Ethiopia’s economic miracle ride is set to turn into a bumpy road

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Ethiopia’s rapid economic growth is one of the great stories of the 21st Century, but there are signs that the country’s boom may not be sustainable. Recent reports suggest government spending, not improved productivity, has been boosting economy. If the government’s investments don’t prove fruitful, and tax revenues don’t increase, the Ethiopian economic miracle could be in peril.

In 2000, Ethiopia, the second-most populous country in Africa, was the third-poorest country in the world. Its annual GDP per capita was only about $620 (in 2011 dollars). More than 50% of the population lived below the global poverty line, the highest poverty rate in the world. What has happened since is miraculous. According to World Bank estimates, from 2000 to 2018, Ethiopia was the third-fastest growing country of 10 million or more people in the world, as measured by GDP per capita.

It hasn’t just been a matter of the rich getting richer. The prosperity has been relatively broadly shared. The country’s poverty rate fell to 31% by 2015 (the latest year Ethiopia’s poverty level was assessed by the World Bank). Life expectancy rose from about 52 in 2000 to 66 in 2017, and infant mortality more than halved over that period.

Any country making such progress would be cause for celebration, but because of its size, swelling population, and the depths of its poverty, Ethiopia’s gains are particularly heartening. By 2050, the UN projects the country to grow to over 205 million people, from around 115 million today, making it among the fastest-growing large countries in terms of population, too.

 

Yet there are now real questions about whether Ethiopia’s recent economic growth will continue going forward. The World Bank recently revised its projection for 2020 growth down to 6.3% from 8.2%, and to 6.4% for 2021 down from 8.2%. The World Banks says this slowdown will result from “tighter fiscal and monetary policy aimed at containing inflation.” The Ethiopian government still projects GDP growth of greater than 10% in 2020.

In the 2000s, about half of Ethiopia’s growth was due to improvements in productivity per worker, explained IMF Africa director Abebe Aemro Selassie in his July 2019 Keynote Address to the Ethiopian Economics Association. The remaining growth was a result of increases in the share of the employed population and capital investments. Although rises in employment and investment are useful, productivity increases are the best sign of sustainable economic growth. It means companies and people are getting more efficient at making goods and services, and it is rare that  productivity gains are reversed.

In the 2010s, Ethiopia’s GDP growth was even faster than in the 2000s. Yet productivity growth stagnated, down to less than 2% per year, compared to over 4% in the 2000s. Productivity growth has mostly been replaced by increasing capital investment, most of which has been done by the government or state-owned enterprises, said IMF’s Selassie, who is originally from Ethiopia.

This has led the country’s debt to rise from about 40% of GDP to 60%. Most of this growth in debt has come from an increased reliance on borrowing from foreign entities. The government’s high spending and efforts to keep the cost of borrowing low for public and private enterprise also led to high inflation.

In the long run, much of the current investment in Ethiopia could be money well spent. Government spending on roads, schools and hospitals should serve Ethiopia well in the future. The country rates unusually highly on the World Bank’s measure of  “government effectiveness,” suggesting much of this money was spent efficiently.

Economists are concerned long-term growth may never materialize if there a destabilizing financial crisis in Ethiopia.

Economists are concerned this long-term growth may never materialize if there a destabilizing financial crisis. In September, Moody’s changed the outlook for the government of Ethiopia’s ability to pay down its debts from stable to negative because of the combination of rising debt and falling government revenues (paywall). Selasie is also concerned about an increased chance of a financial crisis and he sees two ways of avoiding this. One, the government needs increased tax revenues, which have been falling as a share of GDP since the early 2000s. Ethiopia generates an unusually low rate of taxes compared to its peers, mostly because it grants so many exemptions and tax holidays for local companies. Second, Selassie believes the country needs to develop its export sector and gain more foreign private investment. This would diversify the economy and make it better able to service its debts.

One way the Ethiopia intends to keep the economy humming and generate revenue is through privatization. Privatization is a priority of prime minister Abiy Ahmed, who is just finishing first year in office. The government intends to raise $7.5 billion from selling assets like the phone system and railroads, according to Bloomberg. It is not intending to privatize Ethiopian Airlines though, as it is considered to be well-run and serving state interests as a public company.

