Ethiopia must avoid double-digit inflation, at all costs – World Bank

26 Jul

Posted by The Ethiopia Observatory (TEO)

Guang Z. Chen, WB country director for Ethiopia

The World Bank this year set a record high funding to Ethiopia.

UntitledThe record was set both in terms of disbursement and commitment. Guang Zhe Chen, director of WB for Ethiopia, speaks about issues pertinent to the economy. One such case, perhaps, is access to finance. Manufacturing and the private sector is the other topic where Chen shared his views. Birhanu Fikade of The Reporter sat down with the country director to talk about the recent recurrent budget. Chen warns that Ethiopia should not go back to the double-digit inflationary status following the salary adjustments. Excerpts:

The Reporter: This year the World Bank approved and disbursed record high loans to Ethiopia. Why Ethiopia and why now?

Guang Z. Chen: A number of reasons can be mentioned. Obviously, some of the loans are accumulations of projects that happened to be ready for this year. I think the important thing is the level of strong partnership with the authorities. This partnership, which was built in the past couple of years, certainly helped us lay the foundation. We have approved eight new projects from the various sectors; from education to roads, power sector, water, pastoral development to sustainable land management. And in our new venture we support the ministry of industry in a project we call Competitiveness in Job Creation Projects. It’s a project that will support the development of two industrial zones. So, it’s a record year in terms of both the number of projects approved and the amount of money. The amount was USD 1.6 billion. We want to maximize whatever resources that have been allocated for Ethiopia. Therefore, for a combination of these reasons, it has turned out to be a record year. Making commitments is the other important thing. You know we disburse our money based on progress of the project.

But this year we also set a record of disbursement of IDA [International Development Association]-funded projects of USD 930 million. This amount exceeds last year’s; I think it was some USD 880 million. Therefore, that’s a good proxy in terms of showing the progress on the existing portfolio. To me that’s very important. The USD 930 million we have disbursed and if you look at this year’s budget of the federal government (just over USD 9 billion), we account for about ten percent of that budget. This last fiscal year we also did a lot of analytical work, research – and policy-based analytical work. We will launch the third economic update next week. In April this year, we had a spring meeting in Washington and we organized an “Ethiopia Day” to bring in a group of people working in Ethiopia to best represent a series of analytical work done in Ethiopia. It will include poverty assessments about access to finance, about public investment and business etc. Therefore it was a combination of a lot of works. I think it was a good record year.

Access to finance has remained a big issue echoed everywhere from the private sector. What are the findings of the World Bank?

We have done the analytical work. In fact, we are waiting for the final comment of the authorities in terms of when to launch it. There is no disagreement in terms of the basic analysis. The key feature we have found was the so-called “missing middle.” You have micro-finance enterprises to deal with the small-scale borrowers. Then you have the banks dealing with the big customers that may develop small – and medium-sized manufacturing enterprises. So we are advocating some measures on how to improve access to finance. The government has welcomed it and I think a few days ago there was a private sector forum chaired by Prime Minister Hailemariam Desalegn. The same message was voiced. The message is there on how to go about it. Of course there are disagreements between the central bank governor who actually thinks that there is enough money in the market but somehow the banking sector is not providing the money fast enough to meet the need of the private sector. I think it’s a healthy debate and we will continue to push that.

The Reporter: One of the projects the WB approved is the geothermal project. Everybody seems interested in that. The US is coming and Japan is interested in assisting some potential sites in the Rift Valley area. What is the potential and why has it become the center of discussion and interest at this time?

Guang Z. Chen: No, I don’t necessarily say that it has become the center of discussion. I think this is one alternative and Ethiopia has local alternative sources of energies. If you look at the Rift Valley coming from Kenya, it has developed very extensive geothermal resources. Preliminary surveys show that Ethiopia has that potential as well. This project is designed to see whether we can really develop those resources. The project itself is not about power generation. It’s actually about developing those geothermal resources. I would not say that it has become the center of attention because the country has lots of hydropower. The country has focused on hydropower and that is why it spends most of the money on that. Therefore, I won’t call it the center but a very good complement for the mix of energy sources that you have. You also have a green farm now and the bank is very happy to work with the government to export other alternative sources of energies.

