Economic Reform and Development in Ethiopia

Economic Reform and Development in Ethiopia


By :Dejene Yirgu, WIC 26/01/2000




An attempt is made here to summarize the volumes of material issued on the reform measures taken since 1991 and the results achieved as a result. The purpose is to demonstrate that the development program is on track and that holding development

partnership to the current Ethio-Eritrean conflict is unfair and ill-advised.


The New Beginning


The end of the civil war in 1991 and the subsequent establishment of the Transitional Government of Ethiopia (TGE) have ushered in a new Era of radical transformation in both political and economic spheres in the country's recent history.


The political transformation consisted mainly of changing the unitary state into a federal system withthe attendant devolution of power to component regions and their communities; replacing the command economy with a market economy, and instituting

human rights buttressed up by an independent Judiciary. In addition, the right of Eritrea to self-determination was given recognition. Indeed, a new order of state and society was launched in the country.


In the economic sphere, a process of rehabilitating the economy was soon initiated. A USD 672 million donor-supported Economic Recovery and Reconstruction project (ERRP) was planned and elaborated explicitly to help kick-start the moribund economy by rejuvenating essential social and physical infrastructures.


The TGE, also launched a new economic policy whose main thrust was the transformation of the command economy inherited from the previous regime into a functioning and vibrant market-based economy.


Consistent with the thrust of the new economic policy, in Mid 1992, the TGE initiated an economic reform programme with the principal aims of stabilizing the economy and deregulating the economic activity, which had previously been subjected to central planning and that had suffocated the factors of economic growth and the potentials of the forces of production and exchange.


The IMF supported the first three years programme by providing SDR 49.42 Million from its structural Adjustment Facility (SAF)and the World Bank Provided USD 250 Million from its Structural Adjustment Credit (SAC). The program also received the support of other bilateral and multilateral donors.


Principal Reform Measures for Stabilization and Promoting Growth Under the SAF- Supported adjustment programme for 1992/93-1994/95 a number of measures were taken, the principal of which include the following:


Direct price controls were nearly eliminated, transferring the power of decision on setting prices to the choice of market.


The distribution and transport of nearly all commodities were liberalized and to empower the real actors in economic activities to apply the rules that govern the market place.


New and more liberal investment regime was enacted.


Large devaluation of the local currency, Birr, took place, with a view to make enhance the export possibilities of domestic products.


A foreign exchange auction market was introduced, to involve the market in determining the exchange rate of the Birr.


A negative list that limits the activities for which foreign exchange may be purchased was virtually eliminated. This provided to importers the freedom to obtain hard currency to import any Commodity that is in demand in the domestic market.


Restrictions on payments for invisible transactions were considerably liberalized.


The maximum Tariff rates was slashed from 230% to 80% to liberalize import regime.


Tax policy reforms were introduced to enhance Government revenue


Rationalization of expenditure was initiated and defence expenditure was substantially reduced. The share of defence expenditure as percentage of GDP slashed from 11.1% in 1989 to 2.8% in 1992, to 2.6% in 1993, to 2.3% in 1994, to 2.0% in 1995 and to 1.8% in 1996. (Global Coalition for Africa, African Social and Economic Trends, 1999-2000 Annual Report, P 73) This enabled capital outlays, in the infrastructure sector to rise, for instance, from 25% of the total expenditure in 1991 to 40% in 1994 (UN, Economic and Social Survey, 1997)


The first public enterprises were sold, in the policy of gradually transferring, as appropriate, economic activity to the private sector,


Treasury bill auctions were introduced for resource mobilization through private participation.


The market entry of new privately owned financial institutions was permitted.


A market-oriented land-lease system was introduced.


The overhaul of hitherto restrictive labour regulation was implemented.


In the Sectoral front, the development of agriculture was given top priority. To reinforce this and to bring about the structural transformation of the economy industrial development and development of transport network especially that of road transport network was given prime importance.


By every objective criteria, the comprehensive reform measures implemented in combination with the restoration of relative stability, have yielded significant

positive dividends.


The Dividends


The average annual rate of growth in real GDP over the period 1992/93-94/95 was 61/4%. Compared with the real GDP growth rate of 1.9% per annum for the period between 1974 and 1990 and especially compared with the decline in the growth of the GDP for much of the second half of the 1980s, the above growth marked a substantial upturn over the previous two decades.


Inflation is another important indicator of economic performance. During 1990/91-1991/92, the annual rate of inflation reached a peak of 21%. In 1993/94 and in 1995/96 it stood at a mere 1.2%.


The gross official foreign reserves at the end of June 1995 reached the equivalent of 63/4 months of imports. This witnessed a sharp rise when compared to the precarious about one week of import cover at the end of 1990.


