The International Monetary Fund (IMF) recommends that Ethiopia expand its private sector. Jan Mikkelsen, the IMF resident representative to Ethiopia, who met with selected journalists on Wednesday April 2, said that the government should support the private sector financially and promote domestic savings by activating a securities market with flexible interest rates.
He said that while there is general recognition that supporting the private sector is important, it is constrained by a lack of financial resources. “The large GTP financing requirement crowds out credit for the private sector. As a result, in real terms, the allocation of credit from the banking system to the private sector has remained roughly unchanged over the last four years while credit allocation to the public sector has risen steadily,” the IMF representative said.
On several other occasions IMF officials have called for carefully considering the balance between public and private sectors in the economy.
Ethiopia is one of the global leaders in public investment. According to the World Bank data, Ethiopia’s public investment is the third highest in the world, but its private investment rate is the six lowest.
The international financial institution has said the private sector is suffering from lack of finance.
In the past couple of years even though the country has registered economic growth and inflation remains in single digits export competitiveness and performance remains disappointing.
For instance the country’s export performance during the previous fiscal year was lower than the exceeding trend. In the past few year’s excluding the 2008 financial crisis, Ethiopia experienced significant growth in exports, but the past year saw lower results compared with a similar period of the previous year and was very far from targets.
During the first six months of this fiscal year Ethiopia’s exports also did not meet expectations. Price decreases of the nation’s major commodities in the international market and a disappointing performance in the manufacturing sector has contributed to the decline.
In his report Jan Mikkelsen wrote that lowering the cost of trade, by making logistics more efficient and the exchange rate more flexible would increase competition and strengthen exports. He also recommended allowing more foreign direct investment.
He stated that standardizing the way the foreign exchange market operates would make hard currency more available and eliminate harmful waiting time for businesses to purchase foreign exchange.
The IMF resident representative also mentioned several structural policy challenges. He agreed that the state should continue to play a vital role in economic development but argued that more sectors should be opened up for private investment. “This alleviates the capacity problem both in terms of performance and accessing financing,” he said.
“In particular, gradually opening up key sectors like telecom, trade logistics, and finance, and withdrawing from sugar production could attract new investments and improve efficiency and delivery of services,” he added.
On many occasions international organizations have called for the government to privatize telecom and open the banking sector for foreigners and just as often the government has reaffirmed its strong disagreement. This latest IMF recommendation added trade logistics to that list. A recent law gave the sole multimodal scheme to the state owned Ethiopian Shipping and Logistics Services Enterprise.
This issue has created disagreement between the government and Ethiopian logistics companies who with the monopoly would be broken. The government has said that eventually it will ease the law and allow other private firms to provide logistical service. However, over the past two years the Enterprise has had no competition in the multimodal transportation scheme.
The IMF representative also wants the government to withdraw from sugar production. Currently, the government is undertaking several sugar factories and plantations throughout the country with the goal of ending sugar imports and eventually exporting sugar to other countries.
Ten sugar factories are scheduled for inauguration in the coming fiscal year, by the time the GTP ends. Sources claim there has been some revision in some of those targets and not all the projects will be finished by that time.
The IMF representative also lauded the focus on infrastructural growth.
“I would like to commend the government’s continued efforts to improve infrastructure around the country-undoubtedly, the public investments in power, roads, and the Djibouti railway are key to sustaining economic growth in Ethiopia,” he said.
But he said that withdrawing from sugar production could attract new investments and improve efficiency and delivery of the service.
He pointed out that the planned USD 5.5 billion investment in sugar is more than the USD four billion spent on the Grand Ethiopian Renaissance Dam.
“Why not let for foreign and domestic investors spend their money on sugar, it is very attractive to them,” he said.
The government disagrees saying the needed investors do not exist.
“The sector requires huge capital, so the private sector is not very interested in investing in sugar,” the government argued.
Like previous IMF recommendations the representative also mentioned that the financial sector should be strengthened by promoting a well functioning securities market with flexible nominal interest rates and by phasing out the 27 percent National Bank of Ethiopia (NBE) bill holding requirement on private commercial banks. In the past few years the government has imposed the 27 percent NBE bill on private banks to buy bonds from the amount they lend. On several occasions the local financial intuitions have asked that the government to lift the requirement.