The Reporter: Still, Foreign Direct Investment on geothermal power is increasing and that prompts a question; what is so special about the particular area?

Guang Z. Chen: I think it probably represents a new area and the government wants to explore the area on how to go with public private partnership framework in that particular area. But the investment is not as huge as hydro dam projects. I think probably environment and other concerns are not as severe as hydro dams. It’s a good place to start in terms of pubic-private partnership.

The Reporter: Let’s talk about the record high figures in comparison with public agencies’ efficiencies. You were very vocal about the public offices inefficiencies and lack of getting accurate data. Despite that, the bank has approved and disbursed money to these offices. What can you say about that?

Guang Z. Chen: No, what I have been saying is that in Ethiopia a lot of things are going on. A lot of projects are ongoing. Sure we have faced challenges in terms of implementations. It is not only those projects the bank financed that are facing the challenges, but also government-financed projects too. So we have to tackle those capacity constraints. We have to deal with the systems, measures and bureaucracies in getting things done. But this is part of the support we are providing; this project is not about providing money to the government. It’s all about supporting capacity building; it’s all about supporting how things are done. So this is consistent within all our packages. We build our system while using the government’s system to assist us in disbursing the funds smoothly. That’s why we actually have the fastest disbursement ratios. We will continue that and in the meantime we are working with the ministry of finance and economic development, the portfolio review was chaired by the minister and line ministries were also looking at the implementation constraints they are facing and see how we work together to address those constraints. So this is the package we are providing.

The Reporter: Some of the projects are on hardline where the bank provides finance for projects taking place in the South Omo Valley. These are scrutinized by international human rights activities. What will be your reaction to that?

Guang Z. Chen: A number of projects we have supported are nationwide projects. We don’t want to exclude any particular locality. We are aware of those complaints and concerns but when we finance a project we want to make sure that the project we finance will have a system in building the project design that will adjust to those concerns. This past fiscal year we were able to reach an agreement with the government on applications of the bank’s borrower’s policies of indigenous people, for example, has been applied now in Ethiopia. This is all certainly reflected in the designed project. If there will be a resettlement, there will be our requirement that should be fulfilled before we can finance those projects. Hence, we do have in-built safeguard in the system. In the meantime via those projects we are working with the government to improve their own systems so that these kinds of complaints can be minimized in the future. There is also complaint about the level of compensation that is all about grievance in the system, particularly the regional governments.

The Reporter: The Growth and Transformation Plan (GTP) is coming to its end and to which the bank is well noted for its financing involvements. But some say that it was ambitious from its inception and still remains ambitious because GTP has achieved way below the targets. What will be your comment on that?

Guang Z. Chen: Well, first of all in any country it’s the government and the people who make their plans. When they do that they always need to reflect cultural, historical perspectives. Some countries like to set the targets very high though they feel that they may not reach to 100 percent of it. But by setting such high targets, mobilizing resources and support for such a target, even if they can reach 70 or 80 percent, it is a great achievement. Perhaps when Ethiopia planed the GTP there was that kind of thinking. Over fifty years, this country has hardly grown at all. Average annual growth was like one or two percent with ups and downs. I was not here by the time the GTP was planned but the leaders must have felt that they had to set an ambitious target. So the people feel that there is some hope for this country to move in those directions. Yes, perhaps some targets of the GTP may not be achieved. I know certain sectors will not be fully achieved. But whatever they have achieved is a remarkable achievement by itself. One could draw lessons from this process when you prepare GTP2 because once you set the targets very high, you may misjudge resources and the capacity of the systems. Sometimes, you need to prioritize certain areas. Coming to GTP2, I will certainly expect to see and I think there will be a much stronger room for the private sector to play in the fulfillment of these targets and the government may create more space for the private sector because there can’t only be public investments to achieve the process. In GTP1 the very massive public investments, relatively good for infrastructure foundations, will now crowd in private investments, roads, power, telecom etc. improved over the past five years.

