IMF, Policymakers Project Vastly Different Growth Scenarios

Addis Fortune (Addis Ababa)

By Samson Haileyesus

6 June 2011

Ethiopia’s policymakers and a delegation from the International Monetary Fund (IMF), which spent the past two weeks in Addis Abeba, found that their macroeconomic analysis and growth projections of the Ethiopian economy drastically departed from one another, last week.

Sufian Ahmed, minister of Finance and Economic Development (MoFED), gave a parliamentary standing committee a rosy picture of growth prospects on Monday, May 30, 2011.

He sees robust expansions in the agriculture, industry, and service sectors, projecting growth to reach 8.5pc, 14pc, and 22pc, respectively. Over the past nine months, government revenue reached 42.3 billion Br and the protection of basic services (PBS) and debt relief tallied 4.5 billion Br, not even half of the expected 10.6 billion Br, Sufian reported.

The following day, a statement issued by the IMF dashed his optimistic outlook, projecting that it is very unlikely for Ethiopia’s GDP to expand by 11.1pc. More likely was growth of 7.5pc, even more than one percentage point lower than the growth projection the fund had posted on its official website up until last week.

This ought to be depressing news to the administration of Prime Minister Meles Zenawi, who banked its hopes on the base case scenario of GDP expansion at 11pc or best case scenario of growth as high as 14pc.

After a series of consultations with Meles; Sufian; Teklewold Atnafu, governor of the central bank; and Neway Gebreab, chief economic advisor to the Prime Minister; the IMF delegation, led by Paul Mathieu, concluded that Ethiopia’s economy will continue to be challenged by multiple factors, particularly unabated inflationary pressure.

“The principal macroeconomic challenge is surging inflation,” read the statement issued by the IMF at the conclusion of its mission’s consultations with Ethiopian authorities.

The rising cost of living has been destabilising Ethiopia’s macroeconomic balance since the mid-2000s, but record high headline inflation was registered in July 2008, with the consumer price index reaching 49.6pc. Food inflation was recorded at a staggering 65pc.

The source of inflation and the policy response to tame it have always been subjected to sharp differences between IMF experts and Ethiopia’s macroeconomic policy team, led by the Prime Minister. The latter blamed imported inflation due to the escalating international price of commodities, particularly fuel. They also argued that the inflation is partly induced by high and continued growth.

The IMF mission remains as sceptical of these arguments as it was in 2008.

“Over time, inflation is becoming a bigger monetary phenomenon,” the IMF mission argued in its presentation to Ethiopian authorities last week. “The role of interest rates in explaining inflation has declined, as this policy tool has been abandoned.”

Broad money growth in the economy, coupled with state intervention in allocations of resources to sectors favoured by policy, are causing inflation, which the experts believe is illicit tax imposed on the public, they continued to argue.

“While this partly reflects rising international commodity prices, excessive monetary growth has been the principal cause,” said the IMF’s statement of last week.

In their private presentations to Ethiopian authorities, IMF experts have been firm in arguing that the source of macroeconomic imbalance can be largely attributed to the government’s own policy of both fiscal and monetary expansions, disclosed documents obtained by Fortune.

Three years ago, Ethiopian policymakers were persuaded by the IMF to reduce broad money growth in the economy to 17pc, from an average of 23pc at the time. They achieved marginal success with inflation subsiding to the single digits at the beginning of this fiscal year.

This was achieved partly after the government imposed caps on the lending of banks to the private sector, while retaining its policy of making massive investments in public infrastructure projects.

Unrealistic macro framework with excessive public spending as well as domestic and external borrowing which will lead to large imbalances that pose big risks to macroeconomic stability.

If not corrected, current financial repression will lead to further shrinking of savings as well as tax revenue through lower growth.

A more cautious macro scenario ensures more balanced and sustainable growth. Less could be more.

“We have never been out of the woods,” said a macroeconomic analyst who requested to remain anonymous due to the sensitive nature of the subject.

Inflation began to resurge in the economy in March this year, partly due to the overheated economy resulting from policymakers’ decision to massively invest in public projects. This has led the money supply in the economy to 35pc this year, a stunning growth from what the two parties had agreed in 2008.

Macroeconomic analysts blame a conscious decision of policymakers in the administration for allowing this to happen because of their political determination in lending to state enterprises to undertake public projects, which also turned out to exacerbate the deficit in the federal budget.

Despite claims by Ethiopian authorities that the budget deficit is below even that of the Euro zone macroeconomic stability pact of three per cent, the IMF argued that the nation’s budget deficit is much higher when these loans to state enterprises are included.

The IMF refers to public debts owed to enterprises such as the Ethiopian Electric Power Corporation (EEPCo), which took close to 29 billion Br from the state owned Commercial Bank of Ethiopia (CBE). This puts the public debt Sufian claimed last week (7.9 billion Br) as a much suppressed figure.

These investments are not only necessary to ensure speedy economic growth key to overcome poverty within the coming decade, but are also made in a macroeconomic environment with a fiscal monitoring mechanism, Ethiopian authorities argued. These mechanisms include the price caps that were introduced in January 2011 and were partially lifted last week.

Conceding that the results could not be conclusive, MoFED’s 160-page third quarter report to Parliament last week claimed that, “There are indications that the price ceilings have prevented the situation from escalating.”

Macroeconomic analysts, who view this measure as a mere political gesture, do not agree.

“We are back to square one,” said the macroeconomic analyst, who is critical of the decision by policymakers to intervene in the economy at the micro level. “The state’s policy of a lending cap, price cap, and now subjecting banks to buy bonds was bound to fail from the start.”

Privately, members of the IMF’s mission were more severe in their assessments, according to a diplomat who attended the mission’s brief of heads of donor groups based in Addis Abeba. The public statement they issued was watered down by comparison, he claimed.

“The IMF based its analysis of the economy on data from the world economy as well as the government’s figures,” Sukhwinder Singh, resident representative of the IMF in Ethiopia, commented to Fortune last week on the disparity in the projections.

The IMF’s contention is that Ethiopia’s macroeconomic framework is characterised by “excessive public spending and domestic as well as external borrowing;” these trends will continue to unbalance macroeconomic stability, warned experts at the fund.

If left unattended, the existing financial repression, which they argue is an illicit tax imposed on the commercial banks, will further shrink national savings and tax revenues due to lower growth, which will contract to six per cent in the 2011/12 fiscal year.

Ethiopia earned 2.1 billion dollars in revenues from the export of primary goods over the past 10 months, according to the Ministry of Trade (MoT). This is an increase over that of the 1.5 billion dollars during the same period last year. Coffee remains the highest export revenues generator with 633.6 million dollars, followed by gold, oil seeds, and Khat that generated 776.5 million dollars, according to the ministry.

AllAfrica – All the Time