Ethiopia’s efforts to continue its fast growth, while staving off financial trouble, is hugely consequential. If the country is successful, it will life tens of millions out of poverty, and live up to the country’s burgeoning status as the “next China.” Failure would be a disaster.

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3 Responses to Ethiopia’s economic miracle ride is set to turn into a bumpy road

  1. None of the so called Ethiopian government officials got the authority to sign this signature. Ethiopian people will not be held liable to any signature the Prosperity EPRDF sign in the people’s name.

    #DoNotSellNileInMyName

    #DoNotSellNileInMyName
    February 5, 2020 at 7:25 am
    Reply

  2. I just read a story from the old country that tells about the ‘imminent’ divorce of TPLF from its front associates in the EPRDF. It talks about how the ‘divorce’ will proceed and finalized. It even tells us about the property settlement where one side will get 3/4 and TPLF will walk away with 1/4 of what is left of the ‘estate’. Then I began wondering who will pay back the more $30 billion dollars that was siphoned off from the nation’s coffers in just 6 years from 2012 and 2018? We are talking about $30 billion in US dollars!!! We hear a great story out of even Nigeria where close to half a billion in US dollars that stolen by the former dictator Sani Abacha was located and is now back into that nation’s coffers. It was not the entire loot but something to be happy about. What I would like to see the Attorney General and Election Board chairman do is freeze the entire property of the former EPRDF until someone starts squeaking with the whereabouts of the looted treasure. 30 billion is not a chump change. Every one of them should start coughing it up. Such drastic and just measure will leave an enduring lesson for any future connivers in leadership roles. Every penny they own now should be declared eminent domain. Meanwhile, this is my advice to the stubborn knuckle heads who are trying to pass as poor victims!!!

    I highly suggest to the leaders of the two groups to grow up, wise up and get their priorities straight. The most important issue on their plate should be how they can put their intellectual asset together to take the citizens of the entire country out of abject poverty. Over inflated pride will only stands on the way of such sacred task. That country had potential and opportunity to do a lot for the good of its people in the 1970’s but because of its misguided and stubborn elite/intellectuals all went down the tube. The craze then was to eradicate everything that seemed to what they called ‘reactionary’ with none given the reforming chance. When all was said and done, millions perished and millions others were left with lifetime emotional scar. When those front running know-it-all elites first went at it, they thought all will be done quick and with minimal collateral damage. Many of them perished in it, many others took to the bushes to give it another try, another left the country and several others wanted to work with the demon. They bowed and licked the boots of Mengistu who they wanted to kill just less than a year ago. They joined others in his loyal entourage in deifying him as the ‘Center’. They called him the ‘Center’!!!! That means he was the ‘Center’ of the ‘universe’. I could not believe my eyes when I read about it a few years after he ran away. Viva Chairman Mengistu!!! Viva! Viva!!! There are some who still prefer to call him ‘Chairman Mengistu’! I once heard one of the reporters of a major Diaspora TV network referring to him so affectionately as ‘Chairman Mengistu’! Mengistu was not that unproductive though. When he cut and ran he was replaced by a smarter talking and even more stubborn ‘Center’. Another carnage for a long 27 years!!! But still the new front running elites don’t seem to learn from the bitter and destructive history of our time. What makes the immediate needs and aspiration of that rural or urban dweller in Tigray so different from that in Oromia, Amhara or any other region? What is it? Does the one in Tigray have priority in ‘reclaiming’ the lasagna as his main course at the dinner table every night? What is it? Stop being childish and behaving grossly bad!!! Grow up!!!!

    Ittu Aba Farda
    February 5, 2020 at 3:42 pm
    Reply

  3. If I have one employee and my company makes a profit of daily income of $1 Brs I am satisfied since me and my employee can spend the $1 BIRR and get through our day.

    Then it so happen I hired 100 employees for my company and we started making 10 birrs profit EACH day for profit, then my economist friend told me how impressed he was since the economy of my company grew . He told me I am successful bla blah blah but when we divided the 10 birrs profit among 100 employees and me , we were not happy and I realized that I should not listen to economists
    As population grows economy GROws. TPLF didn’t grow the ECONOMY the population just grew during TPLF pp EPRDF time.

    Sp
    February 6, 2020 at 12:03 pm
    Reply

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