Topic An Ethiopian Business News organization operating in print and online platforms. EBR provides deep analysis to major business stories and trends facing the private sector in Ethiopia. The Ethiopian Business Review Magazine is for Middle or senior level managers, academicians, business consultants and others working in the areas of business. http://ethiopianbusinessreview.net Wed, 24 Oct 2018 02:59:18 +0000 Joomla! - Open Source Content Management en-gb Transacting in the Shade http://ethiopianbusinessreview.net/index.php/topic/item/6002-transacting-in-the-shade http://ethiopianbusinessreview.net/index.php/topic/item/6002-transacting-in-the-shade Transacting in the Shade

Wide Spread Contraband Trade Cripples Ethiopia

Contraband , part of the shadow economy, is still a threat to Ethiopia’s economy. But even more, it has recently started to affect the well-being of the nation. The recent violence in the states of Ethio-Somali and Benishangul Gumuz shows the severity of the problem. Items from textiles products to precious metals are traded by contrabandists. This has paved a way for a shadow economy to thrive, raising its contribution to the GDP to as high as 40Pct. EBR’s Ashenafi Endale investigates.

Ever since inter-communal violence started along the border of the states of Oromia and Ethio-Somali in September 2017, the term ‘contraband’ and ‘contrabandists’ have become everyday language among Ethiopians. In fact, the so-called ‘contrabandists’, or people who are involved in illegal cross-border trade, have been accused by government officials of being the ‘origin’ and ‘kindling’ for the violence, conflicts and lawlessness that have been spreading across various areas of the country in recent times. 

 Although the practice of illegal cross-border trade is not new in Ethiopia, its recent climb to new heights, threatening the unity and well being of the nation, is unheard of. While addressing Parliament in March 2017, former Prime Minister Hailemariam Desalegn  admitted that “black market” and “contraband” business was the main cause of the conflict between the states of Oromia and Ethio-Somali. “Both factors have played a significant role in the violence that resulted in the death and displacement of many Ethiopians,” he told members of Parliament. 

According to the UN Office for the Coordination of Humanitarian Affairs, at least 1.1 million people have been displaced by the violence in the states of Oromia and Ethio-Somali as of mid-April 2018. This figure accounts for 40Pct of the 2.8 million internally displaced people currently in Ethiopia. 

Immediately after Abiy Ahmed (PhD) was sworn in as Prime Minister in April 2018, he travelled to Jigjiga, the capital of the state of Ethio-Somali, to resolve the border disputes between the two regional states. “The incident was inappropriate and outside our culture of respect. It made us bow our heads in shame,” Abiy said in Jigjiga before calling on the two regional heads to shake hands in front of the gathering as a sign of their commitment to bring about real reconciliation. 

Despite the handshakes and promises, armed incursions and cross-border raids continue in many parts of the state of Oromia, such as Moyale and most recently in the eastern part of the country, including Jijiga, where much of the violence took place. Once again, government officials, including Lemma Megersa, president of the state of Oromia did not hesitate to point the finger at the so called ‘smugglers’ and ‘contrabandists’ for sponsoring and fueling unrest in different parts of the country since June 2018. Yet no one seems to know the identities of the so-called ‘contrabandists’, including officials of the Ethiopian Revenues and Customs Authority (ERCA).

When Moges Balcha, director-general of ERCA, presented a six-month performance report before Parliament in February 2018, he had nothing to say to MPs who demanded the identities of people involved in the contraband trade. All Moges said was “contraband and illegal trade practices are becoming serious problems.”

Although the identities of those involved is still a mystery, illegal cross border trade is openly practiced in Ethiopia. Since the country is landlocked, products manufactured inside or outside its borders are traded in two ways. Firstly, goods can be traded legally across borders by businesses and individuals that have licenses and pay taxes to the government. The second method involves trading activities carried out contrary to the legal system of a country. In Ethiopia, such illicit cross border transaction takes place with neighboring countries such as Kenya, Sudan, Eritrea, Djibouti, and Somalia.

Hartisheikh, a small town near the border that separates Somaliland and Ethiopia, is a well-known center for contraband trade in east of the country. Items from textiles and TV sets, to precious metals and diamonds enter mainland Ethiopia through Jijiga, according to information obtained from the Ethiopian Revenues and Customs Authority (ERCA). On the other hand, khat and live animals are the main items illegally exported from Ethiopia. 

Biniam Fikru (Col), human resource director at Dire Dawa Police Commission is familiar with the huge contraband transaction undertaking in the eastern part of the country. “The illegal cross border trade between Ethiopia and Somalia is perhaps the highest in terms of volume when compared to other routes of illicit transaction with neighboring countries,” stress Biniam.  “Sometimes I can’t accept the reality before my eyes, even as a police officer. They take very risky actions.” 

According to Adugna Bekele (whose name has been changed to protect his identity), an illegal cross border trader operating via the Ethiopia-Somali route, contrabandists usually deposit their goods in secret chambers in residential houses, the owners of which usually get the first piece of the pie. “Many households in the region have underground bunkers. Although everything seems normal on the surface, illicit transactions take place underneath,” he says. 

Adugna says he exported live animals from the east of the country to agents, explaining, “I used to export up to 16,000 live animals annually via Ethio-Somalia border.”

Humera, a small town in western Ethiopia, serves as the center of contraband trade on the Ethio-Sudan route. Goods smuggled into Ethiopia include electronics, garments, perfumes, cosmetics, pornography, drugs and arms, among others while gold and silver, garments and cosmetics are exported to Sudan. 

“Contrabandists usually use the western border to smuggle in armaments,” says Tesfaye. “They also smuggle out live animals and agricultural products to Sudan via borders.”

The main hub for contraband trade in the south, on the other hand, is Moyale, a border town between Ethiopia and Kenya. The town serves as a transition point for items that comes from Kenya such as TV sets, smart phones, new as well as second hand shoes and leather jackets to reach the central market through Hawassa, the capital of the state of SNNP. Even automobiles are illegally traded through this route. 

There are sometimes gang fights to establish control over the Ethio-Kenya contraband route, according to insiders. “There are a number of gang leaders on each route. They establish links with officers and regional governments. They control who is allowed to trade and even tax contrabandists,” explains Adugna who worked on the route for over ten years.

Walelign Mulugeta, performance evaluation director at the National Planning Commission says contraband trade in Ethiopia ranges from import/export activities to domestic industries. “Industries sell their products off-book, if the raw material is imported or accessed from the informal economy,” he explained.

Although it is difficult to estimate the exact value and volume of items traded illegally, insiders indicate that the items caught by ERCA are only the tip of the iceberg. The products confiscated by the Authority reached one billion birr in 2017/18 

Illegal cross border trading is one segment of the activities hiding from the country’s rules and regulations regarding commerce. The definition of black (shadow) economy plays an important role in assessing the nature and size of contraband trade taking place in a given country. Although no single definition exists, the most precise and predominantly used definition relates the shadow economy with all economic activities which are hidden from official authorities for monetary, regulatory, and institutional reasons. 

A survey conducted by the Central Statistical Authority in 2015 indicates that the size of the black economy is around 20Pct of the gross domestic product (GDP). Yet experts like Alemayehu Geda, a professor of economics at AAU, strongly disagrees. “According to studies conducted by international organizations, the size of the shadow (illegal) economy is up to 40Pct of the GDP,” Alemayehu explains. “In Ethiopia, the official figure prepared by the government does not include many small and medium businesses, which are part of the shadow economy based on internationally accepted standards.”

A report published by the International Monetary Fund in 2018 tends to agree with Alemayehu’s assessment. According to the report, which measures the size of the black economy in 158 countries, the size of the shadow economy in Ethiopia between 1991 and 2015 ranged from a minimum of 34.4Pct to a maximum of 40.7Pct of the GDP.

In most economic literature, one of the major factors for the growth of contraband trade is the high intensity of regulations in a given country. The intensity of regulations can be explained by the existence of discouraging tax rates, customs duties and tough tax policies as well as a high number of laws, regulations and licenses requirements, which decrease economic agents’ freedom of choice.

Experts stress that where barriers exist against bartering and exchanging one thing for another, businesses tend to utilize the available options whether they are lawful or not. “This is why practices like under-invoicing and underground trading are widely used by the private sector in Ethiopia,” argues Tilaye Gete (PhD), research director at Trin International Consultancy. “Improving the business and regulatory environments is essential to minimize these unlawful practices.”

Of course, Ethiopia lags behind in ease of doing business even within sub-Saharan Africa. While it takes 166 hours finalize customs clearance and inspections to import items into Ethiopia, the sub-Saharan African average is 136 hours, according to the 2018 Doing Business report by the World Bank in 2018. Twelve types of documents are required to import into Ethiopia, while border compliance costs were USD738, higher than the sub Saharan average of USD688.8. 

Adugna believes that the exaggerated number of laws, regulations and licenses requirements are pushing businesses to engage in illegal trading. “Many prefer to export illegally because of the burdensome requirements. For instance, I have an export permit but I just keep it to fulfil the formality, in case something happens,” he explains.

The high tax rates and custom duties also discourage importers from using legal channels. Belayneh Bogale, lecturer in Development Management at Dilla University, in a study conducted with colleagues entitled ‘Cross-Border Contraband Trade across the Main Route from Moyale to Hawassa,’ indicates that in Ethiopia, a 35Pct import duty, 30-100Pct excise tax, 15Pct VAT, 10Pct sur tax and three percent withholding tax is levied on imported vehicles with spark-ignition engines. In Kenya however, 25Pct import duty, 20Pct excise tax and 16Pct VAT is required for the same vehicle. 

Such significant excise, customs and other tax differences between the two countries, according to Belayneh, makes the legal import of items to Ethiopia relatively expensive, leading individuals and businesses to engage in contraband trade in order to make easy money.

The lack of capacity and inefficient controlling mechanisms are among the major factors responsible for the spreading of contraband trade. Although the fight against contraband is a recurrent theme in Ethiopia, more regular and intensive controls as well as imposing higher fines and appropriate prison sentences, which are globally dominant methods, 

According to the customs proclamation approved by Parliament in 2014, any person who transports, stores, possesses, offers for sale or buys contraband items  knowingly will be punished with a prison term of between three and five years and fine not less than ETB50,000 and not exceeding one million birr.

The government has been trying to follow up on the contraband trade through several different agencies.  “ERCA’s mandate is limited to informing the federal police when we suspect containers, shipment or product , including cash, enter or leave illegally,” explains Sisay Bahiru, Intelligence director at ERCA.  

ERCA has six import/export customs branches at Galafi, Mile, Jigjia, Moyale, Hawassa, and Yabelo, along the borders with Djibouti, Somalia and Kenya. There are 15 customs stations on the border with Somalia alone, while there are branches at Metema, Humera, Gambela and Asosa, with stations under them.  “It is difficult to address, once the product enter border and passed customs stations,” argues Tesfaye about contraband enforcement. 

The spiralling foreign currency shortage  in Ethiopia has also had a tremendous impact on the degree and severity of contraband trade. One notorious contraband centre is Togo Chale, a small town on the border with Somalia. Even though there are no significant legal transactions, many commercial banks surprisingly have branches there. 

The branches serve two purposes. “Hard currency is bought from the parallel market in Addis Ababa, smuggled out through the border and re-enters Ethiopia via the branches to legalize it. It is earned by exporting, for instance, live animals,” explains one bank manager. “The hard currency in the black market is pooled from multiple shadow sources”

Insiders also indicate that some individuals who work at commercial banks also buy hard currency from live animal smugglers, and transport it to Addis Ababa using the bank’s transport facilities, without following the proper accounting and recording procedures. Then they sell it to importers engaged in contraband trade at a higher price.

Experts underline that such practices are not only undertaken by opportunistic individuals. “Nobody can take such big risks without the involvement of higher government officials in the federal and regional structures,” says Amin.  

Officials, however, stress that the practice is not out of the government’s sight. “We know why banks open branches in Togo Chale, a tiny border town with no unique economic significance. It is a strategic location for the contraband trade,” Yinager Dessie, governor of the National Bank of Ethiopia (NBE) said during a recent meeting held with private sector representatives. “NBE will establish a financial intelligence unit to tackle the problem”. 

Experts differ on the impact of contraband trade. Some argue that illegal cross border trade can support the formal economy, and contribute to employment, as players in the shadow economy later invest the money they make into the formal economy. 

However, Amin argues this is not the case in Ethiopia. “Most of the contrabandists and illegal importers in Ethiopia are not poor or unemployed. Either they refuse to work for small salaries in government office or they are millionaires who do not want to pay tax,” he says.

Of course, contraband is politicized in Ethiopia, causing instability and conflicts, in addition to its impact on formal businesses and domestic industries, like the recent political conflict in Somali region. Several people died, properties were looted and churches were burned in a clash between military forces loyal to the regional government and those supporting the Prime Minister’s reforms. 

Amin says the worst is still to come in the contraband network in the region, explaining, “We still do not know how many armaments they smuggled into the country, whether they are involved in human trafficking or whether they are financing terrorist in the horn of Africa.” Terrorist groups like Al-Shabab usually survive on smuggling valuable natural resources out of Africa, and smuggling in industrial goods, in addition to piracy. 

The politicization of contraband in Ethiopia is not limited to Somali region. Just a month ago, ethnic political conflicts were orchestrated by contrabandists in Assosa, the capital of the state of Benishangul Gumuz, a potential gold mining region. A network of business people smuggled gold directly from mining zones to Dubai, via Sudan, according to officials. “They incited the conflict because they were worried about losing the network if the Prime Minister’s changes went through,” officials of the region announced.

Tilaye Gete (PhD), a human resources consultant, says the developmental state mentality, inefficient service delivery, corruption and the government’s grip on the economy not only pushed the private sector to the edge, but also resulted in the failure to achieve major economic targets. 

Policy and institutional reforms for efficient government service provision for the private sector, reducing the government’s hold on the economy and more ample room for the private sector were the final recommendation forwarded during a meeting organised by the Addis Ababa Chamber of Commerce. ”People need to make a living, send their children to school and so on. The government cannot create jobs for everyone, but the private sector can help to bridge the gap,” said Tilaye.

Amin recommends the implementation of three layers of control mechanisms to minimize contraband: efficient and separate control at customs as well as health and standard control. “If illegally traded items pass customs, they can be caught by health and standard officers.”

“If you control more, you give more power to the shadow economy,” argues Alemayehu. “Provided that the demand for underground goods and services remains intact, the profit opportunities in the underground economy become so large that contraband trade business recuperates.”


6th Year . Sep 16  - Oct 15 2018 . No.66


 

 

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ashe@gmail.com (Ashenafi Endale) Topic Sun, 16 Sep 2018 15:00:00 +0000
Eritrea Hopes to Rise http://ethiopianbusinessreview.net/index.php/topic/item/5976-eritrea-hopes-to-rise http://ethiopianbusinessreview.net/index.php/topic/item/5976-eritrea-hopes-to-rise Eritrea Hopes to Rise

Before the 1880s, Eritrea was part of Ethiopia. It was the advent of colonial rule that created a historic divide between them. Global developments after the second World War and diplomatic efforts by Emperor Haileselassie helped the reunion of the two countries in 1952 through federation. However, the federation was abolished in 1962 and subsequent internal power struggles ignited the Eritrean liberation movement. In a war that spanned for 30 years, Eritrea finally became an independent state in 1991.

The two countries established formidable relations since then. That close relationship, however, was short lived, because of a bloody two-year war between the two countries brokeout in 1998. 

With the coming of a new leadership in Ethiopia, the two countries have now started a new chapter after two decades of a no-peace no-war situation. Eritrea, whose economic growth has been highly constrained because of the hostilities with Ethiopia over the past 20 years and UN sanctions, is now one of the least developed countries in the world. Even though it is difficult to access up to date data, estimates by the World Bank shows that over 60Pct of Eritreans live in poverty. The government’s isolationist policy, which has highly discouraged the private sector, has contributed for its deteriorating economy. EBR Staff Writers visited the state of Eritrea last month to compile this report. 

Since 2010, Daniel Sebhat, a father of five, has planned to construct a house for his family in Asmara, the capital of Eritrea. Although he managed to get money from loved ones living abroad, the 47-year old was banned from building the house he dreamt by the Eritrean government. “We are not even allowed to refurbish old houses, let alone build new ones,” a frustrated Daniel told EBR. “We live in a country where we are not allowed to reinvest our money.”

Home to an estimated five million people, Eritrea, once referred to by Human Rights Watch as the ‘African North Korea’, is among the few countries in the world where people are deprived of the rights to build a shelter. 

Such unfortunate realities have deteriorated the confidence of Eritreans, who were known for their entrepreneurial skills before the war between Ethiopia and Eritrea started in 1998. “Even though I had enough money in my bank account to start investing in the transport sector, I am not allowed to withdraw more than 5,000 nakfa (USD333) from my account,’ explains Daniel. “It is only in Eritrea that people are forced to live from paycheck to paycheck, even when we are capable of changing our lives. People are living in despair.”  

He is not the only one disappointed by the government’s bizarre policy. Gone are the days when Asmara, which used to house industries and factories, used to be an economically vibrant city. In contrast to the early and mid-1990s, pioneer factories such as Asmara Brewery and Red Sea Bottling, now work way below their capacity.  