In 1992 Ethiopia obtained debt relief from Paris Club creditor countries on London terms, estimated at USD 371 million. This reduced total debt service ratio (excluding rubble dominated debt to Russia) from 84% of export of goods and services in 1991/92 to

32% in 1994/95. In addition the country benefited from the debt-buyback scheme of the World Bank with which about 80% of the total commercial debt of USD 283 million was bought back at a 92% discount.


The period also witnessed positive supply responses of the productive sectors to the liberalized reform regime as well as to sector-specific measures.


Accordingly, the agricultural sector grew by 6.4% in 1992/93 industrial growth amounted to an impressive 27%, while the distributive services recorded an expansion of some 24% year-on-year. The growth of the productive sectors witnessed a sharp up turn as compared to the growth of agriculture at 0.2% on average between 1987/88-1990/91 while that of industrial growth was -5% in 1989/90.


The Liberal Investment regime as well as the enabling investment environment have stimulatedboth domestic and foreign private investment.


Medium-Term Programmes of the First Parliament


TheGovernment of the Federal Democratic Republic of Ethiopia that was elected in 1995, encouraged by the achievements made with respect to the TGE's reform programmes main objectives adopted a new comprehensive medium-term adjustment programme for the period 1996/97-1998/99.


The programme was supported by the IMF's Enhanced Structural Adjustment Facility (ESAF), by the World Bank the form of new sector investment loans and by other multilateral and bilateral donors.


The IMF approved SDR 88.47 million from its ESAF, the World Bank Extended $ 309 million for road sector, $ 200 million for energy sector, $100 million for health sector, $100 million for education sector, $ 60 million for Agricultural research and so on.


As far as the performance of the economy in 1996/97 was concerned:


GDP growth registered a robust 5.6%


Inflation decelerated to a negative 6.4%


Public saving reached 7.8% of GDP in 1996/97 from its lowest level of minus 0.12% in 1990/91.


The fiscal deficit was smaller than targeted level of 62/3 % of GDP.


The external current account deficit (excluding official transfers) was 7% of GDP which was smaller than projected 91/4 % of GDP.


Important liberalization and structural reform measures were undertaken in 1996/97. These were, inter alia:


Foreign exchange bureaus were opened within the Banking system.


The frequency of the foreign exchange auction was changed from every two weeks to weekly.


Export proceeds surrender requirements were reduced and exporters and recipients of private remittances were allowed to open foreign currency deposit accounts so as to liberalizes the external sector.


Maximum import Tariff rate slashed from 80% to 50% and the number of Tariff bands reduced from 8 to 7 with the aim of integrating Ethiopia into the global markets for goods and services.


In 1997/98, as a result of the EL NINO weather Factor GDP growth registered only 0.5%. However, owing to a prudent monetary policy, inflation was kept within the initial programme target of 3%.


The government continued to deepen the structural reform measures in 1997-98 as well. In this respect, the following were the principal steps taken:


Interest rate was liberalized by lifting the control over the bank lending rates in January 1998 and setting the minimum deposit rate at a positive level in real terms so as to encourage domestic saving and investment.


The investment code was liberalized, particularly to allow foreign investments in the Telecommunication and Power sectors.


In sum, the above mentioned series of difficult macro-economic, structural and sectoral reform measures and achievements simply testify the preoccupation of the Ethiopia government with development endeavours.


It is amidst this endeavour that the unprovoked war of aggression was committed against Ethiopia by the Eritrean government in May/1998.


Although the Ostensible reason for unleashing the unprovoked aggression was territorial claim, the real motive for the invasion was diverting the attention of the Ertrean people from asking for the economic miracles about which the regime had been bragging since independence. It was to divert attention from the socio-economic woes that had frustrated the populace Unable to deliver to heir people the promised "fruits" the authorities at the helm of power in Asmara faced the grim reality of the failure of their over-ambitious and misguided economic policies. Thus, they resorted to unleashing a war of aggression as a way out of the economic quagmire they were wallowing in.


It was visible all along that the preoccupation of the Eritrean government since independence has been militarizing the country with the meagre resources it had at its disposal. The Global Coalitions for Africa, 1999/2000 report cited earlier indicated that the percentage share of military expenditure in GDP of this young and poor nation was 21.4% in 1993 and 22.8% in 1996. It is to be recalled from the same report that the figure. for Ethiopia for the same years was 2.6% and 2.0% respectively. Eritrea's military expenditure was the highest in percentage terms, compared to the military expenditures of each of the 48 sub-Saharan countries, as clearly indicated in the same report cited above.


A United States-based publication called the INQUIRER said that Ertrea's military expenditures represent 44% of the country's GDP and described it as the highest percentage in the world. This huge military expenditure has naturally left the economy in tatters, let alone making Eritrea the "Singapore of the Horn." It is an aggression which is designed, paradoxical as it may seem, to impose Eritrea's will and policy on a Country which is in no shape or form suited to play second fiddle to Eritrea. It is also quite possible that Ethiopia's preoccupation with development and with the fight against poverty over the past several years might have created the wrong impression in the minds of Eritrea's leaders with a fixation on muscle-flexing and military might. These devilish motives of the aggressor never succeeded. The task of countering the invasion and going ahead with development activities were going hand-in-hand.


