What a year 2010 has been for Ethiopia. I’ve never seen anything like it! With twists and turns and lots of surprises… My guess is the road to a new Ethiopia has already commenced.
Happy New Year to all of you peace lovers!!
Debt is our subject today.
Four or five years back I argued that the country has big debts that will eventually become harder and harder to pay. The big wigs then argued that borrowing is no problem when dollars are cheap, that low interest rates mean the cost of servicing that debt is low.
The government is smart, they said, it will plant canes and produce sugar to repay its debt and bring prosperity to the nation.
Results to date? A big fat zero!
Debt worsens of course when interest rates go up and the dollar strengthens, and that’s what happened in the past three years. The more the dollar rose, the more Ethiopia’s Birr fell. In such cases dollar-denominated debt become too expensive to repay or service as the dollar rises. Before long default becomes the only viable option.
Obviously we have a major crisis at our doorstep!
Speaking of crisis…
Last week I read an article that said the PM Office ordered government ministries to stop driving their V8 Toyotas, effective immediately. I applaud this decision to purge the rottenness out of the system. But then again, I hope the PM will not let these cars sit for more than 3 months in parking lots. They will start rotting!
Careful not to repel one blunder by another! Beside wouldn’t be best to establish an independent Government Waste Commission to cut wasteful spending and duplication across the government system?
Anyway, back to our subject: How bad is Ethiopia’s debt problem?
The answer is: Serious!
By the way those who argue Ethiopia’s debt to GDP is under 34%, and therefore little to worry about, are dreaming! Small or large, debt to GDP (Debt being foreign in our case) for countries like Ethiopia that owe far more than they can pay things can get really sh*tty. It can lead to devaluation of domestic currency. After all, we’ve all been there, right? Mr. Government has tried to put the brakes twice in the last eight years – with the devaluation of 2017 and of 2010.
Today, we’re a much poorer nation than we thought we were ten years ago. We collectively owe about fifty times or so as much as we did 30 years ago.
How did we get there?
The basic plot was simple: the government spent, wasted and defrauded too much money it didn’t have.
Last week an interesting comment came from overseas.
It argues the government is wasting its time worrying about its debt… that it should forget about it…not bother making a fuss about it. The World Bank will eventually show up to cancel it all.
I suspect the writer is right about one thing: Many governments don’t care about debts. Our government just agreed to add USD 1 billion of debt from the World Bank, bringing the total debt to close to $30 billion. By the way the USD 1 billion did not come free, it came with interest (of course) and World Bank conditionalities.
You’d expect there would be some growl and cry from citizens at least from those over rated PhDs. Nothing! No outrage!
In a way our commentator has judged the political climate correctly. The public and its leaders are of one mind – not bothered.
What our reader is surely wrong about, though, is that the resulting debt will not add to wealth; it subtracts from it. As far as we know, no debt has ever disappeared, vanished, or left home leaving no forwarding address. As my next door plumber says, debt and gravity can be ignored temporarily but will never go away.
Yes, dear readers, debt does not go away. It needs to be fed. If you lend a Dollar, you still have the Dollar as a credit. The other party has it as a debt. You may ignore your debt, but at a cost; notably, by tossing out your credit away. Debt is never a fiction or a fantasy. It’s real. It is what you were counting on to build your infrastructure…your investment on agriculture and manufacturing…or hospitals. Ignore it, so goes away your infrastructure, farms and industries, or the hospitals.
And so are the jobs that depend on these things…and the incomes that depend on those jobs…and the spending that depend on those incomes. What makes this especially lethal is that most people have no idea it will ultimately come to haunt them.
What to do?
If we are serious about tackling our debt and strengthening our economy here are some short term ideas to consider:
First agree on how to put in place a social contract for unifying Ethiopia.
Cut taxes and reduce government spending by some 20% across the board (excepting education and health) over the next four years.
Eliminate all excessive regulations and introduce targeted incentives to create new jobs.
Speed up privatization of commercial enterprises that provide no essential services to the public and have no perceived security or strategic importance.
Contribute assets to local businesses entering a joint venture agreement with foreign concerns.
Relax restrictions on non-agricultural trade finance, including ICT, artistic endeavors, education, food processing, health services, residential construction, and public transportation;.
Reinforce the right of private land ownership.
Encourage new models of initiatives, such as social entrepreneurship.
Move towards the elimination the state’s monopoly on land ownership, formation of a market for land, as well as the privatization and effective redistribution of agricultural land.
Pursue aggressively foreign investment interest from China (where investment capital and commitment remains strong).
Embark on real fight against corruption.