As Eritrea remains under a strict command economy, with government policies crowding out private investment, businesses have suffered the most. “The government shut down my shop several times because I was suspected of not depositing money at the bank. I don’t have a right to decide on my own cash,” says a retailer who sells food stuffs in Keren City. “As a result, I dropped my plans of buying stock for my shop, just to deposit the money [in the bank] and make the government happy.”

The calamity is not restricted to the retail sector. Except for the mineral sub-sector,  which remains relatively vibrant, other economic activities are lifeless. While some link the economic catastrophe to the government’s isolationist and strict self-reliance policies, others attribute it to the sanctions placed by the United Nations. 

Deteriorating Economy 

Although economic developments in Eritrea are notoriously hard to track because of the dearth of official data, trends show that its economy had been performing poorly over the past decade, while the majority of East African countries registered better economic achievements. 

Neither the Central Statistical Office of Eritrea nor other ministries have released any official reports on the the economy for over a decade. The Demographic and Health Survey is the only public report released in 2013 by the Office so far. “Although we conduct studies on different activities of the economy, we are not allowed to release any information. Almost all reports, except for the Demographic and Health Survey, are authorized only for internal use,” an official working at the Statistics Office informed EBR. Despite the non-disclosure policy of the government, estimates produced by international organizations show that the economy has been floundering. 

Eritrea’s economy grew by an estimated 3.7Pct over the last two years, on average, after shrinking for the two previous consecutive years by one percent, according to the African Development Bank (AfDB). While the revival of the economy is credited to the growth in the mining sub-sector, the negative growth rate registered by the agricultural sector, which accounts for almost one-fifth of Eritrea’s GDP and is a source of income for more than 60Pct of the population, is the primary factor for the sluggish economic trajectory.  “It would be wrong to conclude that the agriculture sector is underperforming without the availability of fully fledged research. However, it is evident that it won’t improve while being isolated from the world,” stressed an official working at the Eritrean Ministry of Agriculture (EMoA).  

Weak rural infrastructure, coupled with low technological usage and yield enhancing inputs, are the main causes of agriculture inefficiency, in addition to inadequate irrigation systems, insufficient post-harvest storage facilities, inefficient land management, and a lack of skills and extension services to support farmers. 

No significant infrastructure developments have been made over the past decade, except for the construction of micro irrigation dams in a few areas, with the help of development partners, according to officials of the EMoA. “Technology transfer is not possible as the nation is isolated from the world,” the official at EMoA told EBR. “As a result, farmers are not able to improve their yields.” 

These realities have pushed the nation to become dependent on imports to fulfill its food demand. In fact, Eritrea produces only 80Pct of its total food needs in a good year, and no more than 50Pct in unfortunate years, according to the Food & Agriculture Organization (FAO). 

Sorghum, which is mainly used to make injera, a spongy flat bread which is a staple food item in Ethiopia and Eritrea, is one of the most consumed crops. It costs around 30 nakfa (ETB55) a kilogram, whereas teff, another crop used to make injera especially in Ethiopia, costs as much as 70 nakfa (ETB128.80). The country’s demand for sorghum is largely satisfied by local production and partly by imports from Sudan; teff is largely imported through contraband from Ethiopia. 

Before the 1998 war between Ethiopia and Eritrea, the latter was one of the major markets for teff traders. Though formal relations between the two have not resumed since then, the contraband market is still strong. “Despite its expensiveness, we get Ethiopian white teff via Sudan,” a truck driver who transports crops in and out of Eritrea told EBR. Other crops, spices, and packed foods are also available through the contraband market, including red pepper (berbere). 

Eritrea, which has trade relations with no more than seven countries in the world, imported USD336 million worth of goods in 2016, according to the Observatory of Economic Complexity (OEC), a website that provides trade information of more than 150 countries. Wheat flour (USD24.3 million), raw sugar (USD22.9 million), electricity generating sets (USD17.3 million), cars (USD12.2 million) and rubber tires (USD11.8 million) were the top items imported during the year. The import bill was financed by its exports, which have been growing by two percent annually and reached USD371million in 2016, as the OEC’s data shows.

Eritrea’s exports, which solely depend on mining products, showed significant growth over the past five years, mainly driven by increases in the production and exports of mineral ores and metals from the Bisha mine and gold from the Zara facility. Although copper ore  is Eritrea’s biggest export item with a value of USD154 million in 2016, the country also ships gold, precious metal ore, zinc ore, and precious stones  worth USD68 million, USD38 million, and USD4.8 million, respectively, to China, the United Arab Emirates, India, Serbia and Canada  

Despite the improvement of its exports, Eritrea is still less competitive in the global arena. In addition to sanctions placed by the United Nations Security Council, the exchange rate regime also hampers its economic growth as well as exports because Nakfa is overvalued The official exchange rate was 15.075 nakfa to the dollar in August 2018 while a dollar is exchanged for 27.34 birr in Ethiopia. 

The overvalued currency has had an impact on the lives of ordinary people, including Robel Belay, a soldier who makes a net salary of 805 nakfa (USD53.4). “I am only allowed to use 200 nakfa(USD13.30). The rest is given to my family even though I want to use it for my personal consumption,” he said. 

This is an experience shared by many young Eritreans. “I don’t have hope that my life will improve,” says Robel. “I’ve repeatedly pled to be relieved of my national service, but to no avail.”

Eritrea’s national service proclamation states that mandatory national service, which also involves secondary school students of both sexes, should not be beyond 18 months, with the exception of war time. However that limit had never been respected by Isaias Afwerki’s government, pushing Eritrean youth see themselves as having two options: national service, or migration.

Students see the education system in the country as a trap that will lead them into the government’s hands, where they will be forced to do things contrary to their interests. Senait Tesfamichael, 20, whose name changed to protect her identity, quit school in grade nine not to join the army. Living in Keren, Eritrea’s second largest city, with an estimated population of about 100,000, she is not sure how long she can avoid the program. “I don’t have a clearance certificate, which means I am not allowed to access food rations, register to open a business, buy a SIM card, acquire a driving license, or open a bank account. If I join the army, I know I will stay there forever, like my cousins, brothers and sisters,” she said.

Eritrea was once labelled by the United Nations Commission on Human Rights as the last place in the world where anyone would want to serve in the military, but the government has another justification for military service. Eritrean Minister of Information, Yemane Gebreab, was once quoted as saying, “Eritreans are not fleeing the country because of indefinite national service in the military. Rather they are fleeing for economic reasons and Europe is making it easy for them by granting political asylum.” The European Union agreed with Yemane’s sentiments and pledged 20 million euros to Eritrea in a long term support to eradicate poverty in 2015.

A hostile relation with Ethiopia was the major reason for indefinite military service, according to government officials. But now as the two countries are restoring peace, there is high hope among the youth that national service will become limited. In fact, there are some signs from the government as well, which has made attempts to create more jobs in sectors other than the military, according to a regional official EBR spoke to.

Effects of ‘No War No Peace’ Situation

If there are two countries in Africa with extremely close ties in almost all social aspects, they are Ethiopia and Eritrea. The people are bound by blood and ancestral roots, and by common traditions, legends and history. They share culture, way of life, language and religion. Their ties came loose after Italy snapped Eritrea from Ethiopia in the last quarter of the 19th century. Britain, after expelling Italy in 1941, ruled Eritrea for almost a decade. That political sting by foreign powers seeded present-day Eritrean nationalism, even though it would be wrong to link the secession of Eritrea with colonial rule. 

Although Eritrea and Ethiopia federated because of a UN decision in 1952, incidents under both the monarchical and military regimes in Ethiopia played a major role in the quest for Eritrean liberation. The annulment of the 1952 federation prompted Eritreans to start guerrilla movements against the imperial regime of Haileselassie I. They continued their struggle and founded the Eritrean People’s Liberation Front (EPLF) in the early 1970s. After 30 years of war, the rebells were finally able to secede Eritrea in 1991.

Its initial years of independence showed significant progress in recovering and developing economic and social infrastructure. Construction of apartments, water infrastructures, health facilities and industries were heavily undertaken. 

The country improved social indicators, macroeconomic stability and achieved one of Africa’s biggest economic growths growing at an average annual rate of 10.9Pct from 1993 to 1997, according to the World Bank. That success was short-lived because of the war with Ethiopia (1998 - 2000).

Although the war was caused by multifaceted and interrelated factors, the real reasons continue to be the subject of debate among academics, diplomats and politicians. While some link the war with age-old political tension between the Tigray People Liberation Front (TPLF) and EPLF, others attribute it to economic factors, including the introduction of the Nakfa as the Eritrean currency. Bahiru Zewde (Prof.), a renowned historian, once said, “The reason for the war was the test of Eritrea’s independence [on Ethiopia].” But the conflicting parties attribute their shared border as the bone of contention. 

Prior to the war, Ethiopia was the destination of 60Pct of Eritrea’s exports, which were worth ETB147 million, ETB261.8 million and ETB275 million, in 1995, 1996 and 1997 respectively. Eritrea’s imports for the same years were 260, 273.4, and 218.2 million Birr, whereas its re-exports were worth 94.57, 69 and 19.8 million Birr, correspondingly, according to the World Bank. 

The decline in these figures was not accidental, but were rather due to Ethiopia’s protectionist measures, claiming that Eritrea was allegedly depleting its resources through the latter’s State Building Projects. This is believed by some to be one of the basic causes of the war.

Later on, tensions between the two countries were further aggravated by armed clashes in the town of Badme, on the border, which soon escalated into a full scale war. Although casualty figures are contested, the total number of deaths on both sides is estimated to be around 154,000, of which 135,000 were Ethiopian and the rest were Eritreans (both governments claim half of the total casualties). It also resulted in the displacement of over a million people, 100,000 refugees and both sides expelling over 100,000 people. Both countries incurred costs of hundreds millions of dollars because of the war. 

Since the end of the war, except for short conflicts between the two armies, a “no war no peace” situation prevailed for nearly  two decades. At the same time, Eritrea’s economy, which was poorly diversified and hugely dependent on mining, was severely affected, because of the government’s inward looking strategies among other factors. The government, which focused on the provision of basic services, failed to recompense the country’s low agricultural productivity. 

In addition, Eritrea’s two ports, Massawa and Assab, were left idle when Ethiopia resorted to the port of Djibouti for its international trade. Coupled with United Nations sanctions that included travel bans and asset freezes for government and military leaders, the country experienced a steeper economic downturn. Ethiopia worked tirelessly for these economic sanctions. Isaias was suspected of helping Somali insurgents 

Dawn of a Bright Future? 

Now that a new leadership under Prime Minister Abiy Ahmed, who pledges to honor the Algiers agreement, is in power in Ethiopia, hopes are high that the two countries relation started to normalise and economic activities in Erirea are expected to improve. The gesture to normalize relations was welcomed by Eritrean government. It was then followed by visits by both heads of government to the other country, as well as a resumption of air transport, and an agreement to resume trade. 

The positive sentiment was also shared by both countries’ citizens. “We are optimistic that our livelihoods will greatly improve after Ethiopia and Eritrea made peace,” an employee of Massawa Port for more than 20 years told EBR. “I remember how busy Massawa used to be with ships carrying Ethiopians goods. But after the war, we became poor, as the port has been almost idle since the war.”  

But experts still see some flaws in the normalization process. “As many agree, the main cause of the disagreement between the two countries is beyond borders, and of course beyond the Algiers agreement,” argues Mekonnen Fisseha, associate professor of law at Mekelle University. “Simply accepting the Algiers agreement will not make the normalization process easy. A lasting solution depends on how the deal can bring peace, stability and development to the war affected areas. The normalization process is about economic integration, advancing common interests and free economic zone.” 

Alemayehu Geda (PhD), professor of macroeconomics at the Addis Ababa University, also has concerns. “It is a good thing that the countries are normalizing their relations, but the peace deal should be implemented in a way that can make both parties winners,” he said.“International laws on regional integration must be taken into account. Eritrea might be pushed to amend its policies to match Ethiopia’s growth policy.” 


6th Year . Aug 16  - Sep 15 2018 . No.65


 

 

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info@ethiopianbusinessreview.com (Ethiopian Business Review) Topic Thu, 16 Aug 2018 07:43:23 +0000
State Capture http://ethiopianbusinessreview.net/index.php/topic/item/5940-state-capture http://ethiopianbusinessreview.net/index.php/topic/item/5940-state-capture State Capture

The Rise of A Shadow Government

State capture refers to systematic high level political corruption that establishes a hidden political regime at odds with the constitutional purpose of the state, by capturing politicians and parties, journalists and the media, the police as well as key state institutions such as the legislature, the executive, the judiciary and regulatory agencies in order to protect and to benefit its own private interests. Although state capture is a concept that has received extensive attention principally in the post-communist states of Eastern Europe and Latin America, it has also found its way into Africa’s political discourse in recent years. In fact, the influence of state captors is growing in developing countries. Ethiopia is no exception, as evidenced by the mismanagement of massive mega projects and numerous corruption scandals as well as political persecution, especially in recent years. EBR’s Samson Hailu investigates the extent of the phenomenon in Ethiopia.

In recent years, stories ranging from the mismanagement of mega projects, embezzlement of public money and numerous corruption scandals to political persecution and the use of extreme measures including torture to silence dissents are becoming more common in Ethiopia, a country currently making significant changes. Despite the extent of the problems, what has become striking is the way these tragedies are orchestrated and covered-up to conceal wrongdoings. 

One of the major scandals and disguise attempts seen in recent years involves the Ethiopian Sugar Corporation, a government entity responsible for the expansion of sugar factories. The absence of accountability over the failure to complete 10 sugar factories while missing deadlines repeatedly after spending billions of birr shows the seriousness and complexity of the issue. 

In fact, the swindle started when the executive branch of the government decided to begin the projects without conducting feasibility studies, and the legislative body allowed it to do so. Neither a single government official nor member of Parliament (MPs) spoke out when the construction of all sugar factories, at an estimated cost of ETB77 billion, was awarded to a single government owned industrial enterprise, the Metals and Engineering Corporation (METEC), without following proper procedure. 

Even worse, when the construction of nine sugar companies was taken away from METEC and handed over to the Chinese contractors three years ago, not a single person was held responsible for not completing the projects, although a significant portion of the fund had already been consumed. 

Eyob Tesfaye, an macroeconomist with many years’ experience, is among the scholars who have been probing the government’s ill-advised undertakings. “The problem started in the planning stage, when the government deliberately embarked on the sugar projects knowing the inadequate project management skill and capacity available in the country, as well as the fact that deprived public institutions could not conduct proper monitoring and follow-ups,” he argues. “Undertaking these huge projects without conducting feasibility studies lays bare the absence of a government and legislative body powerful enough to stop the deed.” 

Of course, when Endawok Abite, CEO of the Ethiopian Sugar Corporation (ESC) presented the 11-month performance of the ESC in front of the parliamentary State Enterprises Affairs Standing Committee in July 2018, he did not deny the fact that although METEC agreed to deliver on the projects within a year and half, it could not finalize the construction of a single sugar factory in seven years. “The steering committee made up of top government officials decided to give the project to METEC although they knew METEC had no capacity to undertake it,” Endawok told members of the Committee. 

Yet committee members rebutted that it was not acceptable to repeatedly postpone the due date. “The last time we heard your report, you agreed to finalize the construction of Beles 1 sugar factory by December 2017,” one of the members said to Endawok and his colleagues. “Seven months after the deadline, construction is still underway. This has to stop now.” 

However, Endawok, who assumed the leadership of ESC two years ago, noted that making the current officials of ESC responsible for the delay is unjustifiable. “It is not fair to judge us while the executive body and Parliament remain insensitive. This committee knows the exact progress of the projects. But we are the only ones blamed.”

Of course, members of the standing committee are well aware of the status of the projects. When they visited the Beles sugar project sites last year, they admired the progress, saying they were going well. They even went further by indicating 85Pct of the Beles 1 sugar project was complete. 

The Ministry of Public Enterprises (MoPE) is responsible for the 17 state enterprises, including ESC. “The Ministry assigns board members to state enterprises and corporations who report monthly to the Ministry on top of presenting reports to Parliament on a quarterly basis,” explains Wondafrash Assefa, director of Corporate Communications Directorate at MoPE. “The Ministry undertakes evaluations on the projects undertaken by these institutions. But we have no mandate to take direct measurements, because it is the job of the boards.”

When the Ministry presented its performance report for the 2017/18 fiscal year before Parliament on July 4, 2018, the main topic was the wide-ranging problems regarding sugar projects, including delays. “Parliament requested the Ministry to present another plan for the 2018/19 fiscal year and a definite reason why the projects failed,” adds Wondafrash. “The problem is due to a lack of contract management knowledge and poor follow-ups.”

However, Mekonnen Fisseha, associate professor of law at Mekelle University, argues there is strong evidence that corruption was used to shape the country’s economic direction and implementation of mega projects. “The fact that the state was heavily involved in many unfeasible projects shows that there is a desire for corrupt practices to help the state to unnecessarily expand its sphere of economic engagement,” he explains.

