Financing Long-term Development Plans

Over the past decade-and-half, the drive for industrialization through infrastructural expansion and mega industrial projects called for significant resource requirements. Ethiopia has little mineral exports to take advantage of a commodity price boom, so it must mobilize resources from local and foreign sources.Ethiopia has primarily leveraged external debt for financing development. External borrowings, both concessional and commercial, have been used heavily by the central government, SOEs, and mega private sector projects. For instance, between 2007 and 2019, external debt taken on by the government increased to ETB460.6 billion from ETB18.4 billion. Similarly, both government- and non-government-guaranteed loans drawn by SOEs increased to ETB 320.91 billion from ETB 2.7 billion. FDIs have also played a significant part in boosting the manufacturing investment. The building of industrial parks has attracted more FDI, particularly from China. Furthermore, the National Bank of Ethiopia (NBE), the state, and the private sector have been used heavily to support development. Besides borrowing from NBE, the government has used a captive treasury bills market to fill budget deficits.

The drive for development in the past decade was envisaged in two successive grand plans: GTP I and GTP II. The implementation of the plans (despite with limited success) has caused considerable economic imbalances: building up of debt—both domestic and external, high inflation, severe foreign exchange shortages, and a vulnerable financial sector.

Recently, the government of Ethiopia has prepared a ten-year plan covering the period of 2020-2030. The current plan is as ambitious as its predecessors. For instance, in the current document 4.4 million houses are planned to be built. Similarly, other aspects of economic growth in the document—GDP growth of 10Pct and domestic revenue growth of 26.1Pct— are as wildly ambitious as the housing plan.

Keeping aside the practicality of achieving such highly ambitious targets, the new plan has considerable resource requirements. Over the next ten years, government expenditures are projected to reach ETB19.3 trillion. Out of which 88.7Pct is expected to be covered by governmental revenue and grants. The balance is a budget deficit. Apart from budget financing, domestic resource mobilization (bank and MFIs savings and loan collections, sale of treasury bills, and funds from capital markets) is expected to reach ETB18 trillion. 86.3Pct of this accounts for domestic savings mobilization and loan collections by the finance sector. These projections are too good to be true by past experiences. For instance, during the year ended 30 June 2020, the total savings mobilization and loan collections by the banks and MFIs is less than ETB350 billion. Planning to mobilize ETB15.53 trillion through banks and microfinance institutions over a ten year period requires a leap of faith. Considering the political instability, which could last for some time, the possibility of mobilizing such a large amount of resource is too unrealistic.

The trouble with these projections is that if the resources do not materialize as planned while expenditure plans are executed, considerable resource gaps will be created with serious repercussions as significant amounts are earmarked for the public sector. In such a case, project delays, inefficiencies, and cost build up will be inevitable. To fill the gap, the government may be forced to use ways of financing which have caused serious economic maladies in the past decade: massive borrowing from the central bank and foreign creditors and forcing the private sector to fund the public sector. For instance, borrowing from the central bank has caused repeated spells of high inflation. Persistent high inflation coupled with a range of administered interest rates has made real interest rates to be close to zero or negative for most of the period since 2006, causing distortion in resources allocation.

One of the most striking things about Ethiopian policy makers is that they often make wild projections despite repeated failures. A realistic resource and expenditure plan is extremely essential for running a healthy economy. It enables Ethiopia to practically leverage domestic revenue, foreign aid, domestic savings, external borrowing, and FDI for its development. A realistic resource plan will also avoid the kind of serious economic imbalances that Ethiopia experienced over the past decade and reduce unhealthy interventions in the financial sector.

Ethiopia needs to pay extra attention to domestic resource mobilization—both domestic government revenue and savings—as foreign aid and borrowings are unpredictable. The mobilization of savings entails rewarding savers with positive returns. The past decade’s experience shows that savers have been punished due to persistent negative real interest rates caused by inflation. The negative interest rates have also caused a considerable distortion in resource allocation. Through tight monetary policy and other instruments, the government should create an economic situation where savers earn a real positive return to encourage more savings. Overhauling the tax system and stabilising the political situation will enable the tax authorities to collect more revenue as businesses will thrive.

9th Year • Jan 16 – Feb 15 2021 • No. 94


Leave a Reply

Your email address will not be published. Required fields are marked *

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

2Q69+2MM, Jomo Kenyatta St, Addis Ababa

Tsehay Messay Building

Contact Us

+251 961 41 41 41