics and the economy.

In its June 2011 issue, Forbes magazine ranked Ethiopia the 121st Best Country for Business out of 134 states. Not much differently, in its Operational Plan for 2011-2015 UK’s Department for International Development (DFID) acknowledges in its webpage “Ethiopia matters to the UK for a range of development, foreign policy and security priorities … But its approach to political governance presents both substantive challenges to sustainable development and reputational risks to partners.”

B. Illicit financial flows from Ethiopia

Major investors and do not like to associate their businesses with a poor country, where there is the problem of un-ending hunger, corruption and looting. They know that these are the perfect ingredients for political instability, possibly conflicts, and a danger to their wealth, reputation and life-long efforts to build legacies in their names and their families.

Unfortunately for Ethiopia, there is now the story of $11.7 billion siphoned off from the country just in one decade, this past decade. It has angered citizens. Foreign observers write their disgusts and bewilderments, blaming the country’s leaders. Also diaspora undercurrents are being felt to prepare the ground for international action, by drawing the attention of foreign governments, businesses and international civil society organizations to help a poor country recover its undeserved losses. Many share the conviction that this pretty hefty sum could have been used to conquer deep-seated hunger and poverty, for which Ethiopia has been known and many at the beginning of this regime were hoping it would become a thing of the past.

Unfortunately, in a country that has not been able to feed itself right at this moment over 12 million people in Ethiopia are alive because of international food aid. This figure is the sum of the 7.8 million people that are being taken care of under the multi-donor financed Productive Safety Net Project (PSNP) to which must be added the government figure of 4.8 million that have been afflicted this year by what has come to be known as the current Horn of Africa famine.

It is against this background that this question of illicit financial flows has now become a very troubling, nasty and revolting story everywhere. It is even difficult to discuss, but in time the culprits would be exposed. I would begin this piece by asking why the government is involved in importing food and oil, by avoiding the time-tested international principles and practices of competitive bidding?

Last April, in its bewilderment Addis Fortune also raised a number of pertinent questions. I must confess that, when I read that piece first it did not strike me as a revelation of sorts but a speculation, about which Ethiopians are far advanced. It began to both worry and bother me after the UNDP’s June revelations, which were followed by findings of the above-mentioned task force this month on substantial illicit financial outflows from Ethiopia.

Here is what Addis Fortune wrote at the time:

    The manner in which the palm oil is purchased from Malaysia can potentially become controversial, gossip claimed. The administration is spending close to 17 million dollars on 12,500tn of palm oil to be distributed by the state owned enterprise in charge of merchandise trading.

    This company is to be supplied with the oil by a company based in London, Agrimpex Co Ltd, whose accounts is with the Swiss UBS, gossip revealed. The company is owned by the Phillipas family, with Mr P.G. in charge, according to gossip. This was not the first time for the Phillipas family to be awarded procurement contracts without competitive bidding. Since 2008, wheat imports worth six billion Birr had been supplied to Ethiopia by this company.

    Why this company is always awarded such lucrative procurement contracts designed to provide welfare to the Ethiopian poor is a subject of quiet controversy between those on Lorenzo Tazaz Street and their counterparts on King George VI Street, gossip disclosed.

    Someone owes the Ethiopian taxpayers an explanation, claimed gossip.

To make matters worse, in August this year Rethinking business and politics in Ethiopia: The role of EFFORT, the Endowment Fund for the Rehabilitation of Tigray was published, under the auspices of the UK Aid and Irish Aid-sponsored Africa Power and Politics Project (APPP), authored by Sarah Vaughan and Mesfin Gebremichael. The main purpose of the publication is to promote endowment funds as effective means of centralizing rents for the development of Ethiopia, which APPP tries to promote it to other Sub-Saharan African (SSA) states.

Nevertheless, unlike their broader conclusions endowments as tools for national development, the authors acknowledge that EFFORT’s objectives, as set out in its articles of association, primarily are: (a) “To use the resources ‘of the people of Tigray’ held by the TPLF, for the economic, social and cultural development of the region; (b) To generate income for the families of the martyrs and other victims of the war in Tigray, as well as other vulnerable citizens including orphans, the elderly, HIV victims, etc.; (c) To act as an instrument to promote the industrialization of Tigray, given that most investors prefer the service sector; (d) To open up new sectors into which private sector businesses could follow, once infrastructure and a precedent have been established; (e) To contribute to the development of human resources in Tigray, especially to the establishment of research and training institutions.’

To show successes and virtues of EFFORT, however, they write:

    Our analysis suggests that it is unlikely that the endowment-owned companies in Ethiopia will be short-lived, however little they accord with international funder preference. The role that EFFORT-owned companies play in Ethiopia shows some important differences with similar commercial ventures in other countries. They do not seem to provide direct financial subsidies to the ruling party and political elite as is the case in Rwanda. Nevertheless they provide indirect resources and public goods that feed wider social, political and developmental processes. They have played a role in financing and facilitating investment in areas of weak private involvement, and by small and new business start-ups, including youth co-operatives. A degree of divestment from the SME sector, in combination with outsourcing business to new actors in the last year or two may contribute to the emergence of a small-scale entrepreneurial class. Although benefits in terms of profitability have been relatively slow to accrue to some of the companies, EFFORT now makes important contributions to the slender commercial tax-base of Tigray Region, to job creation, and to manufacturing capacity.