Yonatan Tesfaye, an opposition figure and former Public Relations head of the Ethiopian Blue Party agrees that there are groups within the government structure that shape the nation’s policies, legal environment and economy to benefit their own private interests, saying, “We know that there were puppet leaders put there by the state captors.” 

Yilkal Getnet, former leader of Ethiopian Blue Party and prominent opposition figure, agrees with Yonatan, and explains the country has been under state capture for a long time.  “The wealth of the nation has been controlled by a few people since the ruling party came to power close to three decades ago,” Yilkal says. “The legislative, judiciary and executive branches of the government are all controlled by a few people, who even go as far as crafting policies in favour of their needs.” 

According to Transparency International, an international non-governmental organization working on corruption, state capture is a situation where authoritative individuals, institutions, companies or groups within or outside a given nation determine its  policies, legal environment and economy to benefit and protect their own private interests through corruption. All state agents-the legislature, executive and judiciary-as well as regulatory agencies both at the federal and local levels can be subject to capture.

The expression ‘state capture’ was first used by the World Bank to describe the conditions in central Asian countries such as Kazakhstan, Uzbekistan and Kyrgyzstan, which separated from Soviet Union in 1991 and were in transition starting from the mid 1990s. The World Bank principally adopted the phrase ‘state capture’ to describe how small but powerful groups used their corrupt influence over the government officials of these countries to change and shape decision making process so as to strengthen their own economic positions. 

However, there is no universal consensus over the precise definition of state capture. For instance, Rasma Karklins (Professor Emeritus) of the department of political science at the Chicago Public Research University defines state capture as systematic high level political corruption that establishes a hidden political regime at odds with the constitutional purpose of state institutions. 

Daniel Kaufmann, an economist and  president of the Natural Resource Governance Institute, on the other hand, stresses that relating state capture with corruption is downplaying the extent of the problem, because when it comes to corruption, the outcome of the practice, whether it is a policy or regulatory decision, is not certain. In contrast, in cases of state capture the outcome is assured and likely to be beneficial to the captors. Scholars, however, have a common understanding of the broad definition of state capture: the existence of the influence of interest groups over laws, policies regulations and decisions. 

Endawok’s defense of himself and his colleagues against the accusation forwarded by the standing committee sheds light on the reality and degree of state capture in Ethiopia. “In order to finalize the projects, we recommended to our board to discontinue some of the construction activities and focus on selected ones,” he said. “But the board told us not to; it would be like crashing against a concrete wall. Even a few top government officials outside of the board warned us to go on as planned.”

Mekonnen explains, “There are clear indications that the ruling elite and the economic elite have been engaged in unhealthy and unprincipled benefit-driven relations, which the government itself has admitted. The mrger of political and economic power has been the manifestation of power politics in Ethiopia, and are seen both at federal and regional levels.”

The marriage between the political elite and economic elite are seen in the growing economic dominance of endowments established by the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF) coalition. In particular, the Endowment Fund for the Rehabilitation of Tigray (EFFORT), which is an umbrella company for a group of businesses involved in major industrial activities such as import and export, construction, agribusiness and mining, among others, plays a big role in the economy. Started with an initial capital of around USD100 million, EFFORT’s capital has now reached around USD3 billion, according to WikiLeaks. 

Government protectionism and excess demand in major sectors such as transportation, cement, and construction have ensured that many of the larger EFFORT companies are reaping large profits, according to information released by WikiLeaks in 2009. The same source also quotes Seeye Abraha, CEO of EFFORT from 1995 to 2001, as saying that these “party-statals” likely receive preferences even over the special treatment received by state-owned enterprises.

Party affiliated businesses can be considered manifestations of state capture, according to Mekonnen. “But the degree and gravity of the problem needs further inquiry. I don’t have ample evidence to boldly state that the hold of party affiliated businesses on the economy has greatly affected state capture in Ethiopia. However, conglomerate-controlled businesses are the biggest channels for corruption and embezzlement of public’ money.” 

Experts argue that the non-transparent nature of the four parties that formed EPRDF, and their economic sources have strengthened the grip of political party affiliated businesses. Thus, the main source of the problem lies in the huge government intervention through fusion of party and state as well as party property and state property.

Tsegaye Tegenu (PhD), senior lecturer of Social and Economic Geography at Uppsala University in Sweden, is one of the proponents of a free market economy. “Government intervention through a ‘picking winners and saving losers’ approach involves not only risk of misjudgement such as distorting competition; it also exposes the state to capture by interests that benefit from its intervention,” he says.“This is despite the fact that the market itself can ensure efficient allocation of resources. Instead of becoming directly involved in the market the government’s role should not be more than incentivizing the market.”

Experts like Eyob, however, go further. “State capture happens when groups capture some parts of the system. But what happened in Ethiopia is a deliberate action by the government itself,” he says. “The government fabricates and distorts every official report and statistic in order to gain legitimacy, including the annual economic growth rate, the level of poverty, and the unemployment rate.”

In a commentary entitled ‘Ethiopia at Cross-roads Again’  published in the 62nd edition of EBR edition, Alemayehu Geda, professor of economics at Addis Ababa University, noted the political course of gaining state legitimacy through the ideology of developmentalism invariably makes economic growth, poverty, inflation and related indicators political competition tools. “This, in turn, may blind political leaders from looking at the real unemployment and poverty levels on the ground,” he wrote.

To make his case, Alemayehu examines the official figure of people below the poverty line, which was officially declared by the government as 23.6Pct of the population in 2016. However, this figure is computed based on the assumption that an individual can survive on a minimum of ETB20 a day (ETB600 a month) for all his/her expenses including food, rent, transport, and clothing, which in his opinion, is very little to live on. But using the international poverty line cutoff of US1.25 a day (around ETB1,000 per month) raises the percentage around 65 to 70Pct (65 to 70 million people). 

While briefing Parliament about the 2018/19 budget in May 2018, Abraham Tekeste (PhD), minister of Finance and Economic Cooperation, rejected such conclusions, reaffirming that the percentage of people living under the poverty line is below 25.3Pct of the population. “Although the economy slowed down in 2016/17, Ethiopia managed to register 10.8Pct economic growth in 2017/18,” he told MPs. “The country registered 10.6Pct economic growth on average in the last 14 years.” 

Although the government claims the annual economic growth rate remained above double digits in the past decade, Alemayehu disagreed with the assessment while presenting his findings at a discussion organized in June 2018 by the Addis Ababa Chamber of Commerce. Using the double rule and source of growth analysis, he stated the most likely annual growth rate is between five percent and 8.8Pct. Yet Abrham argues economic growth has been inclusive and fairly distributed. 

Studies indicate that the economic growth and political transformation achieved by most developing countries like Ethiopia has started to lag in recent years, and with it trust in elected leaders. According to a study published by the Electoral Institute for Sustainable Democracy in Africa in 2017, although corruption outrages and inefficiencies are common in these countries, currently there is a far more threatening concern: countries experiencing democratic transition are becoming vulnerable to state capture aimed at democratic pillars of society such politicians, parties, journalists and the media as well as the police, the legislature, the executive, the judiciary and regulatory agencies.

South Africa is an example. For the first time in its history, a state capture narrative - as opposed to corruption – has emerged and gained momentum in South Africa in recent years following an escalating number of political scandals and thousands of leaked emails between the Gupta family and prominent government officials, including former President Jacob Zuma.

The considerable theory developed in Eastern Europe and Latin America as well as recent revelations and developments in South Africa reveal that state capture has profound implications for the erosion of democracy. In fact, the developments in South Africa raised the questions of whether and to what extent state capture may be affecting other African nations.

Just like South Africa, Gudeta Kebede, student at the University of Gothenburg (Sweden), in a study entitled ‘Political and Economic State Capture in Ethiopia’ stressed that the artificial nature and failure of the country’s transformation to democratic governance, and its legacy to the deficit of the political system, opened the door to corruption and facilitated a fertile breeding ground for human rights violations.

Evidence found during investigations by the Ethiopian Human Rights Commission (EHRC) support his findings. Addisu Gebregziabher (PhD), Chief Commissioner of EHRC told MPs the extent of human rights violations occurring in the country when he presented the Commission’s report prepared after visiting Kality and Zeway prisons last year. “Although there are signs of human right violations in various prisons, nothing has been done,” he said. 

According to legal experts, Ethiopia’s constitution does not explicitly regulate state capture. “But other relevant provisions such as accountability and transparency (Article 12) and the economic objectives under Article 89 provide the government’s economic objectives,” explains Mekonnen. “The whole sprit of the constitution makes it clear that the government is to strive for the interests and needs of its people. A government that engages in state capture is in clear violation of the will of the Ethiopian people.”

Some improvements have been seen after Prime Minister Abiy Ahmed (PhD) assumed power. Attorney General Berhanu Tsegaye recently announced the dismissal of five top prison officials for alleged human rights violations. “The top prison officials were relieved of their posts for failing to discharge their responsibilities and respect prisoners’ human rights,” said Berhanu.

Even the Office of the Prime Minister is aware of the growing influence of interest groups. According to a press release issued at the end of June 2018, the Office declared that  orchestrated activities have been undertake in order to block ongoing reform in the country. The statement read, “Interrupting electric power and telecom networks as well as creating economic collusion in an organized manner is being observed across the country. The committees drawn from various bodies are conducting investigations to bring the perpetrators of these illegal activities before court.”

Despite these attempts, experts argue no concrete measures have been taken to fight the problem.  “The new administration is unclear in a number of ways,” says Mekonnen. “So far, what we know is Prime Ministerial decrees over TVs and public forums. Except for the decision of the Executive Committee of the ruling party, I did not see any policy options from the new administration.”

In fact, Mekonnen says, state capture is still going on, against the the back drop of a growing personality cult. “When a society develops the idea that a leader is always right, there is a problem and what I see these days is the growing tendency towards populism at the expense of legalism.”

Yilkal also believes that state capture has continued during Abiy’s administration. “It seems like the Premier is attempting to become a king. He is trying to control everything from the media, opposition figures, and artists to religious leaders and investors. That is another way of monopolizing the political ground. This is, indeed, a character of state capture,” he says.

Yonatan argues differently. “There is a hope that power will be shared by the majority after the new Prime Minister took power, contrary to the situation that existed for more than two decades,” he says. “It shows that the influence of interest groups is weakening.”EBR

Ashenafi Endale and Samson Berhane contributed to this article. 


6th Year . July 16 - Aug 15 2018 . No.64


 

 

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samsonh@ethiopianbusinessreview.net (Samson Hailu) Topic Fri, 10 Aug 2018 15:00:00 +0000
Abiy Ahmed's First Three Months http://ethiopianbusinessreview.net/index.php/topic/item/5922-abiy-ahmeds-first-three-months http://ethiopianbusinessreview.net/index.php/topic/item/5922-abiy-ahmeds-first-three-months Abiy Ahmed's First Three Months

For most of the past two years, Abiy Ahmed was best known for being one of the major driving forces behind the economic revolution and reforms in the state of Oromia. But for the last 90 days, his actions as the new Prime Minister of Ethiopia have been grabbing the headlines.  Since he took power, changes and reforms have been announced almost every day. Among these reforms were the decision to fully or partially privatize key state owned enterprises; unconditional acceptance of the Algiers agreement-a peace agreement between the governments of Eritrea and Ethiopia signed on December 12, 2000, in Algiers, for the formal end of the Eritrean-Ethiopian War, which lasted from 1998 to 2000; and the release of thousands of inmates charged with and convicted of corruption and terrorism.  He also negotiated the release of thousands of Ethiopian prisoners in neighbouring countries.  Abiy reshuffled, appointed and demoted several members of the council of ministers; and even removed key officials in the military and security apparatus. The Premier also called on exiled opposition parties and media to open offices in Addis Ababa. 

The sweeping changes that Abiy undertook in a short period of time has enabled Africa’s youngest leader to garner tremendous support.  As a result, a team of released prisoners, bloggers and artists teamed up to organise a rally in Addis Ababa on June 23, in support of the premier’s mission of deepening nationwide reforms. On the day, millions of people flooded the Meskel Square chanting songs of support for the Prime Minister. The rally was going peacefully until a bomb was thrown to the stage. Although the attack didn’t cause fatalities on the spot, some victims later passed away while receiving treatment. EBR’s Samson Berhane explores the reform agendas of the premier and the challenges ahead.

When Prime Minister Abiy Ahmed (PhD) was sworn in before Parliament on April 2, 2018, he vowed to bring stability, unity and reform to the country. Initially there was a division between people who perceived him as just having the appearance of a reformist, without substance, and those who believed Abiy would honour his pledges. Others preferred to wait before making any judgment. Despite diverse expectations, he has made a hopeful start in his first days in office. At the very least, his ascent to power brought about a sharp drop in tension, although there is still much to be done. In fact some sceptics question if indeed Abiy’s accent to power can restore peace in the country. They base their claims on the continued mass eviction of Ethiopians in some parts of the country, including in Abiy’s home state of Oromia and the Southern Nations. A bomb attack during a rally of support on June 23 in Meskel Square, attended by millions of people highlighted the mixed feelings about the changes he has made. In spite of the rumours circulating among some in Addis, Fitsum Arega, Chief of Staff of the Prime Minister’s Office, could not confirm if the bomb attack was an attempt to assassinate the Prime Minister. 

Unlike previous leaders, Abiy has had to accomplish a lot in the first three months since he was appointed Prime Minister. A flurry of changes and reforms, that have sometimes been  perceived as strange, have been announced almost every day, giving Ethiopians a glimpse of what the future could hold for a country undermined by political violence and ethnic based conflicts, as well as a sluggish economic trajectory under the reign of his predecessors. 

But making such sweeping changes has required Abiy to walk a political tightrope. He has had to deviate from the policies and ideologies of the Ethiopian People’s Revolutionary Democratic Front (EPRDF), in power in Ethiopia for 27 years. His changes have revealed his intentions to introduce widespread policy changes from the get-go, including his decision to lift the state of emergency, fully or partially privatize key public owned enterprises, unconditionally implement the Algiers agreement -- a peace agreement between the governments of Eritrea and Ethiopia that ended the Eritrean-Ethiopian border war, and the release of thousands of inmates charged with and convicted of corruption and terrorism acts including Andargachew Tsige, who was on death row. His conciliatory speeches about forgiveness, peace, love, and brotherhood in many cities across the nation were designed to return a sense of unity and restore people’s confidence in the country. 

Many argue that any assessment of Abiy over his three months in office should not be so much about concrete results, basing their opinion on the fact that any new leader tends to be oblivious about governing, and Abiy needs to be allowed time to find his footing. Others, however, including some of his party comrades, assert he is going too far. But these arguments work in an ideal world where leaders are given time to even make mistakes and learn. 

Unfortunately, Abiy has to live in the country he inherited. Instead of having to learn, the Prime Minister has had to unite a politically alienated country, a ruling party on the edge of collapse, an economy in decline, and a disconcerted population calling for dynamic change. While speaking with people in Gondar and Bahir Dar towns, Abiy himself openly described how difficult and challenging the task ahead is, by mentioning the trouble he went through to facilitate the release of two monks who were arrested on terrorism charges. Although he didn’t say it word for word, his remarks indicate the tough resistance to the changes he has been advocating for, even from his own party. 

Despite many confrontations, Abiy has kept the wave of reform going, by allowing exiled opposition leaders to return to Ethiopia and engage in discussions about reforms, as well as balancing pragmatic power in executive, military and intelligence establishments. Such actions have strengthened the hope of many Ethiopians; even those who lost their loved ones to the political violence in the states of Amhara and Oromia over the last three years happily greeted him during his visits. However, a significant portion of the population, who have learned from the countless empty promises of EPRDF in the past, still remain cautious. But the majority were astounded and even surprised by his pace, leading some on social media to coin the term Prime Minister Abiy Bolt. 

Globally, his acceptance has been remarkably positive. Despite the US State Department’s official release of a report regarding human rights abuses a few weeks before Abiy’s inauguration, a statement released by the US Embassy in Addis Ababa after his appointment struck a hopeful tone. “This year has seen positive steps as well, including the release of thousands of prisoners. We are also encouraged by strong and clear statements by Prime Minister regarding the need for reforms,” read the statement.

In addition to getting a nod of approval from western governments, Abiy received warm welcomes when he visited Saudi Arabia, the United Arab Emirates, Djibouti, Sudan, Egypt, Rwanda, Uganda, and Somalia. He even managed to secure the release of hundreds of Ethiopian prisoners during his foreign visits. 

Flip-flop Politics

After being assigned as the chairperson of EPRDF, Abiy, who received 108 out of 180 votes during the 17-day meeting by the EPRDF’s Council to elect the party chairman three months ago, started distinguishing himself from his predecessor just one day after his swearing in. He went to Jigjiga in a bid to find a solution to the conflict between the states of Oromia and Ethio-Somali, which resulted in the displacement of almost one million people. He then went to Ambo, the epicentre of the three-year anti-government protests in the state of Oromia, before continuing on to Meqelle, Gondar, Bahir Dar, Assosa, Hawassa, Neqemte, Gambella and Welkitie towns to meet the local people. 

During his meeting with communities in Gambella he stressed that secularism does not always work, while during his visit to Hawassa, Abiy promised to include term limits for the prime minister in the constitution.

His local tour was followed by the lifting of the state of emergency and the release of more than a thousand inmates, including political prisoners and former government officials, such as Melaku Fenta, former director of Ethiopian Revenues and Customs Authority, and his deputy, Gebrewahid Woldegiorgis, as well as Alemayehu Gujo, former State Minister for Finance and Economic Cooperation who was charged with corruption acts and arrested after a parliamentary vote repealed his immunity.

Although a large number of people supported the release of prisoners, some people were wary. “While pardoning political prisoners is reasonable, I don’t see the point of releasing officials and business people charged with and convicted of corruption to bring about national reconciliation,” argues Beyene Petros (Prof.), a member of the four pary coalition Medrek Party.  

Mekonnen Fisseha, an assistant professor of law at Mekelle University, has similar concerns. “The release of prisoners, the majority of whom were charged with terrorism, grand corruption and other high crimes was not clear to many of us. In fact, [that] undermined the rule of law,” he said.

Abiy, however, begs to differ. “First we need to be clear about what terrorism is and who is a terrorist. Terrorism includes the use of force by government in order to prolong its power,” Abiy told members of Parliament on June 18, 2018. “EPRDF and the government have already apologised for many of the mistakes we made to stay in power, which includes torture and we need to forgive each other and move ahead.” As a first attempt to level the political field, he dined with leaders of civic societies, media outlets and opposition parties at the Jubilee Palace where he promised to create a conducive political environment that will benefit his party, the country, and the public. For some, however, the charm offensive is nothing but an extension of the rhetoric of the ruling party. “Although Abiy is a visionary leader, the chance that change will happen in the country is low, as the ideology followed by EPRDF doesn’t allow him to widen the political space,” said Beyene, pointing to the discomfort of the Tigray People’s Liberation Front (TPLF), one of the coalition of parties that makes up the EPRDF, regarding the way in which the executive committee of the ruling party makes decisions, as laid out in a recently released statement about the country’s ongoing situation. 

But Abiy’s charismatic leadership skills were on full display when he held talks with members of the Council of Ministers, televised through the state-owned Ethiopian Broadcasting Corporation. The Prime Minister, who has prior experience in military intelligence, also met with the high level army officers with the aim of bringing about reforms,  like ensuring institutional neutrality and independence in the defence force.  “The army should be loyal to the country and the constitution, not to the ruling party. It also should be a force that must accept the orders of the leader of the country,” Abiy told army officers, also announcing that his government has plans to build a naval force.

In a rather bold move he also relieved five long serving officials, including Sebhat Nega, formerly the head of the Foreign Relations Strategic Research Institute, Tadesse Haile, formerly an advisor to the Prime Minister for trade and industry policy planning and execution, and Kassu Illala (PhD) and Mekonnen Manyazewal from the institute of Policy Research. Abadula Gemeda, who was appointed as a security advisor to the Prime Minister after officially resigning as speaker of the House of Representatives, and Girma Birru, former Ethiopian Ambassador to the United States, were retired. Less than a month before, he reshuffled the cabinet, and appointed 10 new ministers, and 40 state ministers and directors. 

Only two months after taking power, Abiy rocked the military and intelligence establishment by replacing long serving chief of staff of the National Defence Force Samora Yunis (Gen) with Seare Mekonnen (Gen). In the same day, he appointed Adem Mohammed (Gen), chief of the Air Force, to lead the National Intelligence and Security Agency, a position held by Getachew Assefa, who served at the institution for over 15 years after the death of Kinfe Gebremariam in 2001.

The power shakeup, however, does not seem to be acceptable to some, including TPLF. The party denounced the recent reshuffle and departure of high level officials at the federal level in a statement released last month, saying it is against the principle of the party. Taking this into account, the party requested an emergency meeting of EPRDF’s executive body and council, which have 36 and 180 members respectively. Such realities portray a deep mistrust among the coalitions, according to analysts. “It is not clear whether he is acting within the EPRDF rules or he is acting as stand-alone Prime Minister,” says Mekonnen. “Factions have already been created.” 

But this didn’t stop Abiy from reconsidering the Algiers agreement. On June 5, 2018, the executive committee, chaired by Abiy, announced its decision to unconditionally accept the pact, with the aim of normalizing the relations between Ethiopia and Eritrea.  

While many western countries and analysts describe the situation between the two countries as ‘no war, no peace’, Abiy prefers to call it ‘a war with no deaths’. “The time when the country invests in the war must be over. Rather, we want a road and railway linking Asmara and Addis Ababa,” he said. 

 Convincing Eritrean President Isaias Afewerki to sit down and discuss matters that affect both countries for the first time since war broke out between the two countries in 1998 was a victory for the new PM. “The events and developments that have unfolded in our region in general and in Ethiopia in particular in the recent period warrant appropriate attention. Ethiopia is now at a turning point or transition,” Isaias said in a televised speech on Eritrean Martyr’s day, on June 19, 2018. “For this reason, and outside myopic considerations of public relations stunts and advantages, we will send a delegation to Addis Ababa to gauge current developments directly and in depth as well as to chart out a plan for continuous future action.”

Many people have supported EPRDF’s move to negotiations and restoration of peace with Eritrea. However, some have a different view on the issue. Residents of Erob, in the north of the state of Tigray, demonstrated against EPRDF’s decision to implement the agreement. Their concerns are also shared by Mekonnen. “The EPRDF Executive Committee’s decision to implement the Algiers agreement unconditionally does not seem right or timely,” argues Mekonnen. “In the first place, it is not clear how the recent decision differs from the previous one or how it will be implemented. I don’t see any circumstances changing in the rush to accept without any preconditions. It would be better to postpone until internal security is fully restored.” 

Abiy, however, argues there is nothing new when it comes to the Algiers agreement. “The Parliament and the Council of Ministers approved the Algiers agreement 16 years ago. The government also notified the Africa Union of its approval,” he told MPs. “So no new decision has been made by the government.”

A Change in Business, Economy

Echoing the political landscape, business has been very challenging in the last three years for many retailers, wholesalers, service providers, and manufacturers, primarily due to public unrest in the states of Oromia and Amhara. Street clashes between security forces were common and left hundreds dead, thousands displaced and many businesses closed. The appointment of the new premier meant a slowdown in unrest. Ashenafi Melka, a manufacturer and a wholesaler of shoe products, witnessed these changes. “Back then, we were unable to even pay salaries to our employees. But since April, our revenues and customer numbers have greatly improved,” explained Ashenafi, who owns a manufacturing company in Burayu and an outlet in Merkato, the largest open air market in Ethiopia. 

Kidist Habteyes, a cloth wholesaler in the same market, has had similar experiences. “Although the chronic shortage of foreign exchange has worsened, there is a noticeable change in the business,” said Kidst. “The number of customers has more than doubled since Abiy was appointed.”

Hotels, transport service providers, and manufactures are also amongst the businesses that have benefited from the peace and stability that came about after Abiy came into the picture. Retailers in various towns and regional states, who were insecure about conducting business in the capital, are now seen more often in Merkato. 

The financial industry has also felt the change. EBR spoke to tellers at the Commercial Bank of Ethiopia, Bunna and Oromia International banks, who revealed that there has been an increase in deposits after Abiy came to power.

Yet the issue of foreign currency continued to be a constant headache over the past three months. Unfortunately, it was during Abiy’s time in office that the country’s forex reserves reached historic low- unable to cover even a month of imports, according to sources. It was this situation that pushed the administration to make the decision to sell some of the shares of key state-owned enterprises, including Ethiopian Shipping Lines and Logistics Services Enterprises and Ethio telecom. Abiy has of course explained the economic merits of the partial privatization of these enterprises during his appearance before parliament on June 18.

This unprecedented move comes with a plan to expand mixed ownership or full privatization of some sectors, including railways, industrial parks and sugar. “Allowing the private sector to participate in these sectors makes the growth of the country more inclusive” reads an official statement from the ruling party. 

Kebour Ghenna, executive director of the Pan African Chamber of Commerce and Industry, is one of the individuals who opposed the EPRDF’s decision, although he recognized that some individual proposals for privatization have considerable merit. “I personally oppose the privatization scheme that transfers profit earned by public institutions to private individuals,” Kebour wrote on his Facebook page.

Atlaw Alemu, dean of the College of Business and Economics at Addis Ababa University, argues privatization should not be taken as a temporary solution. “What matters is allowing private entities to flourish in sectors that are solely controlled by the government. In doing so, it is possible to realize competitiveness, productivity and efficiency.” 

One of the contentious public institutions whose shares are expected to be made available for sale is Ethiopian Airlines, one of the biggest airlines in Africa, with international destinations covering five continents. The Airline, which recently signed a management agreement to jointly develop Zambia and Guinea Airways, is one of the most profitable public institutions in Ethiopia, with a profit of USD232 million last year. Likewise, the Shipping Enterprise and Ethio telecom registered gross profits of USD370 million and USD1.1 billion, respectively.

Experts say that knowing the motive behind the privatization is important to conclude whether the recent decision of the ruling party would be beneficial to the economy or not.  The public institutions are up for sale, either partially or fully, not because the government has a desire to promote the private sector, argue scholars. Rather, it is a desperate response to the foreign currency crisis.

“These actions don’t show that the economy is opening at all. It should be noted that the majority stakes of key public institutions will remain in the hands of the state, and that the industries which have been closed to foreign investors are still closed,” explains Abdulmenan Mohammed, a financial analyst based in London. 

Abiy doesn’t deny that the country is desperately in need of foreign currency. “The country has been borrowing massive amounts of money from external sources in the past. Since the projects started with borrowed money have yet to be finalized, the country is unable to service its debt,” he said during his second appearance in the Parliament. “There should be economic reforms to tackle this challenge.”

But Abdulmenan says that it is doubtful that Ethiopia is in a position to open up key sectors such telecom, logistics and airlines to foreign investors, or that privatization of key public enterprises, most of which are highly indebted, will have a positive contribution to the economy. “What is important is to make sure the privatization activities are done in the best interest of the public. The question is how the government will discharge this responsibility properly. To do so, bringing ailing enterprises back on track, reforming the market, and crafting a transparent privatization process and instituting accountability are crucial.”

On top of such doubts, there are also worries about the actual procedures of the selling of public enterprises. It is feared that the highly-indebted and loss-making nature of the enterprises, whose debt is around 30Pct of the GDP, will be an obstacle for the transfer of shares to private entities. “It is going to be very difficult to sell the state owned enterprises as most of them are in a shambles,” stresses Abdulmenan. 

Eyob Tesfaye (PhD), an economist and policy analyst, agrees. “Considering their complex debt structure and assets, it is difficult to sell the enterprises in less than two years,” he remarked. Such hurdles are not singular to Ethiopia. The Indian government faced similar challenges when it tried to privatize Air India, which has more than 126 aircrafts, primarily due to its crippling debt and dreadful operational performance. 

Both Eyob and Abdulmenan suggests Ethiopia needs to first change the laws, prepare a regulatory framework and set up regulatory bodies, so as not to repeat the failures of other countries that have privatized their strategic public enterprises. 

The future may look bright for Abiy Ahmed’s administration, but the pitfalls that sank the leaderships of his predecessors are still present. Until the talk is translated into action, however, the day to day life of the Ethiopian people who have lost so much in the last three years is still up in the air.


6th Year . June 16 - July 15 2018 . No.63


 

 

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Samson.b@ethiopianbusinessrevew.net (Samson Berhane) Topic Thu, 02 Aug 2018 22:30:00 +0000
Ethiopias Alarming Debt http://ethiopianbusinessreview.net/index.php/topic/item/5906-ethiopias-alarming-debt http://ethiopianbusinessreview.net/index.php/topic/item/5906-ethiopias-alarming-debt Ethiopias Alarming Debt

Debt stress has always been a contentious matter in Ethiopia. As the country pursues billions of dollars worth of infrastructural development projects, external debt stock has been growing proportionally, now accounting for almost 30Pct of the GDP. While the risk to debt sustainability escalates, several challenges limit the prospects for bucking this trend. This includes the wide gap between investment and savings, and the underperformance of the export sector. With such factors in mind, the International Monetary Fund (IMF), changed the debt stress rating of Ethiopia from moderate to high recently, hinting that the chance of defaulting on loans is increasing. Although the government is able to take corrective measures such as refraining from taking commercial loans, experts say that is too late. EBR’s Samson Berhane spoke to government officials, macroeconomists and financial analysts to probe into the matter.

Ever since Ethiopia began the first phase of the Growth and Transformation Plan (GTP I) in late 2010 with rather ambitious targets, the country has been dependent on external borrowing to bring about growth and productivity improvements in the manufacturing sector and infrastructure development. After constructing railway networks, cross-country roads, industrial parks, and multiple sugar and fertilizer factories, the country, which is trapped in a quagmire of mega projects, has been sinking into external debt. 

Ethiopia’s external debt stock increased by a whopping 207.6Pct from USD7.8 billion in 2010 to USD24 billion in September 2017, which is 40Pct of the gross domestic product (GDP), according to the Public Sector Debt Statistical Bulletin published by the Ministry of Finance and Economic Development in December 2017. Adding in domestic debt, which currently stands at USD22.6 billion, shoots the debt figure to 57Pct of the GDP.  Although investment has increased extraordinarily from a weak base, the most decisive aspects of the first and second phases of the GTP have yet to materialize. In fact, the mounting external debt has increased the country’s vulnerability.

The swelling appetite of the government for growth has worsened the external public debt stress rating of Ethiopia from moderate to high risk in early 2018, signaling the country’s low capacity to service its debts unless it takes preventive measures. The International Monetary Fund (IMF) rates external public debt stress at four levels: low, moderate, high and in debt distress. If countries with high debt risk ratings don’t become more self-reliant while undertaking heavy infrastructure and social development projects, they won’t be able to avoid the risk of a debt trap, according to IMF. 

Atlaw Alemu (PhD), head of the economics department at Addis Ababa University (AAU) with 16 years of experience, shares the IMF’s assessment.“Most projects constructed using commercial loans do not pay off in the short term. Their return on investment is very low,” he said, citing the railway projects, power generation projects and industrial parks constructed over the past four years. “The payment period of the loan is short and the interest is very high. It is not clear why the government keeps taking non-concessional loans.”

There are two forms of external public borrowing: concessional and non- concessional loans. Concessional loans are provided with low interest rates or longer grace periods than normal market loans. According to the IMF, concessional loans have average interest rates of 1.3Pct, maturity of 30.3 years and grace periods of 5.7 years. On the other hand, non-concessional loan are provided at market-based interest rates. 

The structure of debt in Ethiopia is such that it is largely made up of concessional credit. Out of the total external debt, 63Pct is non-concessional loans accessed from bilateral sources and private creditors. As a result, risks have increased, according to the Debt Sustainability Analysis conducted by the IMF in 2017. This is because debt service indicators have deteriorated, mostly because of export underperformance, even if Ethiopia’s debt leverage remains unchanged from 2016. 

Admasu Nebebe, state minister for Finance and Economic Cooperation, however, stands against the IMF’s assessment. “It is a short term problem and is not going to have an impact on pending projects,” he said. “The country is in a good state in all parameters that measure the debt stress of a given country, except for export.”

Is Ethiopia’s External Debt Sustainable?

Based on the Country Policy and Institutional Assessment conducted in 2015, which classified Ethiopia as a medium performer, the minimum thresholds for achieving debt sustainability are set at 40Pct, 250Pct and 150Pct of the present value of debt-to-GDP, debt-to-domestic revenue and debt -to-exports, respectively. The IMF’s Analysis, which shows Ethiopia’s projected debt burden over the next 20 years, taking into consideration normal and extreme circumstances, reveals that the present value of debt-to-GDP stood at 22.6Pct in 2016/17, well above the minimum threshold. This trend is expected to continue for the next 20 years. 

Yet experts stress that given the size of external debt in relation to the country’s GDP, the economy is unlikely to produce sufficient revenue to pay back loans without incurring further debt. “Such rates would exist in a country where the government is a powerful and dominant player, and the private sector is not vibrant,” explained a macroeconomist with two decades of experience. 

Nonetheless, Tyler Cowen, a professor of Economics at George Mason University, is not overly concerned, alluding to the case of Singapore, which was once labeled a high risk country with a debt to GDP ratio of over 100Pct, but managed to repay its debts despite the IMF’s projections. “The rise in debt to GDP ratio might show the risk is higher, but it does not matter,” he said, during a press briefing held at the US Embassy in Addis Ababa last month. 

Irrespective of the swell in the ratio, it is possible for Ethiopia to remain unharmed, according to Cowen. “The question should be whether the debt outraces the growth or vice versa. Reducing additional borrowing while focusing on debt servicing can help Ethiopia remain intact,” he added.

Alemayehu Geda, professor of Economics at AAU, is amongst those who believe the debt-to-GDP ratio might not accurately show the country’s debt stress risk, but he takes a different perspective. “As Ethiopia’s GDP is overstated due to various estimation errors, the ratio is even higher than the current figure, which signals that the chance of default is higher. This will adversely affect the country’s credit rating and record,” he said. 

Just like the present value of debt-to-GDP, the current value of future debt-to-revenue ratio will remain below the minimum threshold in the next 20 years under normal and extreme circumstances, according to Debt Sustainability Analysis. In 2016/17, it stood at 141.7Pct, 73 percentage points lower than the threshold. 

But when it comes to the second indicator: present value of debt-to-export ratio, the ugly truth is uncovered. Even assuming all variables remain constant in the future, the present value of debt-to-export ratio begins to surpass the benchmark in 2017/18 with 271.9Pct, which is 121.9 percentage points above the threshold. IMF projections show that the ratio will only fall below the 150Pct threshold in 2021/22. 

Even worse, the ratio, which is already above the threshold under normal circumstances, exceeds the threshold under extreme conditions for the next nine years. Dependency on only a few export commodities, coupled with low export revenues, makes Ethiopia especially vulnerable to export shocks, according to the IMF. 

“Had we achieved export earnings targets, the sustainability of external debt would never have been an issue,” argues Admasu, explaining the importance of exports in determining debt sustainability. 

At the end of the GTP I period in 2014/15, the share of exports to GDP at current market price was targeted to reach 31.2Pct from 10.5Pct in 2009/10. In absolute terms, the plan was to increase export earnings from USD2 billion to USD6.5 billion within five years. However, the actual achievement fell short of the target, and annual export earnings barely surpassed the USD3 billion mark. 

During the ongoing five-year plan period, the export sector has remained sluggish, despite the government’s plan of increasing foreign exchange earnings from merchandize exports from USD3.1 billion in 2014/15 to about USD13.9 billion in 2019/20.

None of the various measures taken by the government to promote exports have brought about much needed change. Even the 15Pct devaluation of the local currency in October 2017 against the basket of major foreign currencies did not provide a cushion, as data obtained from the Ministry of Trade indicates. In the first three quarters of the current financial year, the country’s export revenues were around USD2.1 billion, showing a meager four percent rise compared to the same period last year.   

On the other hand, imports reached almost USD17 billion in the last financial year, resulting in a trade deficit of USD14 billion. On top of this, more than half of the country’s export commodities are agricultural products, which have unstable prices in the international market. Thus, the trade deficit is expected to widen as the prices of agricultural commodities face a predicted decline.

“There is a big implementation gap,” argues Atlaw. “There is no entity tasked with promoting and following up the export sector. Establishing a separate body would have helped the country to integrate services provided to exporters, and it would play a major role in minimizing the role of intermediaries and encouraging exporters.” 

But for the moment, the export sector, which has always been volatile, throws the sustainability of external debt in Ethiopia into question. Even adding the foreign earnings that come in the form of remittances doesn’t reduce the vulnerability of the country to the mounting external debt. 

In Ethiopia, remittances are becoming the major source of foreign currency reaching USD4.4 billion in 2016/17. The share of remittances in GDP stood at 5.5Pct in the same year, well above exports, which accounted for 3.6Pct of GDP. Yet the present value of the debt-to-exports-plus-remittances ratio continues to breach its threshold. The violation of the minimum thresholds even after adding remittances paints a grim picture about the debt sustainability situation in Ethiopia. 

 Impact on Economic Growth, Private Sector 

Scholars like Catherine Patillio, a strategist at the World Bank, who examined debt sustainability by studying the experiences of 61 developing countries, stress that external debt has a positive impact on economic growth. Since developing nations have small capital stock and low levels of saving at the early stages of their development, external borrowing can help to bridge the financial gap, according to Patillio. 

Likewise, when Ethiopia embarked on an ambitious five-year plan in 2010, the share of domestic savings in relation to GDP was 9.5Pct, while the investment rate was around 23Pct of GDP. The gap between the two forced the government to lean on external borrowing, partially to invest in growth enhancing sectors such as infrastructure and social sectors. Seven years down the line, however, the gap between savings and investment remains wide. Last financial year, domestic savings to GDP ratio stood at 24.1Pct, while investment to GDP ratio reached 39Pct. 

Although the huge gap between saving and investment indicates that the government is likely to continue with its previous style, officials stress that the government will not go beyond a level that surpasses the country’s debt repayment ability.  “We have set a threshold for each state-owned enterprise (SOEs) that wants to take commercial loans from various sources,”     explains Admasu. “Contrary to the previous approach, a new committee that approves or rejects the debt proposal of any government institution and SOEs was established by the MoFEC.” 

However, another macroeconomist who has spent three decades in the field believes such measures won’t be fruitful in the short term. “The measures should have been implemented before the crisis,” he said. 

One of the important conditions for external loans to have a positive economic impact on a credit receiver country is to guarantee that the marginal productivity of each external loan, at least, is greater than the cost of the principal and interest repayment, according to Patillio. This condition requires that the external loan is in productive sectors that improve the productivity of other sectors, so that external debt servicing will not hold back the borrower’s economic growth.

But if external credit is invested in an unproductive way, the expected gains from external loans will be much less than the cost of borrowing, which is the case in Ethiopia. One case in point is the sugar development project started by the government seven years ago. Despite none of the factories having started operation, Ethiopia is being forced to spend a significant amount of hard currency to service its debt. In face, in the past two years, the country has spent USD1.2 billion annually to repay its debt. 

For the macroeconomist, negotiating with debtors for rescheduling would be helpful until the projects start paying off. Such an approach, however, would be tough for Ethiopia, according to Alemayehu. “The expensive loans taken from China do not only impact debt servicing, but also on the country’s sovereignty,” he remarked. 

China, whose financing model is very different from the traditional aid programs of European countries and the United States, is the main bilateral partner of African countries, providing billions of dollar of concessional loans. Between 2000 and 2014, more than USD59 billion was provided by the Chinese Exim Bank to finance African governments and state-owned enterprises. 

Yet Admasu is still hopeful. “Despite the challenging situation, the country is very capable of fulfilling its debt obligations properly. Meanwhile, the industrial parks built across the country will bolster export proceeds, and increase the potential of the country to repay its credits.”

In spite of officials’ optimism, the adverse impact of the debt stress is starting to be seen.  The World Bank limited Ethiopia’s non concessional loan borrowing to below USD400 million starting in March 2018. Even members of Parliament voiced their concerns about external debt management during a session held last month. “The effectiveness of the loan financed projects must be checked. The reality might be different from our expectations. We might be passing a heavy debt burden to the next generation,” Mesfin Chirnet, an MP from Southern state said, when an aggregate of one billion birr worth of loan agreements with the World Bank was tabled before Parliament for approval. 

Experts are also certain that the swell in debt stock will leave a scar on the economy. “Unless the government postpones the mega infrastructural development projects, it will be exposed to debt [stress], whether external or internal,” argues Alemayehu. “The problem would turn into a vicious cyle.

The other impact of increasing external debt is its constraining effect on liquidity, which is caused by channeling limited export earnings to service external debt instead of using it to raise the productivity of private investments. Indeed, the external debt crowds out the private sector. 

“Coupled with the existing crisis, servicing debts might spur a rise in taxes, which would discourage investments and crowd out the private sector,” explains Alemayehu.  “It will also erode the inadequate hard currency available for imports and adversely affect businesses and investment projects that are dependent on imported goods.” 

Abdulmenan Mohammed, a senior financial analyst in London agrees. “Increased government demand for foreign currencies for the repayment of debts and interest has affected the forex operation of the financial sector. A widening budget deficit due to excessive debt repayment forces the government to scramble on the financial resources of the commercial banks in competition with private sector.”


 

6th Year . June 2018 . No.62


 

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Samson.b@ethiopianbusinessrevew.net (Samson Berhane) Topic Sat, 07 Jul 2018 08:54:48 +0000
The Politics of Urban Land Policy, Affordable Housing http://ethiopianbusinessreview.net/index.php/topic/item/5889-the-politics-of-urban-lad-policy-affordable-housing http://ethiopianbusinessreview.net/index.php/topic/item/5889-the-politics-of-urban-lad-policy-affordable-housing The Politics of Urban Land Policy, Affordable Housing

As housing affordability in the capital becomes a hot issue, the twin problems of ‘asset bubbles’ and housing affordability have challenged the minds of policy-makers, experts and the general public. The demand for housing has kept increasing in urban areas like Addis Ababa, whereas the supply of land has remained unchanged, leading to inflated prices. This, in turn, diminishes the affordability of houses for residents.  Worryingly, any low and average income earners are unable to construct or buy their own houses due to the skyrocketing lease prices. While experts attribute the problem to the law governing urban land distribution, the government remains firm in its position that there is no shortage, Samson Berhane, EBR’s staff writer, reports.

Two years ago, 28 year old Biruk Assefa, who makes a monthly net salary of ETB7,000 working at a private insurance company, decided to buy the title deed of a 140 square meter plot of land in Legetafo, on the outskirts of the capital, Addis Ababa. He paid ETB300,000 for the plot, half of which he had saved over a period of three years (initially for the purpose of buying a 20/80 condominium apartment). The other half came from his family. 

But the dream of owning a house never came true for Biruk. “I spent most of my savings to purchase the land so I didn’t have the money required to start construction,” Biruk told EBR. “I have been unable to start yet.”

Buying a plot and constructing a house or purchasing an already-built residence is one of the options available for urbanites like Biruk in Ethiopia. Yet, the overwhelming majority of households in urban areas like Addis Ababa aren’t able to build or buy their own homes. This is because of ballooning land prices, coupled with the surge in construction material costs, which have kept many residents from their right to housing, which is recognized in a number of international human rights instruments.

One alternative for residents of urban areas who want to own a house is to lease land from the government through an auction and build their own houses. Between 2011 and 2016, close to 134 hectare of land was leased through 27 rounds of auctioning in Addis Ababa, with the smallest area being 125 square meters and the largest being 16,750 square meters. More than 75Pct of the total bidders leased land for residential purposes, according to the Addis Ababa Land Management Bureau. 

There were at least 20 bidders vying to lease each plot of land up for auction, indicating that the demand for land exceeds the supply by the same amount. Yet, residents are unable to afford the lease price. The average offer for a square meter of land grew from ETB4,716 in the first round of auctioning during 2013 to ETB20,804 in the 28th round last year, which leads to the conclusion that the minimum amount needed to lease at least 125Sqm of land at auction is no less than ETB2.5 million. 

A small fraction of people in urban areas also buy houses from real estate developers. Ever since Ayat Real Estate became the first real estate company to develop houses, housing companies, both local and foreign, have flourished, delivering thousands of apartments and villas across the country. But their cost have become unreachable for low income earners.

So even the real estate sector, which contributed 12.5Pct to economic growth over the past decade, is not in a position to fill the city’s housing gap. As of 2016, there were 630 large scale real estate investments in the country, 23Pct of which were foreign owned. Moreover, real estate and rental businesses accounted for 56.2Pct of the total capital of investments that became operational in the past financial year.

The land price surge has also affected the real estate market, according to industry insiders EBR spoke to. “It is getting worse every year,” said a real estate developer, who spent more than ETB16 million to lease land on which to build an apartment building that is likely to cost her ETB80 million. “Had the land lease price stabilized, we could have bought the land two or three years ago and delivered the houses for a cheaper price than we are planning to now.” 

Mulugeta Tesfakiros, founder and major shareholder of Muller Real Estate, feels the same. “I was asked to pay ETB20 million to buy the title deed for a land valued at around ETB2.6 million eight years ago. If increases in price continue like this, only those with high capital will survive in the housing market, which undermines competitiveness.”

Waiting to be the winner of a condominium house is the last remaining option that exists for residents of Addis. One million people have registered for condominiums so far. However, the government has only constructed and transferred over 176,000 condominiums so far. To satisfy the current demand, it would take over 60 years at the current rate of delivery. “It is a gamble no one can win,” says Anteneh Tesfaye, an expert with 12 years of experience in urban planning and development, who is doing a thesis on the affordability of houses to low income people.

On top of this, the rising cost of condominium houses is evaporating the slim hope of residents of Addis. The cost of three bedroom condominium house under 40/60 scheme, for instance, showed a 56Pct rise to ETB829,568 during the last few years. 

The huge imbalance between the demand and supply of housing units in the capital has reached the point where there are 361 houses per 1,000 people in 2016, according to a 2017 study by the Ethiopian Institute of Architecture, Building Construction and City Development (EIABC).The demand is also expected to surge ahead as the capital, which contributes half of the nation’s GDP, experiences a surge in rural migration.  

Faulty policy or implementation gap? 

In Ethiopia, urban land is provided to residents on a restricted basis. This means the land use rights are obtained from the landowner, which in Ethiopia’s case is the state, for a specific period (up to 99 years). When the government became the sole provider of land through leasing and put forward a small fraction of the land in its hands on the market, the demand for land surpassed supply, and raised the lease price. 

All the anecdotal and fact based evidence demonstrates that because of the urban land price surge, as well as the increased cost of construction, affording and owning housing through almost all the available options is becoming very difficult for urban residents. The price of land is also growing at a higher rate than the country’s average inflation rate; whereas average prices of land grew by 50Pct over the past four years in the capital, the general annual inflation rate averaged below 10Pct. These factors combine to make acquiring land for the middle class almost unthinkable. 

Many attribute the surge in land lease price to the existing law governing urban land, which states that urban land must be held by leasehold through a modality of tender or allotment. “Using this approach had brought about shortages of land, which in turn, increased the lease price,” argues Mulugeta. 

Although this is a clear manifestation of the disparity between the demand and supply of land, this argument does not hold water for the Ministry of Urban Development & Housing (MoUDH). “It is difficult to conclude that there is a shortage of land in a city where there is no clearly defined land plot registration system. It might be due to a poor land management system,” said Ethiopia Bedecha, communications director of the Ministry of Urban Development & Housing (MoUDH), hinting that a conclusion would be reached after the newly established Urban Land and Property Registration Agency digitally overhauls the country’s land information system.

For Fasil Giorghis, an expert in urban planning and a lecturer at EIABC, the price surge occurs due to the inefficiency of the urban land holding proclamation. “The proclamation doesn’t specify setting price ceilings for plots during land lease auctions in a manner that in inline with the free market principle. On other hand, although the proclamation dictates every plot of urban land should have a bench mark price, which should be updated at least every two years,  the failure to do so has contributed to the crisis observed in the land market”, he said.

Jemal Aliyi, general manager of the Land Bank and Transfer Office says although the proclamation that was amended and approved by Parliament seven years ago states that benchmark prices should be revised, that has not been the case in many urban areas, including Addis Ababa. “This is a deliberate action taken by the government to control prices. Had we used an updated bench mark price, the price of land would have skyrocketed even higher,” Jemal argues.

This is, however, very concerning for Tesfaye Dina, owner and major shareholder of Boran Real Estate. “Not revising the bench mark price based on the law of the country can push bidders to make uninformed decisions,” said Tesfaye, whose company tried to buy 1,135Sqm of land for 45,000 per square metre in the 28th round of auctioning, but lost out to a bid of ETB 60,000. “I remember I leased a square metre of land for ETB256 when my partners and I decided to open a real estate development company. Now, it’s hard to get land with an offer of twenty times this amount. These increases have raised the share of land in the total cost of construction from less than 10Pct to more than 20Pct, in my experience,” Tesfaye recalled. 

On the other hand, Tekie Alemu, an economist with over thirty years of experience, thinks the upsurge in prices of land was brought about by individuals. “As the requirements to participate in the land auction become looser, some bidders offer exaggerated bids, but usually fail to show up to pay the required amount,” he explained, mentioning that 32 winners faded away after offering winning prices to lease land last year. 

As an attempt to combat this, the Ministry of Urban Housing & Development (MoUDH) is presently amending the lease proclamation, to include, among other things, stronger proof of financial competence, which will reduce underutilization of land, as well as the doubling of the bid bond aimed at reducing fake bids. The bill, which is still under review by the MoUDH, also requires developers to deposit 25Pct of their project costs in a closed bank account in order to lease land through a grant, according to the Ministry.

In addition to prices not being regularly revised, there are also concerns over the method of computation of benchmark prices, although it was effective in stabilizing the land market during its first two years of implementation. While benchmarks are estimated based on the income and living conditions of residents, it overlooks factors such as optimality in size of the land, distance from the center, accessibility to basic services, as well as lease period, as is pointed out by Melaku Tanku and Eyasu Kumerain a study submitted to the Addis Ababa Chamber of Commerce and Sectoral Associations (AACCSA). 

Industry insiders also share this argument. “These factors are crucial in deciding the prices of houses,” said a real estate developer, who is building apartments in Arat Kilo, mentioning the case of Kenya, where the minimum price of leasehold sales are determined by the selling prices of private businesses, land use plan, site location and development level of infrastructure and other related factors.

“Following the business as usual approach is not a solution to the land shortage crisis,” argues Tesfaye. “There should be mechanism where the private sector and individuals can own or transfer the land at a reasonable price. In doing so, the demand and supply will govern the land market.” 

Experts also have similar concerns. “More government involvement exposes the land market to corruption and misappropriation,” said an urban planner at EIABC with over 15 years of experiences. “Allowing the private sector and individuals to flexibly transact land is important as it can have the capacity to slow down the housing demand, at least for the middle class.”

Learning from best practices 

Other countries with different urban land policies than Ethiopia have been successful in stabilizing their land markets. In Kenya, where there is a mixed land holding system by the government and private holders,  supplies of urban land are determined by demand and supply. Specifically, the transfer of land use rights is through freehold sale, leasehold sale and grants. Using these approaches, the average price of land rose six-fold over the past decade in Nairobi; the price of land in Addis increased five times in only five years.

Even countries which employ a similar urban land policy as Ethiopia and recently implemented flexible land management systems are performing better. This includes Botswana where urban land can be owned by the state, but the private sector is allowed to engage in the land market using public private partnership approaches. The government then becomes a facilitator in land servicing, instead of being a sole player. This contributes to the construction of secondary infrastructural networks and supply of houses, reduced housing shortages, and saved public funds, according to a study by the Department of Architecture and Planning, in the University of Botswana. Nonetheless, Desalegn Rahamato(Prof), former head of the Forum for Social Studies believes it might be difficult to replicate this success in Ethiopia. “History and culture are crucial to making a significant change in urban land policy. Otherwise the probability of success in privatizing land is very low,” he told EBR. 

Yet, studies conducted across emerging economies affirm that government intervention has an adverse impact on the housing market. Xin Janet, Siqi Yan and Wu Qun at the Nanjing Agricultural University, in their study entitled ‘Government intervention in land market and its impacts on land supply and new housing supply: Evidence from major Chinese markets’ conducted three years ago stressed that government intervention in the Chinese land market caused shortages of land supply for housing development, which then brought a decline in the housing supply. 

Tekie, the economist, agrees, but has a different perspective. “It might be true that government intervention has an adverse impact on land supply, thereby affordability of houses. But even though the government is willing to privatize urban land, there is no mechanism to do it in Ethiopia,” he commented.

Experts also blame the current land allocation mechanism. “The existing proclamation has serious flaws. It is makes the government and the rich richer, while leasing land becomes a dream that can never be achieved for poorer people,” says Fasil. “Other mechanisms such as availing land based on lease arrangement, or for free to house seekers who want to build houses organized under cooperatives or unions, should be adopted.” 

Fasil cites the experience of Switzerland, which managed to stabilize its housing and land market through cooperatives. After being introduced in early 20th century, cooperative housing became popular and currently constitute one-fifth of housing in Switzerland. 

Actually, private housing cooperatives are not a new concept in Ethiopia. They were popular during the Dergue Regime and continued after the current ruling party took power. The City Administration provided 2,049plots, from 75 meter squared to 250 meter squared, to housing cooperatives in Addis Ababa between 1995 and 2002. The figure increased to 60,000 plots by 2005. Nonetheless, it has rarely been practiced since then.

However, the state of Oromia Land Management Bureau is currently putting the cooperative system into practice, which is making land available free of payment in towns surrounding the capital. The land, which is intended to help those troubled by the housing shortage in Addis, is available to teachers, civil servants and employees who organize themselves under cooperatives. Likewise, the state of Tigray made land available to 30,000 households using the same arrangement. “Similar approaches are going to be practiced in other regional states as a preventive measure for the housing shortage,” said Ethiopia Bedecha.

Moreover, to avert the shortage, experts such as  Anteneh listed successful strategies such as community based housing projects that were built by taking the housing demand and land shortages into account. One of them is the Community-based cost effective houses build in cooperation with Redd Barna, Norwegian Save the Children Fund, around Menen High School. Constructed during the Dergue Regime, the houses were built in cooperation with the government and the community. The former built half of the construction and the latter complete it by forming a union. 

Similar projects aimed at satisfying the housing demand of low-income residents implemented in Saris, Addis Sefer. Executed with the help of World Bank, individual home seekers who organized themselves into unions were given designs to build their own houses, while the government provided utilities and sanitation facilities such as toilets. “Such self-help projects, which use bottom up approaches, will help the government ensure equitable distribution of land, and thereby houses,” said Anteneh.

Undoubtedly, the main problem related to urban land emanates from the law that restricts and limits the supply of land, which is owned by the state. However, the experiences of many countries that follow similar urban land policies to Ethiopia demonstrate that the country can make it work by modernizing the land management system and minimizing implementation gaps.


6th Year . May 16  - June 15 2018 . No.61 


 

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Samson.b@ethiopianbusinessrevew.net (Samson Berhane) Topic Mon, 11 Jun 2018 19:25:26 +0000
Giveaways or stimulus http://ethiopianbusinessreview.net/index.php/topic/item/647-giveaways-or-stimulus-the-dilemma-behind-investment-incentives http://ethiopianbusinessreview.net/index.php/topic/item/647-giveaways-or-stimulus-the-dilemma-behind-investment-incentives Giveaways or stimulus

The Dilemma Behind Investment Incentives

Many emerging economies like Ethiopia use tax incentives to offset hindrances in the general tax system and as a counterbalance to disadvantages that investors may face. This includes bureaucracies, a weak administration and lack of infrastructure. However, the benefits of such a system have always been questioned by scholars. In Ethiopia’s case, many organizations, including the IMF, have indicated that generous tax exemptions and incentive packages for local and foreign investors present a major challenge to the country’s tax administration system. Just in the first half of the current financial year, over ETB34.2 billion was relinquished to beneficiaries under the duty free scheme, accounting for 37Pct of the nation’s tax revenues. While the figure is mounting year after year, various institutions such as the Federal Ethics and Anti Corruption Commission are signaling incentives’ exposure to misappropriation and corruption. Meanwhile, the government is attempting to enforce proper usage of incentives, and has established a separate office to handle such privileges and prevent abuses, as Ashenafi Endale, EBR’s Staff Writer report. 

Just last month, officials and experts from the Ethiopian Revenues and Customs Authority (ERCA) and other government institutions conducted checks on items imported by investors entitled to duty free privileges. Surprisingly, the team found many items imported contrary to the guidelines of the incentives they used. 

Many investors engaged in the manufacturing sector and entitled to duty free privileges were caught importing finished products, instead of semi-processed items that are supposed to be assembled locally. “In most cases, especially in electronics, the items imported were almost-finished products that require no or little local processing,” explained Mulugeta Beyene, director of the Manufacturing and Duty Free Support Directorate at ERCA. The Directorate, which is currently under establishment, follows up and monitors the proper use of incentives, which have been exposed to abuse. 

Right after the probe, ERCA temporarily cut 55 businesses from their entitlement to duty free privileges for one round of shipment. This is bad news for a country like Ethiopia which provides scarce financial as well as non-financial incentives to attract as many local and foreign investments as possible into the manufacturing and export sectors.

Ethiopia offers financial incentives such as tax reduction and holidays, as well as customs duty exemptions, grants and subsidies for companies engaged in manufacturing activities, including textile, leather, chemical, pharmaceuticals and mineral production. The construction and agro-processing as well as hotel and tourism industries also benefit from financial incentives. 

Although the total amount of money forgone in the form of monetary incentives is unavailable, it is easy to conclude that Ethiopia is losing a good deal of financial resources, just by looking at the revenue relinquished due to custom duty exemptions. In the first six months of this budget year alone, Ethiopia has forgone ETB34.25 billion for duty free beneficiaries, which is 37.71Pct of the total tax revenue collected by the Authority during the period, according to ERCA’s six-month report. Assuming the tax revenue of the current fiscal year is equal to or higher than last year’s, it is safe to say that Ethiopia loses close to ETB60 billion annually because of custom duty exemptions. 

Out of the forgone revenue over the first six months of 2017/18, 27.27Pct was given to governmental as well as nongovernmental enterprises, and 26.04Pct to private investors, while public developmental enterprises and members of diplomatic missions received 1.7Pct and two percent of the total, respectively. 

On the other hand, non-financial incentives such as access to land, public services and infrastructures, which support business development and enhance competitiveness, are also provided by the government. This includes the recently constructed plug-and-play industrial parks, which the government rents to investors for a minimal price.

Fiscal incentives are provided based on policies devised by the Ministry of Finance and Economic Cooperation (MoFEC). However, the Ethiopian Investment Commission (EIC) has the mandate to approve them. Government institutions such as the Ministry of Industry (MoI) have a say in sectors under their watch while regional governments also provide incentive packages to businesses licensed under their authority.

Globally, there is a mixed view among experts about the kind of relationship that exists between incentives and investment. Experts like Dale Jorgenson, a professor at Harvard University who conducted groundbreaking research on tax policy and investment behavior, argue that there is a direct relationship between incentives and rate of investment. Jorgenson’s argument is based on the hypothesis that firms choose investments with positive net present value. Since financial incentives like tax deductions and custom duty exemptions help the projected earnings of a given investment to exceed the anticipated costs, it will attract businesses. 

Citing the growth of investments registered in the last two decades, officials also agree that there is a direct relationship between incentives, especially financial incentives, and the rate of investment in Ethiopia. “Even though the share is unknown, incentives significantly contribute to the increase in investment flow,” argued Mekonen Melaku, director of Public Relations Directorate at EIC.  

Information obtained from EIC indicates that the number of domestic investment projects licensed at the Commission increased from 17 in 1992 to 310 in 2016. The combined capital of these investments also increased from ETB348 million to ETB3.03 billion during the same time. By the same token, the number of foreign investment projects licensed by the EIC increased from three to 335 between 1992 and 2016.

Tsedeke Yihunie (Eng), founder of Flintstone Engineering and Homes is one of the domestic investors who see a direct relationship between incentives and growth of investments. “Incentives indirectly supported my business in three areas,” explains Tsedeke. “Tax breaks and access to land given to local companies that manufacture cement and steel greatly reduced our cost of construction. Customs duty exemptions for imported heavy duty machinery and trucks, including cranes and concrete mixers have decreased our working capital.”

Tilahun Abay, director of Planning and Communications Directorate at the Metal Industry Development Institute (MIDI), also sees the positive side of the incentives, referring to the number of companies that are growing in the metal sub-sector with the incentives provided to them. Over 230 small and medium factories involved in steel and iron production joined the metal industry in the past decade. “The incentives are not even adequate for companies that add real value,” says Tilahun. 

Although providing financial and non-financial incentives to companies has become an accepted practice for developing countries to attract and retain business, it continues to generate debate, pushback and criticism. John M. Clark, who was professor of economics at Columbia University, developed the accelerator model, which states that investment is driven by change in aggregate demand. This economic theory suggests that as demand or income increases in an economy, so does the investment made by businesses. As a result, incentives have an insignificant effect on a given firm’s decision on where to be located. 

Jamuna P. Agarwal (PhD), a senior economist at the Kiel Institute of World Economics, Germany, also pointed out that other factors such as inflation and exchange rates cannot be ignored when talking about investment decisions. According to Agarwal, businesses first study the basic macroeconomic and institutional situations of a given country. Although prospective markets and relatively low-cost labour attract businesses, other considerations restrain investment, such as uncertain policies and political instability. Therefore, financial and non-financial incentives cannot triumph over these negative factors on their own. 

Birhan Kassa, founder and manager of Birhan Kassa General Contractor, asserts that the policy regarding incentivizing businesses has a fundamental fallacy. “Any growth that comes due to incentives is  not real. Businesses fail as soon as they start getting larger. You cannot grow a tree by supporting it with another piece of wood,” says Birhan. “The government should focus on creating an equal and fair playing field, where all can compete and grow equally.”

Even Tsedeke, who stands in favor of incentives, admits that there are limitations when. “There is a mismatch between what is needed by investors and what is provided by the government,” he argues. “For instance, the government may allow old-fashioned trucks to be imported duty free, but the investor needs the latest model. To square this mismatch, collaboration between the private sector and policy makers is needed.” 

In Ethiopia, the incentives are so far being given in a scattered and uncoordinated manner, and there has been no institution that closely follows up how they are being put to use. “Nobody knows how much is forgone due to incentives,” an official at the Strategic Intelligence Affairs Directorate of ERCA told EBR. “We investigate the few businesses that abuse duty free privileges based on suspicions. There is no body that follows up continuously and regularly.”

According to a report presented during ERCA’s in-house meeting held in Bishoftu (Debrezeit) in 2015, close to ETB91 billion was lost between 2010 and 2015. The report also revealed that incentives were given to businesses that only exist on paper. “The business environment in Ethiopia has become multifaceted and it is difficult to trace a product once it enters the country,” adds Mulugeta. 

To make things worse, there is the perception that the implementation of incentives such as duty-free packages are exposed to corruption and maladministration, according to an assessment released recently by the Federal Ethics and Anti Corruption Commission. Conducted using a sample of 433 businesses in Dire Dawa and Addis Ababa, the assessment discovered that one-third of the companies believe that incentives are prone to corruption. 

Girma Gelalcha, director of the Sectoral Supports Directorate at MoI, however, thinks otherwise. “If the companies which import industrial raw materials duty free are exporting their products, we cannot say the incentives are abused and the country is losing,” 

So far, there is no report that shows an all round figure of the incentive packages Ethiopia is providing in terms of money. Nor has there been any impact assessment. “As a layman, it seems that the incentives are highly abused, especially when you see certain businesspersons becoming wealthy from nothing in a short period of time. But, you are grateful when you see the construction boom all over the country,” says the official at the Intelligence Affairs Directorate of ERCA. 

The Auditor General’s report for 2015/16 also blamed the Investment Board of EIC, which was chaired by former Prime Minister Hailemariam Desalegn, for being a major roadblock to the effective implementation of incentive schemes.  It holds the Board responsible for the approval of duty free requests against rules stated in proclamations, regulations and directives. Some companies were also accused by the Auditor General of abusing their duty free privileges by importing items other than the allowed products and selling them on the local market.  There are also investments that receive incentives before they start operations, and continue after they leave the business, while others also request additional incentives in the name of expansion, even though they do not make any moves to actually expand, according to the report of the Auditor General.

To support its evaluation, the report evaluates the activities of many companies that enjoy different kinds of incentives such as Ashraf Group. Although the Sudanese company exported processed meat to Angola and Comoros only in 2010, Ashraf continued benefiting from all the incentive packages, taking additional licenses for expansion and new operations, without any production, until the state of Amhara revoked its license in 2015. 

The same goes for Karaturi, an Indian company which took 100,000 hectares of land in the state of Gambela. Karaturi imported items worth ETB157.01 million free of duty, between 2010 and 2012, without shipping any product. Around 69 investors engaged in the hotel sub-sector in the state of Tigray were also found abusing duty free privileges by importing construction materials worth ETB311.8 million, between 2010/11 and 2012/13. 

Incentives being taken advantage of can be also observed in the pharmaceutical sub-sector. There are 22 companies licensed to manufacture medicine locally, 14 of which are  actively involved in pharmaceuticals manufacturing, according to the Ministry of Health (MoH). These companies are expected to fill 20Pct of the annual medicine and medical materials demand of the state-owned Pharmaceutical Fund and Supply Agency (PFSA), totalling around ETB2.8 billion. PFSA annually purchases medicines and related materials worth ETB14 billion.  However, local pharmaceutical companies are not fulfilling expectations, despite of enjoying lofty incentives. In the last budget year, local companies supplied drugs and other materials worth ETB1 billion, which only satisfied seven percent of the Agency’s demand. “Local pharmaceutical companies benefit from incentive packages including importing raw materials duty free. Additionally, we give them 70Pct of the total cost of goods upfront. They also benefit from a 25Pct preferential margin, if the bid is open to international companies,” explains Loko Abraham (MD), director general of the Agency. “Despite all this, they deliver limited products after long delays, sometimes even after a year.”

While the incentive privileges are exploited by investors, those companies that badly need them are left behind. One such company is Addis Livestock Production and Productivity Improvement Services (ALPPIS), the only firm in Ethiopia that supplies genetic material of cattle breeds. Its founder, Tamiru Zewde, an expert in genetic engineering, was certain that he would succeed when he opened the company nine years ago. To his dismay, he did not get any incentives. “Our activity is essential to increasing the productivity of Ethiopia’s livestock resources,” argues Tamiru. “But we are not operating according to the demand and our potential. We need incentives like duty free privilege and easy access to foreign currency.” Yet, Temesgen Walellign, director of the Follow-up, Monitoring and Evaluation Directorate at the National Planning Commission, says there is no plan to revise Ethiopia’s incentive policies, for the time being. “There are good policies in place. The main thing needed is improving the implementation mechanisms.” Temesgen argues. “Conducting studies is necessary to know the real impact of incentives.” 

Nine months ago, MoFEC in cooperation with the World Bank, started to conduct a study to figure out why tax revenues did not match the growth of the economy. As a part of this study, the Ministry is also assessing the effectiveness of incentives provided by the government. 

Despite the late start, ERCA is also moving forward to address the problem. “A committee was formed after the joint investigation ERCA conducted with other government institutions last month. Currently, we are undertaking studies on how to coordinate all the mandated institution,” stressed Mulugeta. “Since the main obstacle has been lack of accurate information, we are establishing a central database separately to track the activities of companies permitted to benefit from incentives.”


6th Year . April 16  - May 15 2018 . No.60 


 

 

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ashe@gmail.com (Ashenafi Endale) Topic Wed, 16 May 2018 06:00:00 +0000
Hailemariam's Legacy http://ethiopianbusinessreview.net/index.php/topic/item/630-hailemariams-legacy-failure-mishap-or-triumph? http://ethiopianbusinessreview.net/index.php/topic/item/630-hailemariams-legacy-failure-mishap-or-triumph? Hailemariam's Legacy

Failure Mishap or Triumph?

Hailemariam Desalegn’s political history is filled with surprises. In many ways, his journey from being born in a family of 11 in Boloso Sore in Wolayita Zone, to Prime Minister, is a story of the possibilities that Ethiopia affords. Nonetheless, his triumphs have not been short of challenges; his term was characterized by humanitarian, political and security crises. So much so that he gave up his post as the chairperson of the ruling party and Prime Minister. Yet his resignation has left a mixed legacy of achievements and failures. EBR staff writer Samson Berhane, examines.

Perhaps only history can accurately judge Hailemariam Desalegn’s six-year tenure as Prime Minister of Ethiopia.  But there is no doubt that his political career, that began the late 1990s when he became a member of the EPRDF, has been full of surprises. He quickly rose in the hierarchy, assuming the post of Deputy President of the SNNP regional state. In 2002, he became the President of the state, replacing Abate Kisho, who was removed from power on corruption charges.

His political journey in the Southern state lasted only until 2006. After this, Hailemariam’s prominence within the EPRDF leadership and the ranks of the federal government skyrocketed. He held several important positions in the ruling party, as well as the government, rising as far as Deputy Chairman of the EPRDF, Deputy Prime Minister, and Minister of Foreign Affairs until he became the unlikely candidate to succeed the late Prime Minister Meles Zenawi, who passed away unexpectedly in 2012. This was the propelling force that led Hailemariam to occupy the highest office in the country. 

There were mixed feelings when he was first appointed. Those who opposed his nomination noted his lack of experience dealing with complex politics, which is needed to run one of the most diverse nations in the world. Others preferred to give him the benefit of the doubt, at least during his initial years in office.

Girma Seifu, who was the lone opposition Member of the Parliament (MP) between 2010 and 2015, was among the MPs who supported his appointment.  “I was so confident that he could bring a change to the country as he was new blood in the political arena,  and [he was] an academically efficient person,” Girma recalls.

But it didn’t take long for Girma to change his mind. “Although I was hoping he would exercise strategic leadership by having a more accommodating and relaxed approach than his predecessors; it did not take long for me to be proven wrong,” Girma added. “His intention was maintaining the legacy of his predecessor, instead of building his own.”

But from his first day in office, Hailemariam was clear as could be in regards to how he planned to govern. “I will continue Meles’s legacy without any change,” he told MPs, and the nation, after he was sworn in before Parliament. 

Hailemariam’s Economic Achievements, Defeats 

As he promised to continue the legacy and vision of Meles, who was credited with the double-digit economic growth the country registered—especially since 2003, Hailemariam managed to sustain the development trajectory with a yearly average growth rate of 9.9Pct until 2016/17. During his tenure, the real gross domestic product (GDP) grew by a whopping 60Pct from ETB517 billion to ETB828.4 billion, which enabled Ethiopia to become a major economic powerhouse in East Africa. 

Still, many of the targets outlined in the first phase of the Growth and Transformation Plan (GTP I) didn’t materialize. One case in point was the plan to increase the export of goods and services as a percentage of GDP from 10.5Pct in 2009/10 to 31.2Pct in 2014/15. Five years down the line, the figure had slumped to 9.7Pct. The share of the manufacturing sector in GDP also stayed put below five percent. On the other hand, many megaprojects, such as the construction of 10 sugar factories and fertilizer plants, remained unfinished. 

However, especially after the end of the GTP I period, many development projects took place, some of which were targeted at promoting the manufacturing sector. According to many, only the rapid spread of industrial parks came close to the developmental pace set by Hailemariam’s predecessor. One of these people is Lidetu Ayalew, a prominent opposition figure in Ethiopia since the mid-1990s. “I believe it was during Hailemariam’s administration that the country made practical moves towards the development of the manufacturing sector,” he says. 

Indeed, during Hailemariam’s term, Ethiopia demonstrated significant commitment to expanding industrial parks in a bid to attract foreign direct investment (FDI). Over the past two years, six parks—including Hawassa Industrial Park (HIP)—were constructed. Moreover, the construction of nine parks is underway. Close to one billion dollars in export earnings is expected from HIP when it starts to operate at full capacity. 

Despite all this, the country’s rank on the Ease of Doing Business Index dropped from 124 to 161 during Hailemariam’s tenure. Likewise, tighter regulations that deterred the growth of the private sector were also adopted over the past five years, according to many businesspeople. The micromanagement of commercial banks by the National Bank of Ethiopia and the total exclusion of the diaspora community from participating in the financial industry—a lifeblood of the economy—are illustrations of this, according to Zafu Eyessuswork, a financial industry guru. “In fact, most importantly, it was a period when the very existence of the nation was at a crossroads,” he says, adding that ensuring peace and stability should be the priority of the incoming Prime Minister. 

Nonetheless, Endalkachew Sime, secretary general of the Ethiopian Chamber of Commerce & Sectoral Associations argues that the engagement of the private sector in economic matters was more noticeable during Hailemariam’s administration. “We witnessed more dialogue and openness to accommodate the needs of the private sector during the time the outgoing PM was in power,” he says, mentioning that Hailemariam has been the only Prime Minister to establish a PM-led council to provide solutions for investors.  

But behind the achievements, there have also been disappointments. One case is the failure of the administration to formulate a strategy to promote the private sector, as Endalkachew explains. “Additionally, the fact that the outgoing Premier continued to prevent the private sector from participating in areas like the telecommunication industry at the expense of users is another major flaw.”

Be that as it may, one aspect that characterizes the current administration is the surge in unemployment among graduates. The problem of youth unemployment, particularly in urban areas, has been a challenge for politicians and policymakers in Ethiopia, but it has been more severe in recent years mainly due to the growth in the number of graduates from public universities. While the number of universities doubled to 44, many degree holders have not managed to find jobs. 

“This has been a major fault of the outgoing administration,” stresses Atlaw Alemu (PhD), an economist who has done various studies on unemployment patterns in Ethiopia. “It is also the main cause of youth protests across the country over the past few years.” 

Violence and Protest Becomes Inevitable

On top of the rise of youth unemployment, exclusion from the country’s political process and economic growth, as well as lack of accountability, corruption and inefficient governance led to political turmoil that has shaken the country since 2015—exactly three years after Hailemariam became Prime Minister. The unrest began unfolding after protests broke out when people started to protest against the 10th Master Plan of Addis Ababa, which was drafted to expand the capital to parts of the surrounding Oromia Special regional state.

In the first wave of anti-government protests, particularly in the states of Oromia and Amhara, over 400 people lost their lives, according to a report by the Human Rights Commission. In the same period, flower farms and manufacturing companies were ransacked, destroyed, and vandalized by protestors, leaving the country under a State of Emergency (SoE) that lasted for almost ten months. 

In September 2017, a month after the SoE was lifted, another dispute—this time an inter-regional one between the states of Oromia and Ethiopian Somali—resulted in protests across towns and public universities. The crisis in the eastern parts of the country spread to places like Woldiya, a town located in the North Wollo Zone of the Amhara regional state. Consequently, a three-day strike across the state of Oromia not only saw towns at a standstill, but also brought transportation to and from the capital to a halt. As a result, the problem reached a point of no return, and forced the government to declare a second SoE in March 2018, seven months after the first SoE ended. 

Hailemariam Steps Down

Frustrated with the persistent political turmoil and party politics, Hailemariam went as far as to release hundreds of political prisoners, including some well-known opposition party members. Then on February 16, 2018, he stunned the nation and announced his resignation from party and government posts. “I see my resignation as vital in the bid to carry out reforms that would lead to sustainable peace and democracy,” he told the nation in a televised address.  

Those who closely monitored Hailemariam’s unsuccessful ventures and empty promises, support his decision.  “It was the right decision made in a timely manner, considering that the leadership failed to bring about much-needed peace and stability,” explains a member of OPDO whose name has been withheld upon request. 

Zafu disagrees. “Hailemariam should have completed his term. He was supposed to solve the problems before giving up his power,” he asserts.

Besides winning every single parliamentary seat along with its allies, the EPRDF, under the chairmanship of Hailemariam, was criticized for being unable to stabilise the political situation in the nation after the death of Meles Zenawi. Extensive mismanagement of public resources, bad governance, questions over identity and revolts over unfair distribution of economic resource were more common during Hailemariam’s tenure. 

Lidetu, who was a Member of Parliament from 2002 to 2007, believes the cause of the problems is a failure of leadership. “It is a problem that came about with the inception of the ruling party,” he says. “The way the party was formed, based on ethnic groups, is the cause of the violence, which unluckily broke out during Hailemariam’s term.”

Political commentators and activists stress that the increasing power and self-ruling tendencies of some regional states ultimately pushed Hailemariam out of office.  Such attempts became visible especially after the changes made at the helm of Oromo People’s Democratic Organisation (OPDO), which resulted in Lemma Megersa becoming President the state Oromia, as well as Chairman of OPDO.  

Different measures undertaken by Lemma and his colleagues over the past two years show that regional states sometimes contradict the orders of the federal government. Repetitive requests to the federal government to stop its involvement in regional affairs, the shutdown of hundreds of investments, and 121 mining companies licensed by the federal government in the state of Oromia, asserts the growing power of regional states.  “This is commendable,” argues Girma, signalling that the regional states should be more autonomous. 

Despite the domination of the EPRDF and its allies of Parliament, some MPs from OPDO started to actively engage against the will of the party. This was seen during the Parliament session, when a record high 88 MPs voted against the most recent SoE, while seven abstained.

But Lidetu believes the self-governing nature of the regional state, and the self-direction of the coalition parties, show that there is a lack of consensus and integration within the EPRDF. “If this persists, dissolution is very likely. I believe there should be a balance in making the regional state autonomous and exercising power by the federal government.”

Beyene Petros, an opposition figure for almost three decades and member of Medrek Party echoes the same sentiment. “I don’t expect any change by assigning a new premier or chairman of the party, unless the party is ready to make radical shifts.”

Since Hailemariam’s unprecedented resignation, the EPRDF has faced a hard test to pick a new leader from the four coalition member parties. The coalition parties have carried out marathon meetings, resulting in a change of the guards.

Abiy Ahmed (PhD), the former Minister of Science & Technology, was named chairperson of the OPDO, placing him in the running to be the next Prime Minister of the country. He replaced Lemma, who holds the post of deputy chairperson and maintains his role as president of the Oromia Regional State. At the time, Lemma also hinted that the OPDO would be willing to take over high-level seats.  “We are ready to pursue a high level position in the federal government,” he said in an interview with Oromia Broadcasting Network (OBN). 

By the same token, the Southern Ethiopian People’s Democratic Movement (SEPDM) elected Shiferaw Shigute as chairman in place of Hailemariam Desalegn, who had been chairman since 2012. The action of OPDO was followed by an election that maintained the status quo at the Amhara National Democratic Movement (ANDM). Demeke Mekonnen, the current deputy prime minister, was elected chairman of the ANDM again. 

These measures show that there is contention amongst the coalition parties, according to activists such as Seifeselassie Gebre. “The EPRDF is exhibiting hesitation in terms of which direction to take and perhaps has even reached an impasse in trying to reach a consensus and elect a new prime minister,” Seiefeselassie wrote in his commentary published on Aiga Forum. “Collective leadership and the formation of a premiership council composed of each coalition party with rotating chairmanship will buy the EPRDF much-needed time to thoroughly deliberate and come up with a long-term solution that will guarantee the continued viability of a peaceful, democratic, and prosperous Ethiopia.”

Collective leadership is not a new concept for the EPRDF. Subsequent to the appointment of Hailemariam as Prime Minister in 2012, collective leadership was put in place with the aim of ensuring the continued implementation of existing policies and strategies. Besides appointing Demeke Mekonnen as his deputy, he named Debretsion Gebremichael and Muktar Kedir, who was later replaced by Aster Mamo, as coordinator of Finance and Economic Cluster and Good Governance Reform Cluster with the rank of Deputy Prime Minister, respectively. However, during his latest cabinet reshuffle in late 2016, Hailemariam dropped this plan and removed the two from power. 

“Unless there is a strong leader, collective leadership might lead to fragmentation. So, implementing such style of leadership is not viable in the current situation,” Lidetu argues. “Changes can be brought by reshuffling individuals. If the party wants peace and stability to be restored, it has to open up the political space and make itself ready for a transition.” 

In many ways it may be too soon to assess Hailemariam’s influence over the entire nation. But one thing is for sure: he will be remembered as the second Prime Minister of Ethiopia who handed power over peacefully, even if it was to his party comrades.


6th Year . March 16  - April 15 2018 . No.59 


 

 

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Samson.b@ethiopianbusinessrevew.net (Samson Berhane) Topic Sun, 15 Apr 2018 18:00:00 +0000
October's Devaluation http://ethiopianbusinessreview.net/index.php/topic/item/613-octobers-devaluation-measuring-its-impact-on-coffee-exports http://ethiopianbusinessreview.net/index.php/topic/item/613-octobers-devaluation-measuring-its-impact-on-coffee-exports October's Devaluation

Measuring its Impact on Coffee Exports

In October 2017, Ethiopia devalued its currency by 15Pct with the aim of boosting export and improving the current account deficit. Three months later, the impact appears to be positive, with export revival registered in some areas. For example, export proceeds from coffee hit a record high, reaching USD435 million in the first half of the current fiscal year, the highest increase since 2012. 

Experts stress however, that the currency devaluation will eventually have a negative effect on the economy. Valuable and vital commodities such as fuel, medicine, and machinery will become more expensive to import. The effect, some economists cautioned, would widen balance of payment deficit and cause inflation. EBR’s Samson Hailu examines the issue. 

This past October, the National Bank of Ethiopia devalued the birr by 15Pct. Yohannes Ayalew (PhD), vice governor of the NBE told journalists that the decision was made with the goal of “improving the current account deficit by boosting export volume and decreasing import bills.” 

The Ethiopian government has been using devaluation to improve the competitiveness of the country by increasing exports and reducing import bills. This policy, which allows governments to improve merchandise trade balance deficits and outputs by adjusting the flow of expenditures, is known as expenditure-switching policy. 

Before the 1970s, the idea that devaluation leads to merchandise trade balance symmetry was widely accepted. Though there are several empirical studies indicating the positive relationship between devaluation and the rise of exports, there are reports that show the opposite. Alternative theories that emerged after 1980s and 1990s, shed light on the possibility that devaluation might have a negative effect on exports, especially in developing countries. 

Nowadays, experts stress that local currency devaluation only works for countries with vast export potential. “In an agrarian economy like Ethiopia’s, devaluation only increases import bills since the country is [heavily] dependent on imported industrial, petroleum, and consumer goods,” argues Alemayehu Geda (PhD), Professor of Economics at Addis Ababa University. “So, the overall economic impact of devaluation will be widening the current account deficit.”

But officials claim that the devaluation is already reversing the depressionary trend. “The effect of the devaluation can be seen through the increasing export volume and value of coffee in the past six months,” says Sintayehu Girma, director of Public Relations at the Ethiopian Coffee & Tea Development and Marketing Authority. “Our initial performance indicates that the country is on the path to achieving the target set for the entire year.”

In the first six months of the current fiscal year, Ethiopia exported 102,000 tons of coffee, surpassing the quantity sold overseas in the same period of the last fiscal year by 22Pct, according to the information obtained from the Ethiopian Revenues and Customs Authority (ERCA). The volume exported showed a five percent reduction in the first six months of last fiscal year compared with the previous period. However, the figure in the first half of the 2014/15 showed a nine percent increment.

It is not only the volume that showed an improved performance in the past six months. The earnings also rose by 25Pct to reach USD435 million compared with the previous year. In fact, the highest export revenue the country earned from coffee was recorded in the first six months of 2015/16. The previous record for the first half year, USD329 million, was set in 2015/16. 

The surge in proceeds leveraged from the shipment of coffee, which accounts for up to 30Pct of the total export revenue, was aided by the recent devaluation of the birr. 

Since 2011, coffee exporters were challenged by the decline in the price of coffee at the international market. Though the government incentivised them to increase the volume of exports, earnings stagnated for years. 

For instance, the volume of exported coffee stood at a record 200,000 tons for the first time in 2014/15. However, export earnings did not exceed one third of the planned target. During the first phase of the Growth and Transformation Plan (GTP I) period, the government planned to generate an annual average of USD783.3million from the export of coffee. But the performance was underwhelming, reaching just 61.4Pct of the target, according to a report released by the National Planning Commission. 

The devaluation seems to have changed this. Not only did the export volume and value of coffee show a dramatic increment, but more companies are also getting involved in the sector. At the end of the last fiscal year, there were 214 companies engaged in the export of coffee, while 21 companies joined them in the last six months.

Seven more companies applied for certificates of competence to be eligible for coffee export licenses, according to Food, Beverage and Pharmaceutical Industries Institute. 

Coffee exporters, however, argue that the improvement in receipts is driven by the rise in global commodity prices. 

“The price of coffee has increased in the last couple of years. Although the devaluation does have an effect, the price surge in the international market has a higher impact,” the general manager of a company, who wished to remain anonymous, told EBR. The company he works for has been exporting coffee for the past 15 years.

Globally, the supply shortage that started two years ago continued throughout 2017. As a result, the price of coffee has seen steady rise in the past two years. It showed an average of 17.5Pct annual growth, according to the International Coffee Organization. 

Samson G. Moges, operations manager at Tarara Coffee, a coffee processing and exporting company, says that the volume of raw and roasted coffee is increasing. 

“Tarara exported 17.2 tons of roasted coffee last year and earned USD107,000. This year, we are planning to export 50 tons of roasted coffee and have already shipped 34 tons,” he says. 

However, Samson explains that the rise in volume is not the result of the devaluation.

“We have been nurturing our relationships with global buyers for three years. Now we are reaping the rewards of our efforts.” 

Officials do not deny that factors other than the devaluation contributed to the surge. “By conducting studies, the Authority found that coffee production in Ethiopia, as well as its value and marketing chains, needs to improve on a massive scale,” explains Sintayehu. “As a result, Parliament amended two proclamations last year that govern the production, marketing and quality of coffee.”

The major areas the amended proclamations are meant to resolve are issues in the extended value chain, and the widespread illegal trade in the sector. They also aim to incentivize coffee growers and exporters.

Due to these improvements, officials are optimistic about meeting this year’s target of USD1.14 billion in export revenue from coffee. 

“If we keep the current momentum, meeting the target will be possible,” says Sintayehu,  whose institution has even greater ambitions for 2019/20: a target of USD2.2 billion.

Studies conducted on the subject reveal that devaluation is an effective instrument to correct price differences in the local and international markets. Many factors such as high tariffs, over-valuation of local currency, restrictions on commodity, and capital flows could lead to price misalignments. In 2015, the World Bank estimated that one percent real devaluation would increase exports by half a percentage point. The effect is higher for manufacturing.

In a study titled Evaluation of Effect of Exchange Rate Variability on Export of Ethiopia’s Agricultural Product (conducted after the government devalued the birr by 20Pct in August 2010), Abule Mehare, lecturer at the School of Agricultural Economics and Agribusiness, Haramaya University, argues that devaluation might play a key role in eliminating the market distortions and correcting price misalignment in the short term. However, in the long run, Abule believes that in an economy like Ethiopia’s, devaluation will have a negative impact on the export of agricultural products.

Abule indicates that there are several theoretical reasons for this. In the short-term, exporters will take advantage and increase export volume. However, due to the inelastic nature of demand for agricultural products, the increase in price in the global market will eventually cease and the price of a given agricultural commodity in the local market will exceed the international price and businesses will have less incentive to export. As a result, devaluation would, in the long run,  have the opposite effect than intended.

Abule’s conclusion is supported by the theory of deteriorating terms of trade;  for an agrarian economy, export earnings from primary commodities are bound to stack or decrease after a short period of time, while import bills keep rising. This widens the balance of payment deficit.

This is exactly what happened after the government devalued the birr against major currencies in August 2010. Total merchandise export in 2010/11 increased by a whopping 37Pct to USD 2.75 billion, compared to the previous year. The rise by USD841.8 million was largely due to growth in export of coffee earnings by 59.3Pct. As a result, the share of coffee in total exports increased to 30.6Pct from 26.4Pct in 2009/10.

The export earnings from gold, live animals, and leather and leather products also rose by 64.1Pct, 63Pct, and 84.1Pct respectively, during the same period, while meat and meat products increased by 86.2Pct, according to NBE’s annual report. Therefore, the share of export of goods in the gross domestic product (GDP) improved to 10Pct from 6.7Pct in 2009/10.

On the other hand, import bills contracted slightly by 0.2Pct in 2010/11 relative to the preceding year and reached USD8.25 billion because of the reduction of raw materials and capital goods imports. Although the share of imports in the GDP slightly rose to 29.6Pct from 27.8Pct in the previous year, imports of capital goods fell by 4.5Pct to USD2.8 billion. In addition, import of consumer goods dropped by 8.8Pct during the period while raw material imports declined by 13.5Pct. 

Due to the significant growth in total exports and a small reduction in total imports, current account deficits in 2010/11 narrowed by 12.1Pct compared with the preceding fiscal year. 

Six years down the line, however, it seems that the policy had no positive long-term effects on the current account deficit; rather, it appears it may have further aggravated it. In 2016/17, export earnings reached USD2.91 billion, showing a 5.8Pct increment compared to the export revenue earned six years ago. Total merchandise import, on the other hand, almost doubled and reached USD15.8 billion in 2016/17. As a result, current account deficit has grown by 134.5Pct since 2010/11 and reached USD12.9 billion in 2016/17.

For Alemayehu, the widening of the external trade deficit is the result of the nature and composition of export commodities. 

“Ethiopia mostly exports agricultural commodities that have high price elasticity of demand,” he said. “On the other hand, Ethiopia imports products such as fertilizers, petroleum products, and capital goods, which have low price elasticity of demand.”

Agricultural commodities account for 80Pct of the export earnings in 2016/17 (75Pct in 2010/11). Although the share of capital goods, fertilizer, and petroleum products declined from 68.4Pct of the total import bills in 2010/11 to 66Pct last year, they remain a great burden for Ethiopia. 

The effects of currency devaluation on trade balance in Asian countries like China and South Korea reveals that there should be a set of necessary conditions for currency devaluation to be effective. For instance, the Chinese government has kept the Yuan relatively low against major hard currencies despite pressures to appreciate it from countries like the United States. Since China began to focus on the promotion of export of manufactured goods in the early 1990s, it has been experiencing a trade surplus. 

Conversely, India has been experiencing a trade deficit for more than two decades. The value of the Indian rupee has been fluctuating and devaluation would not have a sufficient impact on the export sector because the economy is heavily dependent on imported energy and industrial goods while its export products have been primary commodities, which are price elastic in foreign markets. 

Devaluation can further destabilize the economy by increasing the price of goods and services available in the market and reducing the purchasing power of consumers if it is not accompanied by appropriate policies. Ethiopia saw this after the 2010 devaluation, which was accompanied by rising inflation that reached 41Pct in August 2011. 

Similarly, inflation started to rise after the recent devaluation in October 2017. The annual inflation rate increased by 12.2Pct compared with same period last year, while the monthly inflation increased by 0.2Pct between September 2017 and October 2017 according to the consumer price index released by the Central Statistical Agency. An informal market evaluation confirms that the price of imported commodities showed price surge. The same scenario was witnessed on items produced locally. 

This is why experts stress that it is not possible to narrow the current account deficit through devaluation alone. Such policy interventions need to be executed with care until Ethiopia transforms into an industrial economy.


6th Year . February 16  - March 15 2018 . No.58 


 

 

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samsonh@ethiopianbusinessreview.net (Samson Hailu) Topic Thu, 15 Mar 2018 09:00:00 +0000
Public Transport in Addis From Crisis through Crisis, into Crisis http://ethiopianbusinessreview.net/index.php/topic/item/597-public-transport-in-addis-from-crisis-through-crisis-into-crisis http://ethiopianbusinessreview.net/index.php/topic/item/597-public-transport-in-addis-from-crisis-through-crisis-into-crisis Public Transport in Addis From Crisis through Crisis, into Crisis

One of the critical problems in Addis Ababa is the lack of efficient public transport. This is despite the fact that government has been deploying various schemes, such as introduction of Higer, Bishoftu, and double-decker buses; and constructing Sub Sahara’s first light railway with billions in investment and subsidies every year. 

These initiatives have been unable to sufficiently ease the transport crisis. While officials stress the government is doing its best to execute projects that expand mass transportation, experts argue that transport sustainability can only be guaranteed through proper planning that takes into account factors like urbanization and changes in land use. EBR offers this report.

When the 31.6 kilometer long Addis Ababa Light Rail began service on September 20, 2015, the city’s inhabitants were happy. This was because they had been suffering from inefficient transport systems that created congested traffic and time-consuming commuting. More than two years down the line, however, the light rail, which was constructed with USD475 million and has the ability to transport 60,000 people per hour, has failed to alleviate the deficiency of transport supply in the city. In fact, many blame the railway for the compounding problem because the rail networks crowded other means of transportation such as taxies and buses. 

The light rail, which failed to fix the transport crisis is not the only initiative implemented by the government to improve the inefficient transport system in the city. For instance, more than a decade ago, the Addis Ababa City Administration imported and introduced Higer buses from China to tackle the city’s transport problem. Locally assembled Bishoftu, and Sheger buses; hundreds of imported buses by Alliance Transport Services, and various metered taxies, all started operation in different periods. None have been able to cope with the demand for transportation.  

The city administration has also made another attempt to ease the transport problem by recently introducing 50 double-decker buses, and 100 school buses. These buses are the first batch out of the total 850 the city administration ordered from the Metal and Engineering Corporation at a cost of ETB3.5 billion, one year ago. Despite all of these schemes, the transport mess seems to be getting worse by the day. 

For many residents, the recently introduced buses are but a drop in the ocean. However, officials say by using the existing infrastructures optimally, the various initiatives introduced to ease the transportation issue can bring significant change and improve the situation in the capital. 

Solomon Kidane (PhD), head of the Addis Ababa Road and Transport Bureau (AARTB), stresses that the existing infrastructure is enough to accommodate the existing and the upcoming transport vehicles if automobiles that lend little in the form of transportation solutions, are pushed out from the system. “There is a need to discourage and push out these vehicles that make little contribution to the transport system in order to make enough space for the more useful mode of transport, which is the city bus.”

“We have identified two strategic areas to focus on in the future,” Solomon tells EBR. “The first is expanding mass transport, while the second is to utilize the existing infrastructures to maximize the mass transport service.” 

Public buses are one of the major modes of transportation in Addis Ababa. In addition to government owned Anbessa and Sheger buses, private companies like Alliance Bus provide services in the city. However, these companies cannot cope with the public’s demand for transportation, which costs residents in both time and money. 

According to the information obtained from the Transport Bureau there are currently 1,500 city buses operating in the city. “However, an additional 5,000 buses are needed to provide the minimum mass transport services,” says Mitiku Asmare, deputy head of the City Transport Authority.

Studies indicate that companies engaged in mass transport in the capital are not operating at capacity. The finding of a study entitled ‘Performance Analysis on Public Bus Transport of the City of Addis Ababa’ published by Addis Ababa University in 2015, reveals that the operational and financial performance of Anbessa Bus is low and its service is below international standards, despite the fact that the company is subsidized by the government. 

According to the study, the efficiency of bus services is mainly dependent on the existence of infrastructure such as roads, and capable transport systems, as well as labor, fuel, and spare part costs. Without resolving these issues, interventions like increasing the number of buses will not address the transport problem. Rather, these schemes create higher congestion in the existing mixed traffic system. 

For private companies engaged in mass transport that are operating without subsidies, the business environment is much worse. Alliance Transport Service is the first private company that joined the mass transport business in 2009 with a paid up capital of ETB36 million. Alliance, due to high volumes of traffic and lack of infrastructure in its routes, is unable to perform as expected. 

Formed by close to 2,000 shareholders eight years ago, the company started operation with 50 buses imported from China at a cost of ETB72 million. In November 2016, Alliance received 100 buses imported duty free through a loan obtained from the Commercial Bank of Ethiopia. But managers of the company are now saying they couldn’t start repaying the loan even with the grace period afforded to them. 

“It has become difficult to repay our loan because the business is not profiting much,” a senior manager who requested anonymity, tells EBR. “You cannot profit while the buses waste a lot of time due to congestion, and lack of infrastructure. The low bus fare keeps us from being competitive since we are not subsidized like [Anbessa and Sheger Buses]”. 

Lack of incentive for the private sector to engage in public transport is one of the problems that exacerbate the issue. While the city government subsidizes billions of birr every year for Anbessa and Sheger buses, and the light railway (all public companies), Alliance has never been a beneficiary of such scheme. Last year alone, the city subsidized the light rail with ETB1.5 billion.

Eyob Bekele, Information and Communication Team Leader at the Addis Ababa City Road Authority (AACRA) states that road coverage in Addis Ababa has now reached 23.5Pct. The road network has increased by 320Pct in the last 20 years from 1,500 kilometer to 6,300 kilometers.

Currently, roads are mainly built to link the expanding peripheries of the city with the center,” says Eyob. “The roads are built to accommodate both mass transport, and automobiles.”

For Tamene Belete, director of the Legal Affairs Directorate at the Addis Ababa Traffic Management Office, the transport problem is not caused solely by inadequate infrastructure.“Close to 70Pct of the vehicles in the country are located in Addis Ababa. So, the increasing number of vehicles, mostly owned by private individuals, dominates the existing roads and limits vehicles used for mass transportation access.”

According to the information obtained from the Federal Transport Authority, the total number of vehicles found in the country increased by a whopping 203Pct from 274,065 in 2010/11 to 831,265 in June 2017. This means the number of vehicles has increased by an average 33Pct annually in the past seven years.  On top of this, out of the total vehicles, 73Pct are found in Addis Ababa. “The roads are congested mainly because private vehicles are taking up a lot of the space,” argues Solomon. 

“Following the recommendation of the transport policy introduced six years ago, all responsible institutions are currently trying expand mass transportation,” states Solomon. “The city government is now pushing for mass transport, in order to make use of existing infrastructure efficiently.”

Mitiku has a similar thought; “the Addis Ababa Transport Authority is aggressively working to increase the supply of buses used for mass transportation, integrate it with other modalities and effectively utilize the available infrastructure.”

However, experts argue that most of the initiatives could not improve the transport crisis because the government failed to see the big picture. “All the schemes taken to ease the problem are introduced without considering the land-use change and urban sprawl,” argues Tibebu Assefa, assistant professor of urban planning at the Ethiopian Institute of Architecture, Building and Construction, AAU. “The city is expanding with different land use patterns. In Addis Ababa, the workforce is concentrated in some areas while residential and recreational areas are located far away.”

For Tibebu, the only lasting solution is effective urban planning that balances the spatial distribution of people in the city. “Due to the city expansion, distance between work and residential areas is getting wider. If the residential, recreational and work places are known first, it will be possible to introduce the most efficient means of transportation for every section of the city.”

Studies conducted on the subject reveal that two main factors must be considered before any solution is introduced. A study entitled ‘Urban Mass Transportation Planning’ conducted by Alan Black, Professor Emeritus of Urban Planning states that factors like urbanization, which concentrates peoples and economic activities in specific areas, and interrelated land use patterns should be studied and considered before introducing  solutions. 

Addis Ababa is expanding due to high population growth and migration rates. Although rapid urbanization poses several serious challenges for planning, city development and living conditions, it is not being managed effectively by appropriate urban planning mechanisms. As a result, various developmental activities in transport, housing, and utility provision are not well integrated.  

“Urban sprawl and uncontrolled city expansion is becoming a significant challenge with several types of problems,” argues Tibebu. “The transport crisis and the failed attempts to rectify it can be good examples in this regard.”

Although there have been major debates amongst land use and transport planners over which comes first, the development of land or the provision of transport, Tibebu stresses that sustainable mobility can be engineered. “Appropriate design and management of the facilities, as well as the services they provide, can bring a fruitful resolution.”

In his study, Black explains that transport planning requires making compromises between planners’ ideals, and the existing reality; which is often complex. Since transportation has always been dictated by many factors, the final plan should be flexible under different circumstance and adapt to future changes.

Of course, experts argue that transport systems in urban areas should be tailored and prepared to function within the existing developments and limitations by considering and evaluating economic, social, and various other factors in problem solving process, concurrently. This is because transportation is diverse and multi-sectoral and needs to be fully incorporated with other municipal sectors.

The transport-planning guide prepared by the UNDP identifies the most common gaps that are observed in countries throughout the world.  One is giving too much attention to project feasibility rather than to the best possible solutions. Another is that planning often overlooks low cost means of transportation that can improve transport accessibility and mobility. Lack of alternative analysis and absence of consistent evaluation methodology, as well as lack of transport planning departments and experts are some of the other major gaps highlighted in the guide. 

This is why Tibebu argues that the solution must start from the land use and master plan level. “This can fundamentally solve the problem and dramatically improve mobility. It can also decrease the investment needed to construct infrastructures. The experience of cities in Europe and Africa that have low road coverage compared to Addis Ababa, and still have a detailed transport plan supports my argument.”

However, Tibebu says there is a design gap between the master plan and the demands of individuals. “Since the master plan only provides a general direction, a transport plan that outlines the specific demands and detailed urban features is needed.”

For Tibebu, a transport system that does not save time, money, and energy is unnecessary. “Introducing vehicles without considering the existing reality and demand can be more of a problem, than a solution. The point is not increasing the road network, rather, it is decreasing the road congestions.”

While the concept of sustainability is relatively uncomplicated, the notion of building sustainable transportation is. In all possibility, urban transportation systems will never be truly sustainable without appropriate and detailed planning. Because in the absence of planning, cities like Addis Ababa will continue to grow haphazardly without thoroughly considering the needs of their residents.


6th Year . January 16  - February 15 2018 . No.57 


 

 

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info@ethiopianbusinessreview.com (Ethiopian Business Review) Topic Thu, 15 Feb 2018 09:00:00 +0000