Not one of these suggestions requires a loan to implement!
It is big. It is real. And it’s coming to eat Ethiopia’s economy
IMPROVING ON HDI
After the demise of the bipolar world, certain individuals (following the lead of critical scholarship) working for intergovernmental institutions started to question some of the establishment’s discourses. Amongst these dialogues, the GDP (Gross Domestic Product) index was one. Critiques surmised, this highly influential index was an outdated contraption that had to be changed or at the least, completely overhauled. The idea of GDP was developed after WWI when manufacturing was considered the preeminent indicator of development. In those bygone days, industrialization signified wealth and social progress (of a country). Consequently, the GDP index’s was highly biased towards tradable material production!
GDP excluded, all household works and chores, including the critical task of upbringing future generations! Many other non-tradable activities of enlightened humanity also didn’t make it to the world of GDP! At the same time, useless and destructive rituals were easily incorporated in it. For example, if we dig a hole (say for months) and then reverse the whole process by filling the same excavated soil back into the dug hole, our revered GDP measures and counts this lunatic activity as productive ‘work’! It is such obvious inadequacies that led critics to undermine the usefulness of the index, particularly when dealing with wholesome human development. Mahbub Ul Haq of the UNDP insisted on implementing a new index to address the shortcomings of the GDP. Obviously, measuring only cranked out stuff and connoting it with general human development was a bit of a stretch to many a thinker.
Dominant interests of the modern world system still favor the GDP, as this index bluntly favors capital, which continues to undermines efforts that try to implement genuinely sustainable economic projects the world over. For instance, the production of arsenals used for the purpose of killing human beings, like WMD, etc., are very much incorporated in the GDP, while life nourishing activities don’t make it to the calculus. What a perverted index! Finally HDI (Human Development Index) came to the fore, without displacing the establishment’s favored index of the GDP. The HDI was recognized as an alternative measurement of ‘development’ in 1990. Today HDI itself is encountering serious conceptual difficulties. As the planet’s ecosystem is stretched to the limits, the widely shared assumption that there will be enough resource to go around, thereby raising the HDI for all and sundry is becoming increasingly unsound, to say the least.
If truth be told, there isn’t much resources left on our planet to indulge in wasteful practices. For example, to have a lifestyle of an average American (for all humanity) will require six to seven planet earths! The rational behind the HDI was the ‘wretched of the earth’ could improve their lot by consuming more: mostly by way of increasing their reach to health services, education, employment, etc. etc.! Here the perceptive can recognize the fallacious assumption still operating behind the development index, i.e., HDI saliently imported the irrational notion of ‘infinite growth on a finite planet’! This stupid dogma has now come to haunt HDI. Moreover, just because people have a high HDI ratio doesn’t mean they are actually content, let alone happy.
Other indices are being developed to address these and other problematic issues that are confronting collective humanity. The World Happiness Report is one. This index ranks countries on the basis of pooled results, hardly a scientific approach. Even here, the implied emphasis on increased and hence unsustainable consumption is still recognizable. If truth be told, what the world urgently needs is a solid sustainability index. See Hickel’s article next column and Boik’s on page 41. All countries need to agree on a realistic methodology that will dynamically measure sustainability. Trying to appease entrenched interests and their destructive model of development is not going to be a tenable proposition. Unless humanity collectively and sincerely addresses issues that are detrimental to life and life support systems, its sojourn on the blue planet will be very brief. “Idolatrous respect for GDP, which measures advertising and jails, but does not capture the beauty of our poetry or the strength of our marriages is unhealthy”. Robert Kennedy (1968). Good Day!
The 33th Extra-ordinary session
The IGAD Heads of State and Government held its 33th Extra-ordinary session at the UNECA in Addis Ababa on Wednesday, September 12.
During the session South Sudan’s President Salva Kiir signed a peace deal with the main rebel leader Riek Machar, formally ending a five-year war that has killed tens of thousands.
The deal mediated by Sudan and signed in Addis Ababa, reinstated Machar in his former role as vice president and comes two weeks after a peace deal was officially agreed upon between the government and rebel groups.
“The eyes of the world are upon us as the South Sudan leaders commit to press for reconciliation and lasting peace in their country,” Prime Minister Abiy Ahmed said ahead of the signing.
Prime Minister Abiy who is the Chairperson of IGAD also said it had been convened after Ethiopia and Eritrea, Eritrea and Djibouti, and Sudan and Eritrea had been reconciled and started the processes of normalization and rapprochement.
The IGAD Heads of State and Government also restored Eritrea’s IGAD membership that was suspended since 2007.
