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The second Growth and Transformation Plan (GTP II) was discussed and ratified by the parliament on Friday, December 25, after being presented by the National Planning Commission. The document tabled five months after the beginning of the first budget year of the second GTP period (2015/16-2019/20), was discussed for three days before being ratified by the parliament. The 185-page document outlines the government and the private sector’s targets for the coming five years.
The economic growth is expected to continue, with 11 percent annual growth over the five-year period. At this rate, the GDP will be over3trillion birr at the end of GTP II, a significant increase from1.24 billion birr recorded at the end of the first GTP, five months ago.
The five-year period is projected to springboard the expansion of commodities’ exports such as sugar and potash, expected to bring in more revenue. The energy sector will also be fiercely expanded in the period to act as a major source of hard currency. Also on the export market in the period will be long awaited natural gas. In GTP II, a pipeline will be constructed to supply gas to international markets.
All hopes on exports to cover a gaping trade deficit
The demand for hard currency in the five years period will be USD 119.5 billion, mostly from the services sector. Generating such hard currency will be commodity and services exports, remittances, foreign direct investment, foreign loans from governmental and non-governmental sources. The service sector will need USD 50 billon, while industry and petroleum are expected to demand USD 36 billion and USD 15.3 billion of hard currency respectively.
Demand will significantly exceed the supply of hard currency for the first three years of the GDP, according to the plan document. However, the deficit should decrease by the fourth year and is expected be at zero at the end of the GTP II period.
Affecting the flow of hard currency is the country’s poor performance in exports, which has missed several targets in the first GTP period. The new plan outlines a very concerted effort at expanding and diversifying exports aimed at covering the country’s large trade deficit.
Commodity exports are expected to grow by 36.3 percent every year for the coming five years of GTP II, and make up for 11.8 percent of the GDP in this period. That is an earning target of USD 14 billion by mid 2020. The target is more than double the current share; commodity exports make up only 4.9 percent of the GDP.
Exports from manufacturing are expected to make up 3 percent of the GDP in the 2019/20 budget year from the current 0.6 percent. The industry sector in total is projected to cover 3.6 percent of the GDP, USD 4.2 billion, in the stated period. Exports from agriculture will also have a GDP share of 6.5 percent in the end of the GTP period up from the current 3.6 percent bringing it to USD 7.7 billion in earnings. Mining exports will have 1.7 percent of GDP, a hike from the current 0.6 percent.
Revenue from mining is expected to reach USD 2.05 billion, a high increase from the current USD 344 million. The new plan outlines a strategy to export value added products, expand current production and diversify exports in the sector.
In the past budget year, the country exported 4,373 kg of rough opals, which will be reduced to 1,000 kg of processed opals in the 2019/20 budget year. The export of value added opals is expected to grow to 900 kg from 194.5 kg the past year.
Gold, the major source of hard currency from the mining sector will reach 25,370 kg in the end of the GTP. From the stated amount, artisanal gold miners’ production will be 13,370 kg from 5,548 kg, while production will be expanded to 12,000 kg from the current 3,505 kg.
The export of potash will commence in the fifth year of the GTP II. According to the plan, the production of potash, which is a manufacturing mineral, will start in the 2018/19 budget year and by 2019/20, 74,000 tons will be exported.
The construction of a gas pipeline to the port of Djibouti from Kalub and Hilala will also be undertaken in the current GTP period and is set to become a significant export in the sector.
In the stated period the government will license 20 prominent mining companies on the iron ore, coal, potash, gold, ceramic minerals, natural gas and silica sand development.
Most ambitious of targets has been set for electric energy exports, expected to increase from the current 0.1 percent share of GDP to 0.5 percent, generating USD 642 million over the next five years.
Export projections for GTP periods do tend to be ambitious and optimistic. At the end of the first GTP, export earnings were USD 3 billion; projections had the figure at USD 10 billion. This was revised to USD 6.5 billion after the observation of weak performance in the first year of the GTP.
In the current GTP period, expectations remain high and will need to be met if the economy’s balance of payments is to narrow. The current earnings from exports cover only 20 percent of Ethiopia’s imports.
USD 2.2 billion of hard currency is expected from coffee exports by 2019/20; in the end of the past budget year, the bean contributed USD 780 million, very far from GTP I projections. Oil seeds are expected to generate of USD 2.05 billion. Sugar, which was expected to generate USD 661 million by 2014/15 but made zero income is now expected to generate USD 586 million by the end of the GTP II period.
Expanding tax and finance
The government has set its targets high in efforts to expand its revenue over the GTP II period. The tax to GDP ratio is targeted to reach17.2 percent. In the past GTP, projections were set at 15 percent but only reached 13.3 percent. According to the new plan, government revenue in the 2019/20 fiscal year will reach620.6 billion birr, which was 200 billion in the past fiscal year.
603.3 billion birr of the stated amount will be collected from local tax and non-tax sources, with taxes taking a significant543 billion birr. To reach this target, the tax base will be broadened and additional policy measures are expected to be introduced.
In the final year of GTP II, government expenditure will reach714 billion birr, and from this 421.3 billion birr will be capital expenditure. Local sources and grants will cover 86 percent of the expenditure, while the balance will be covered by local and foreign loans.
Savings will expand from 22.5 percent of the GDP in the most recent budget year to 29.6 percent of the GDP, according to the new GTP document. The financial sector registered good performance in the first five-year period and even surpassed the projection. In the current GTP, banks are expected to expand branches by 30 percent every year, crucial to expanding savings.
Investments are also projected to account for 41.3 percent of the GDP at the end of the current plan’s period.