IMF Executive Board preoccupied with Ethiopia’s economic performance, its debt burden in particucular

1 Oct

By Keffyalew Gebremedhin ~ The Ethiopia Observatory (TEO)

On September 21, 2015, the 24-member Executive Board of the International Monetary Fund (IMF) concluded its annual deliberations in Washington D.C., on Ethiopia’s economic performance adopting the next phase of its policy stance.

This obligatory undertaking, i.e., known as the annual consultations with the IMF, is in fulfilment of the Fund’s mandated activities under Article IV – an official association sign of loyalty to its Articles of Agreement. The findings of the country mission report, usually highlighted in a Staff Report, constitute the basis for the executive directors’ consideration of and conclusions on respective nations’ economies under their surveillance functions.

The IMF sent its latest mission to Ethiopia in early June, headed by Ms. Richter Hume; the team carried out the Fund’s tasks from June 3-17, 2015, which Ethiopia – as one of the original 35 signatory member states accepted on December 27, 1945 – thus facilitated by opening its books to the IMF Staff.

This is an important work of the Fund, and also of the Executive Board – which is sort of a country surveillance nature. They engage Ethiopian officials in-country discussions and going in detail through the nation’s accounts. During such exercises, the Fund Staff usually pay attention to exchange rate, structural, monetary and fiscal policies and related issues.

A year ago in September 2014, the official report on the consultations between the TPLF regime and the IMF showed their dialogue focused on “sustaining high economic growth while preserving macroeconomic stability and debt sustainability.”

From that discussion emerged core issues on which both sides concentrated on, and included:

    (i) The policy mix to preserve macroeconomic stability and debt sustainability;

    (ii) the public sector investment program and its financing; and

    (iii) financial deepening, export competitiveness and the business climate.

As can be seen from the above, at the end of the process the Executive Board was comfortable anticipating growth to continue to remain in single digits with tight monetary policy in place.

Unlike before, however, while affirming the economic outlook to remain favorable due to the country’s significant potential, starkly noticeable from the latest IMF report is the fact of the Executive Board’s concerns becoming strongly pronounced.

In more clear terms, the Fund makes public that it is worried about Ethiopia’s “rising domestic and external vulnerabilities.”

What could these be?

IMF Board uneasy with Ethiopia’s economic performance

(i) Inflation

Unlike previous IMF missions and the Executive Board’s conclusions that often were full of praises for Ethiopia’s economic potentials, this time around the Executive Board openly speaks to its worries about everything:

    *  From inflation pushing domestic food prices above 10 percent to weak capacity to raise domestic revenues to finance some of the investment activities

    *  Unrestrained foreign and domestic borrowing that this September has pushed the national debt to 50.2 percent of GDP

    *  To the thus far commended macroeconomic policy of the nation that now facing ‘rising domestic vulnerabilities” to overvaluation of the exchange rate, burdensome regulations, narrowing access to credit, etc. hampering inclusive growth, etc.

The Ethiopian economy is high quality school that shows any novice how economic problems become so pronounced in as short a period, for instance, from June to September.

Recall that, when the IMF Staff mission was on a visit in Addis Abeba from June 3-17, 2015, the mission on June 19 announced “Inflation has remained in single digits — an important achievement for macroeconomic stability”.

Not long after, nonetheless, the IMF Executive Board in September renounced the mission’s June assessment, being comfortable in its conclusion about inflation in Ethiopia as tamed and projecting it to stay in single-digits.

Incidentally, the Ethiopian Central Statistical Agency (CSA) published early in September that headline inflation had headed down from 11.9 percent in July to 11.6 percent in August 2015. Food inflation rose by 0.8 percent in August to 14.7 from 13.9 percent in July. Even non-food inflation has gone down to 8.2 percent from 9.7 percent in July.

The first time I read this data, it did not make sense to me. I asked myself how this could be possible in a country where:

    a) Rain failure and drought since February 2015 have become the nation’s reality affecting agricultural production,

    (b) Ethiopia could not export more commodities even under normal circumstances, getting worse now when the global economy has slowed the exports of goods and services from developing countries,

    (c) Imports have hugely overshot while exports have declined, thereby disrupting the required reserve balance in the national accounts and especially the international reserve to induce confidence in the economy,

    (d) official admission has told us that the country’s reserve has gone so low that it cannot provide two month’s cover; every passing day its adverse implications to the nation’s weakened national currency has become agonizing to policy and macroeconomic stability in its broadest sense, since stability is characterized by low inflation,

    (e) Rising unemployment and lack of incomes have entailed huge sufferings for significant millions of the country’s population,

    (f) The boost in investment riding higher as if nothing ever is happening has been found ticking the debt clock, and,

    (g) Rises in rural poverty have become stark with farmers unable to either harvest or take out from an empty granary, a characteristic of a hand-to-mouth agriculture, and etc.