Because of EFFORT, behind it is the regime’s commitment, today in Ethiopia it is easier to get investments for Tigrai region than for any others. More coordinated development activities are also being carried out in that part of the country than anywhere else in the country—manufacturing, industries, minerals exploration, infrastructural development, irrigated agriculture, well-equipped education institutions, domestic and foreign marketing researches for trade and exports.

After all, that is one reason why foreign dignitaries during their visits to Ethiopia are shepherded to Tigrai region to show the Meles regime’s efforts in support of the country’s development, something that has not been translated to the rest of the country in the same manner. All this is because EFFORT in Tigrai is working in all sectors, with utmost support from top down by the government of Meles Zenawi and some of its foreign partners. Foreign governments, companies and international organizations are involved in more than one ways with EFFORT. I have in mind, especially those that have joint venture interests or those organizations for which it acts as projects executing agent on behalf of the federal or regional government. The issue here is not how much the people of Tigrai benefitted, but in a country where there is no tradition of state or company accountability how much those who own and run effort benefit themselves at the expense of the people.

The point is that this strength that has muscled EFFORT has also gone in the direction of making things difficult for its competitors, about which private businesses constantly complain. Even at time when all businesses were denied foreign currency, EFFORT was the only one that could knock at government banks and collect what it needs. Therefore, lack of capital and foreign exchange are not problems known to EFFORT — a fact unintentionally confirmed by the Millennium Cities Initiative (MCI)—Mekelle—No. 10/2009, which hints EFFORT’s use of not only endowment funds but also state resources.

For the authors of the EFFORT report, however, this something that could be overlooked, or find a way of explaining it away. They invoke lack of or little credible or empirical “evidences” 12 times to reject or discredit views critical of EFFORT’s behavior. Of this, anecdotal evidence is employed twice, only to underline existence in the country of control systems, which get improved with new legislations put in place from time to time.

To their credit, however, Sarah Vaughan and Mesfin Gebremichael have tried to show the dangers and problems of endowment funds. Still they find a way to make up for that, for instance, by stating, “Perfect market competition or effective liberal constitutional checks and balances might appear to offer ideal solutions. In their absence, however, the institutionalising of the strong technocratic integrity to bolster systems that have the ability to distinguish and steer a path between productive and unproductive rent utilisation is probably more important.”

(i) Does EFFORT own foreign assets?

Whatever the origin of EFFORT’s assets since 1991, it has created serious resentments in Ethiopia and there is a huge credibility of gap regarding those that are associated with it. The stories out there, Vaughan and Gebremichael reiterate the claim by the leaders of EFFORT that they do not own any assets in foreign countries. Ethiopians had also heard about from Sebhat Nega, former chairperson of EFFORT, during his interview on the VOA on 17 June 2009.

But this APPP publication specifically reveals that EFFORT had sold the London-based Tower Trading Company (called Senay Trading up to 1995) that it incorporated in that city in September 1993 with a share capital of UK£300,000. The publication on one-hand states—as related to the authors—the company “ceased several years ago.” Perhaps they trusted this information to a point because they could not find it in the UK list of companies.

On the other, intriguing as it is, former directors of that company that included two diplomats from the Ethiopian embassy in London, individuals associated with EFFORT had at some point reappeared to revive it. At that time, some of the company’s former directors, described by the UK Companies House as “the trustees of EFFORT”, became its new shareholders.

The company is reported to have grossed profits of “UK£125,000 in 2006, and UK£102,000 in 2007 and had an annual turnover of between UK£1million and UK£1.2million”, according to the above-mentioned publication. It is also stated in the publication, “These figures would accord with the view that the company was not of great importance in the overall scheme of EFFORT operation, but provided useful facilitation of import/export activities.” Therefore, the publication understandably states, “no annual returns have been reported since 2008 and in March 2010 the company was removed from the UK Companies Register.”

Interestingly, however, “The High Court in London reversed this decision [delisting of the company] in July 2010, in response to the petition of lawyers acting for Mulugeta Guade Mengiste and Addis International Trading, described by the court as ‘creditors of Tower Trading Company.’ There is no evidence that EFFORT owns other companies outside Ethiopia, and interlocutors report that at present it does not.”

Clearly, during the two-week interview with EFFORT and other TPLF officials in December 2010, the authors of the publication have hardly received any indication that EFFORT would not in future to claim the company.

A friend I have know closely for a long time recently asked me if I had any indication that the removal of Abadi Zemo from his chairmanship of EFFORT on 2 November 2011 to become ambassador to the Sudan had anything to do with the revelation of this information to the researchers. I told that friend that I knew that Abadi Zemo has been a long time TPLF hand and, chief of REST for considerable time previous to this. But I have no information as to the reasons for his removal, although there are news reports of conflicts between him and the prime minister’s wife who has been second in command at EFFORT.

I must also add here that there is no tangible evidence as yet that TPLF, which owns EFFORT, is involved in a scam of sorts with its London operations, or else where. Neither is there evidence that exonerates them from what seemingly reflect their financial and economic interests in London nor whether they may not have arrangements with the rechristened Addis International Trading and what ever happened between 2008-2010.

As I grope in the dark on this matter, for now I feel comfortable with Sarah Vaughan’s conclusion: “The prospect that it [EFFORT] might do so [revert to recover] in future, meanwhile, is explicitly not ruled out.”

This is edited version.

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