Reform supplier credit schemes, bankers say
Financial industry pundits are recommending that the government reevaluate the suppliers’ credit scheme which excludes local investors and instead give priority to foreign companies. They say getting the letter of credit up front breaches the first come first serve directive of National Bank of Ethiopia.
The banking industry leaders that have links to the local and foreign based businesses, and FDI, argue that the supplier’s credit scheme not only affects local investors but the financial institutions themselves because there is a default risk from their clients.
One of the prominent private bank presidents, who requested anonymity, told Capital that initially the notion of the supplier’s credit indirectly forced the banks that applied without the consultation of them to settle the payment with maturity date. “It has forced the banks to face a default risk which affects the country,” he said.
The supplier’s credit by itself is given priority to the clients who are allowed to access the scheme and not those who registered and are waiting to get the LC.
“When the banks secure hard currency they focus on settling the credit rather than approve the LC for its other clients who are not included on the supplier’s credit scheme, which is also another effect on local investors,” Dereje Zebene, President of Zemen Bank said.
Concerns are also being raised by experts that the scheme is genuine or free from any misbehavior. “It has to be cross checked whether it is a genuine supplier or not, besides that the cost includes hidden expense like interest,” they stressed.
The sector actors stated that the supplier’s credit might also promote the parallel (black) market. “We are seeing that sometimes their supplier’s credit is processed from Djibouti. Who is there in Djibouti?” bankers that Capital spoke questioned. They noted that the imported items have already reached Djibouti by those who have a stake in the parallel market.. They said that it may show that illegal actors are using this scheme to abuse the legal market.
“It is obvious that those who have advantage in the supplier’s credit scheme are enjoying the market without competition from other local producers,” Asfaw Alemu, President of Dashen Bank told Capital. “This system has also forced the local producers to be excluded from the market and suffer from bankruptcy due to several expenses including overhead cost and salary for employees that are difficult to avoid,” he added.
“If they have debt in banks they will also be unable to settle their credit, which forced banks to seize the assets. But it needs adequate data to speak on it and indicate the effect on companies and at the same time on banks,” Asfaw explained.
“When this kind of crisis occurs it becomes difficult for banks to sell the assets of defaulted investors since there won’t be real buyers because all banks have assets to sell out,” Dereje said.
When local investors, who have thousands of employees, layoff their workers, it will also affect the social structure, according to experts. “The supplier’s credit scheme that excludes local investors will also allow foreign companies to be the major market actors, which is against stand the national identity,” one banker said.
“It is not acceptable to exclude local companies to access foreign currency in the scheme,” another banker added.
Addisu Haba, President of Ethiopian Bankers Association and Debub Global Bank, told Capital that the local banks do not have a problem with the local currency to settle the credit. “But the scheme has forced banks to pay the supplier’s credit with foreign currency which is highly scarce when the maturity date comes,” he said.
“If the foreign companies who are engaged in export it would be acceptable but the supplier’s credit scheme includes all actors who sell their products locally or export them,” the association head said.
“Since the government endorsed the new directive we did not facilitate LC for clients coming in the usual trend,” a bank president who did not want to be named said.
“Since I gave the suppliers credit I have to also settle the payment when the maturity date comes. So it will be difficult for my bank to approve other LCs since the priority is for credit settlement,” he added.
Another banker also argued that the credit scheme has escalated the shortage of the hard currency. “A hard currency shortage at banks is observed,” he argued.
He also stated that local investors who already borrowed a huge amount of money from local banks have defaulted since they could not produce and cover their costs and other required settlements including scheduled debt payment.
It has been reported that in the past fiscal year the percentage of banks with non-performing loans (NPL) has grown compared with the previous trend, but banks declined to verify this.
Addisu said that members of the association did not discuss the issue. “It is difficult for me to comment on it since I do not have organized data,” he added.
A president of one of the oldest private banks told Capital that as per the NBE law his bank has given priority to clients that have a support letter from NBE for the scheme of suppliers credit whether it imports priority items or not.
“Local companies that have a support on priority criteria of NBE would not get priority because we don’t have adequate resources and give prime service for clients with supplier’s credit,” he said. “If the supplier’s credit had not come into effect we would serve several clients who are waiting in the queue,” he added.
The bankers said that they tabled the challenge for the new governor, Yenager Dessie (PhD), during the one to one discussion with every bank leader, but they said that the new governor needs more time for change.
Most of the bankers agreed that the supplier’s credit has affected their businesses. Besides that they insist the government should open the hard currency allocation as opposed to strictly controlling it. The government has put the first come first serve into priority sectors but it is not effective.