As to the performance of the Ethiopian Economy, the IMF in its public information notice (PIN) No 99/77 of August 16,1999 reported the following.


In 1998/99 real GDP registered a robust growth of 6.7%


Inflation remained in the low single digit of 3.6%


The external current account deficit registered a little above the target of 8.2% of the GDP, due mainly to a sharp drop in world price of coffee (the main source of foreign exchange receipt) and due to a rise in imports, The general government deficit (excluding grants) stood at 6.5% of GDP. as against the programmed target of 6%


The government has managed by-and -large to protect core spending for health and education sectors, despite the spending pressure created by the war,


Important liberalization measures taken included, restrictions of payments and transfers for all current international transactions and the foreign exchange surrender requirements were eliminated in August 1998, with the latter being replaced by a 90% conversion requirement and the conversion period was extended from three to four weeks.


In general, the above report, dated August 16,1999, quotes the IMF's Executive Boards Assessment as follows:


"Executive Directors commended Ethiopia's remarkable progress in improving macro-economic stability and implementing structural reforms over the past two years, despite the shocks created by heavy terms of trade losses, adverse weather conditions, and the war with Eritrea".


From the above it is once again crystal clear that Ethiopia has never slackened its development endeavours despite the constraints of the war imposed on it. However, this effort has not been backed by the international community that failed to condemn Eritrea for its unprovoked aggression against Ethiopia. Had this taken place, it would have saved Ethiopia from the cost of the imposed war and, the resource thus saved would have enabled the country to do more in the fight against poverty.

Even worse, the International Community, led by the IMF, is observed failing to release the resource it has already committed or to commit new resources to Ethiopia's development effort in the wake of Ethio-Eritrea Crisis. For instance, of the SDR 88.47 million that IMF committed to Ethiopia for the period between 11th October, 1996-October 22,1999, about 66.7% was still on an undrawn balance in the IMF account as of August 31, 1999. The IMF even has already

suspended its cooperation with Ethiopia.


The explanation for this action cannot be anything other than political, since the country was commended by the IMF itself for compliance with most programme bench marks and performance criteria and for implementation of the bulk of envisaged reforms. Indeed, there are countries and institutions which are giving due value to partnership in development have stood on the side of Ethiopia realizing that discontinuing development assistance to the victim of aggression would be tantamount to rewarding aggression. Ethiopia is appreciative of this genuine spirit of partnership and will always cherish the

demonstration of their solidarity.


The question one should always ask is: whose purpose does the IMF serve? Or who influences the decision of the IMF?

The IMF kneels down to those member countries having a lion's share of quotas. It is common knowledge that these quotas determine the voting power of each member. Thus, those who contribute most to the IMF are given the strongest voice in determining its policies. The United States, with the World's largest economy, contributes most to the IMF. The contribution was said to be about 18% of the total quotas (about $ 35 billion)in 1998. In the same year the share of Germany was 5.67%, that of Japan 5.67%, France 5.10% and the U.K. 5.10%.


From this one can see that the USA has the voting power just a little less than the combined voting power of other major economic powers of the globe. It follows, therefore, that no one can deter the USA from using its powers in the IMF to dictate its own hidden agendas especially on developing nations. This is exactly the situation in Ethiopia's case.


The USA through the IMF and through other multilateral bodies, where it has the strongest voice, is putting heavy pressure on Ethiopia to yield to its narrow national interest at the expense of Ethiopia's sovereignty. No body can lecture Ethiopia the benefit of peace or the cost of war. Ethiopia has ample taste of both.


It is in this spirit that Ethiopia since the outbreak of the crisis, gave peace efforts a chance even though it had the legitimate right to self defence as provided in the UN Charter. Ethiopia has accepted the OAU Framework Agreement and the Modalities for its implementation. However, it has problems with the "Technical Arrangements" whose provisions are inconsistent with the two basic documents. The "Technical Arrangements" do not assure the return to status quo ante, which is Ethiopia's bottom-line.


Ethiopia cannot compromise its territorial integrity and sovereignty by external pressure as it has never done through out its history. It is a serious mistake to blackmail Ethiopia into forsaking principles of its security and national survival in exchange for what others regard as favours, though the issue at hand falls within its rights. The people of Ethiopia are prepared to carry on with their business regardless of external support. Any partnership with Ethiopia was to be based on justice and free of blackmail.


It should therefore be made clear by now to the USA, to the IMF and to others that the slogan of Ethiopians is always "Motherland or Death".


SDR= US$ 1.32523 (as of August 24, 1998)