The Reporter: The government in its GTP wants to see the private sector in the manufacturing. It has been pushing or lobbying the sector to take part. Is that the right way to do it? Instead of lobbies why doesn’t the private sector come to the sector itself?

Guang Z. Chen: When you say lobbying, it means that the government is trying to do some investment promotions, trying to attract investors into the manufacturing sector. I don’t see anything wrong with that. That’s part of the industrial policy some countries pursue. Certainly, Ethiopia is trying to pursue it. The government has a role to play. For example, let’s take the case potential investors from China. Let’s take the Guangdong province. They may not know what’s happening here. It’s only the past couple of years that the connection between China and Africa became frequent. The government has a role to play to demonstrate to the outside. I think the key thing will be whatever the government says in terms of facilitations. You have to fulfill those commitments then you will be able to attract those investments. Yes, I do expect investments to the manufacturing sector, mostly private investments of both domestic and foreign nature. The key thing is how to build the linkage so that they have cluster developments. I’m sure you have heard about large shoe factories here and some of them are under production. I’m always in the view that two or three of them being successful is not adequate in Ethiopia. You have to build a trend of manufacturing if you really want to change the structure of the economy. Despite the government’s incentives and policies in the last couple of years, manufacturing still has less than ten percent share of the economy. That’s not enough if you want to become a middle-income country.

The Reporter: A large segment of the private sector is not interested in taking part in the manufacturing sector.

Guang Z. Chen: That’s the issue about investment climate in general. The cost of doing business also is the case. This was the issue discussed at that forum, getting things in and out of Ethiopia makes it much more costly. How much it costs, taking one container from the Port of Djibouti to Addis today, can you reduce it by ten percent next year, by twenty in another year? I think that’s the thing GTP2 will tackle.

The Reporter: You have been advocating the case for the light-manufacturing sector. How is it going?

Guang Z. Chen: Based on some statistics, Ethiopia, for example last year, attracted close to USD one billion from foreign direct investment (FDI), which is several times higher than a couple of years ago. I think you are on that trend but it needs to be much faster and bigger. This is why we work with the government to develop the industrial zone projects. We are trying to bring in international good practices and help the government develop a zone through public-private partnership arrangements. I still believe there is a lot more to be done. Perhaps in the coming two years, through these industry zones, we can create jobs for tens of thousands of Ethiopians.

How about the next fiscal year budget? What will the bank’s view be on that? The recurrent budget seems higher than previous years.

The Reporter: You mean in terms of salaries?

Guang Z. Chen: Yes, the salary increments or adjustments are high talking points in fear of escalating inflation.

I think it’s a very delicate balance I suppose. The overall budget as the percentage of GDP is increasing but it is still very modest in terms of size. The big part of the budget includes the fiscal transfer to the regions; the other is development expenditure and the recurrent budget. The recurrent part is what we call public consumptions. In fact, we have done analysis in the second economic update. The public expenditure is actually very low in this country. The public investment part is relatively high. I think the government is trying to strike a balance of this budget. Of course, we all know that certain segments of the civil service pay are very low. The teachers’ salary is particularly very low. So, there is a rationale for increasing the salary for those lowly-paid public sectors. How to strike the balance without causing inflation is something the ministry of finance and economic development has to very carefully look at. Fundamentally, I haven’t seen any major problems with that structure.

The Reporter: Price expectation is the worry of the day. Will that be a concern for the bank?

Guang Z. Chen: Sure. No doubt. For the last 18 months the government was able to keep the inflation down to a single digit. We certainly think that Ethiopia should not move back to the double-digit path. That will require a very prudent management of the development side, particularly internal borrowings.

%d bloggers like this: