Like the rest of the world but perhaps more than most, the Coronavirus poses an unprecedented existential challenge to Ethiopia. If current projections of the spread of the pandemic hold, the country will see the gains from recent rapid growth, now totally wiped out, the poverty level more than doubled, its economy shattered, export revenues drastically reduced, its external debt servicing shooting to an unsustainable and dangerous level, its social and political order enormously tested and even threatened, and its population decimated by death, illness, hunger and famine.

In my commentary published on EBR last month I showed that the experiences of many countries indicate privatization does not automatically improve performance; the 1998 scandal involving the Uganda Commercial Bank is a case in point. Moreover, the World Bank’s experience of financial reform in the former Soviet Union drew the conclusion that early privatization does little to improve the quality of the banking system and may be counterproductive when institutions are weak and prudential regulation is underdeveloped. Therefore, it is by no means self- evident that Ethiopia should follow Mozambique’s example of privatizing state banks early in the transition stage.

one successful country’s experience

Financial reform in Ethiopia has an interesting history. The issue has been an important agenda in the Ethiopian financial sector since the mid-1990s. It was in 1994 that the first financial liberalization measures took place and continued until 1998.

It is an Africa-wide fact that the policies of the World Bank (WB) and the International Monetary Fund (IMF) such as structural adjustment programs (SAPs) through what is called the “Washington consensus”, which includes privatization across Africa, have been the cause of African stagnation and poverty so far. Apart from liberalization, which includes devaluation and related macroeconomic policies, privatization was one of the key policies that Africans need to undertake in order to get aid from the WB and IMF and through their seal of approval from the Western countries.

The 1997 Asian Financial Crisis vs. Ethiopia’s Foreign Exchange Problem

The 1997 financial crisis in Asia occurred after several decades of outstanding economic performance. Annual gross domestic product (GDP) growth in the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) averaged close to eight percent over the decade before 1997. This is similar to the official growth rate registered by Ethiopia in the past decade.

Prime Minister Abiy Ahmed’s Economic and Political Challenges

In my commentary published in EBR issue 55 entitled “Stand Still and Movement” I expressed my grave concerns about the future of our nation. The coming to power of the new Prime Minister, Abiy Ahmed is a relief for such concerns, at least for now. Abiy is the right pick in all senses of the word to be at the helm of power (as that happens to be the criteria at this juncture in our history). However, for all the peace that he has brought about to be sustainable, it is imperative to understand the major political and economic challenges that he in general, and we as citizens in particular, will be confronting. I will begin to highlight the top five economic challenges first and conclude by briefly noting two major political challenges that are preconditions for addressing the economic challenges.

The Reality of Measuring Poverty in Ethiopia

Poverty can be described as living with an income level below some minimum level necessary to meet basic needs. This minimum level is usually referred to as the “poverty line”. However, what is necessary to satisfy basic needs varies across time and societies; therefore, poverty lines vary depending on time and place, and different counties use different values for their poverty line which are appropriate to their own level of development, societal norms, and needs. According to the World Bank, the content of needs is more or less the same everywhere.

 In July 2014, in its Ethio¬pia Economic Update entitled ‘Strengthening Export Perfor-mance through Improved Com¬petitiveness’ the World Bank advised the Ethiopian government to devalue its currency to speed up the growth of exports. Empirical evidence presented in this report suggests that a 10Pct lower real exchange rate could increase export growth in Ethiopia by more than five percentage points per year and increase eco¬nomic growth by more than two percentage points.

The story of the Laffer curve and three points about Ethiopia’s tax revenue

In economics, the Laffer curve is one possible representation of the relationship between rates of taxation and the resulting levels of government revenue. It postulates that no tax revenue will be raised at the extreme tax rates of 0Pct and 100Pct and that there must be at least one rate that maximises government taxation revenue. The curve is typically represented as a graph (see the figure on the following page), which starts at 0Pct tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100Pct tax rate.

Mauritius is one of the few successful African developmental states. Its prospect for growth in the 1960s was, to say the least, slim. It had a feature of all backward and mono-crop dependent economy. The island nation’s success largely depended on sugar export initially, an export-boom in garments to European markets later and an associated investment boom.

Ethiopian Business Review | EBR is a first-class and high-quality monthly business magazine offering enlightenment to readers and a platform for partners.

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