As far as my reading of the data is concerned, I have no doubt that the inflation data has been doctored. This has come perhaps with the mysterious visit by Finance Ministry State Minister Abraham Tekeste last July of the CSA and his ‘directive’ “to improve data” may have something to do with that.

In CSA explanation, there is an implicit attempt to put the change in the inflation data on the back of non-food inflation, to lower general inflation. The contradiction there is that this would have shown a different output; for instance, if the country has had good reserves and merchants get as much as they need, we would see the movement impacting inflation in a more single direction, positively contributing to improve the supply situation in the production of goods and services.

The question in the non-food inflation corner then is that, at a time when merchandize importers are head over heel to get forex, the preposterous hypothesis is how non-food inflation could go down!

Rather in non-food inflation column clearer would be importers eagerness to make profits, importing alcoholic beverages, cigarettes and tobacco, clothing and footwear, construction materials, furniture, furnishing, household equipment and operation, health, transport, communication, recreation, culture, education, miscellaneous goods and services, etc.

Readable would the change in the non-food inflation column is such activity, as an expression of higher demand for foreign currencies from the National Bank of Ethiopia (NBE), which does not have it nor could it supply the commercial banks what their customers need and demand.

So why should inflation a trend to declining, when its strong influences come from different direction?

(ii) Public debts

The IMF Board is very concerned that Ethiopia’s public debt (general government and state own enterprises debts – excluding Ethiopian Airlines) should in 2015 reach 50.2 percent of GDP, while domestic debt in 2014/15 alone stands at 24.1 percent of GDP.

When we discuss Ethiopia’s debt, we should recall that in an August 2012 paper, the IMF arranged the Low-Income Country Debt Debt Sustainability Analysis (LIC-DSA). It concluded that “Ethiopia was at a low risk of external debt distress”, extending the nation’s safety time horizon to 2017.

As a matter of fact, variants of this study were also conducted in 2013 and 2014. Most surprisingly, the 2013 LIC-DSA clearly states: “The public DSA suggests Ethiopia’s overall public sector debt dynamics are sustainable under the baseline scenario but vulnerable under several alternative scenarios. Public sector debt ratios are projected to decline in the medium and long term, starting from a relatively low level in 2013.”

In 2014, it was the same story, with slightly raised temperature. In IMF Country Report No.14/303, in paragraphs 29-33, the IMF underlined “The risk of external and public debt distress remains low, but is on the cusp of transition to moderate. External debt-to-GDP ratio is projected to increase further in the medium-term and return to low levels in the long-run.”

    In paragraph 32, the IMF made it clear that authorities do not concur with the staff’s assessment of the public debt. They maintain that Ethiopian-Telecom liabilities, like those of Ethiopian Airlines, are not guaranteed by the government and hence should not be added to government debt. They explain that both these entities operate as commercial enterprises. Ethiopian Airlines discloses audited annual financial statements and Ethiopian-Telecom is in the process of doing so.”

Unfortunately, the national carrier is also, just like the TPLF regime enterprises, is burdened with debts, endangering this time tested company, which TPLF’s supremacy ethnic agenda also spoiling its internal working environment!

(iii) Related issues that deserve some attention

The IMF Board of Directors invited the attention of the country’s leadership to broaden the tax base and improve revenue administration with a view to mobilizing more resources that are needed for development spending.

Equally important is also the need “to secure positive real interest rates and greater financial deepening remain key to bolstering domestic savings and investment.” IN discussing this, the Board “expressed concern over the acceleration of public sector borrowing with attendant risks of external debt distress and private sector crowding-out. In this regard, they advised careful selection and implementation of public projects with judicious use of non-concessional external financing and greater use of public-private partnerships.”

The Board also called on the regime “to strengthen the business climate and enhance external competitiveness. Greater exchange rate flexibility, less burdensome regulation, and easier private sector access to credit and foreign exchange would be steps in the right direction.”

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