Many Ethiopians looked to 2018 and the then-considered ‘significant political shift’ in more than three decades as the beginning of a great and long-awaited leap forward for the country on many fronts, including the economy.
International partners were swept up in the optimism as well, hoping to see a shift towards more progressive development and more positive bilateral and multilateral relations. Support for economic reform agendas poured in from overseas, with many eyeing a piece of a new and reformed Ethiopian economy.
The hope was short-lived and optimism quickly dissipated as the nation descended into a brutal civil war in late 2020, along with other serious conflicts in various parts of the country.
Three years down the line, the outlook is not encouraging. The country is struggling with its external debt, and galloping inflation remains a headache for citizens and policymakers. The looming cost of reconstruction in the war-torn north, armed conflict in large swathes of the country and dry foreign currency reserves leave little room for buoyancy.
Meanwhile, international development partners are occupied with crises elsewhere on the globe, diverting funding at a crucial time and casting a darker shadow of unease over Ethiopia’s economic future. Senior federal government officials, however, seems unperturbed.
Eyob Tekalign (PhD) is a State Minister of Finance, member of the Macroeconomic Committee chaired by the Prime Minister, and a leader of the ‘Homegrown Economic Reform’ (HGER). The State Minister is also among the chief negotiators working towards external debt restructuring under the G20 Common Framework.
The Reporter’s Bewket Abebe sat down with him for an inside look at how the administration is dealing with the economic turmoil facing the country.
The Reporter: Thank you for your time. Let’s begin with your take on the recent rankings Ethiopia got in the reports from two major international credit rating agencies; Moody’s Investors Service and Fitsh Ratings. Moody’s downgraded Ethiopia’s credit rating in September and Fitch did the same earlier this month, signaling a heightened risk of default. What does this mean to you as a State Minister of Finance and member of the macroeconomic committee?
Eyob Tekalign: When you said ‘recent’ rating, honestly, I thought you were going to ask me about the tourism rating. We received a rating from the World Tourism Organization that puts Ethiopia at the top – as one of the most promising destinations. But, yes, we have seen the reports from credit agencies. I think it is understandable because we have requested debt restructuring. That automatically triggers concern, especially from the private sector creditors. But from our side, as we always do, we are trying to do sustainable, manageable, and fact-responsible debt management. So, as part of the broader G20 Common Framework discussion, we have requested for temporary debt suspension. The G20 gave its reassurance years ago, and it has been in the making. We have been waiting but the system is not delivering as fast as it should. Until that happens, we have asked for a temporary debt suspension. We are hoping that probably this week, even before you go to print, there will be a positive response. As they always do, credit rating agencies look at the headlines, not the full context.
What kind of positive response are you waiting for?
For our creditors to accept the debt suspension. We have requested a suspension until the progress of the debt treatment concludes, and it should be granted. In fact, it was not even our request; it was from the Global Forum. The World Bank president and the IMF managing director together have come out strongly and said at the G20 Forum, ‘look, we have not delivered on this. There must be some temporary solution for developing countries.’ And one proposal going forward is temporary debt payment suspension for a couple of years – maximum. That is what we requested. But the rating agencies only focused on the request, not the broader objective behind it. The broader objective is manageable and fact-responsible debt management. That is how I see it. It will come to pass. It is news. Once that suspension is fully effective and as they pick up the news of the acceptance from our creditors, the news will change. So, am I worried about it? No.
You are not worried at all?
I am not worried at all.
Doesn’t it affect any of your requests?
It wouldn’t. I mean, actually, our request has merit because we are saying, ‘let’s manage our debt in the most responsible way possible.’ That is why we tabled it to all of our creditors under the G20 Common Framework and our co-chairs have examined and supported this. We are hoping that there will be significant progress this month [November].
What leads you to expect such quick results? As you yourself have said, the process has been ongoing but there has been little progress.
Here, we are talking about a temporary debt payment suspension request, which was strongly advocated by the global debt round table itself. It is co-chaired by the World Bank, the International Monetary Fund, and the G20 presidency. The suggestion was tabled at the forum and Ethiopia and other countries have started submitting their requests accordingly. That is the context.
What portion of the country’s external debt will this temporary debt payment suspension consider?
It will essentially be a large chunk of the debt but let’s wait and see the results – if there are any creditors that would not agree to this. But our sense is that the request covers all of our external debt except the private debt. As you know, Eurobonds and so on are distinct. But we will see whether [our request] will be accepted by all.
How long would it [temporary debt payment suspension] last?
For a year or two. Probably two years. But as soon as the bigger restructuring ends, then [the suspension] ends.
You have been meeting with the IMF and World Bank and other potential sources of finance regularly over the last couple of years both for the second phase of the HGER and recently for the Recovery and Reconstruction project. What positive results have you gleaned so far?
We have broadly communicated our ambitious reform program to our partners. As part of that reform program, we are also holding discussions with the Fund for a larger program that would bring in, not just the funding, but resources from all other partners, the World Bank included. The team was here on the ground and there will be a second mission. We are not yet finished but, generally, in terms of appreciation for our reform program, there is a strong alignment. But an actual conclusion has yet to come.
For the recovery, as you know, we have announced the larger Tri-Polar project. But actual commitment has yet to materialize. You know the global environment. There are distractions; the Russia-Ukraine war, and now we have challenges in the Middle East. Donors are distracted and a firm, full commitment for the reconstruction pledge has yet to come. There are some good indications. The EU, for instance, has recently committed some resources. But the partners have exhausted their 2023 budget on many global challenges. We are hoping that 2024 will bring significant response for the reconstruction effort.
Does that mean there have not been any tangible results?
No, there have been. The EU, for instance, has allocated resources to the Commission. And some of the donors, the UN organizations, are supporting in kind. But we have asked for significant resources as a reconstruction package. That requires strong resource mobilization. We have not yet engaged in a full-fledged mobilization campaign because of the global environment. We hope to do that in 2024. And what we hear from our donors is that 2024 will probably be a much better year to realize pledges.
Let’s talk about the HGER. You are promoting its second phase. How effective was the first three-year phase implemented beginning 2019? According to your evaluations, what footprint has it left? Which macroeconomic elements have improved as a result?
I think we have made a very thorough evaluation of HGER 1.0 and the most important conclusion we can draw from that evaluation is it was a huge success on many fronts but it also, because of several internal and external factors, failed to meet some of our policy objectives. I think, in terms of keeping the economy afloat, we saw one of the most challenging and troubling times in our history. Despite that, the economy continued to grow with significant productivity in agriculture, and okay productivity in industry, and a very good growth in service. This is, to any sensible analyst, a significant success. You have to consider the counterfactual. Hadn’t we initiated the reform, where would we be? That is the critical question.
Could you be more specific? What makes HGER 1.0 a success story?
Let’s start with the financial sector – I mean the sector’s sustainability. It continued to expand. We were worried about a possible financial sector crisis because the significant amount of SOS debt was pushing the banking sector to the verge of disaster. We have reversed that, reformed SOS by and large, and put them on a strong footing and the banking sector actually stayed strong. It grew. Look at deposits. They have more than doubled; from 700 or 800 million to almost 2.1 trillion. We said we needed to make a change in the direction of the financial sector, to where it can focus on the engine of growth – the private sector. The private sector is now taking the lion’s share. The most recent data show 86 percent of the credit goes to the private sector. We want to make this sector fully digital. We are talking about 4 to 5 billion birr in transactions digitally now compared to probably just a few million a few years ago. It is a phenomenal achievement.
Similarly, we have significantly improved our national debt standing. The debt-GDP ratio has gone down by 13 or 14 percent. External debt for instance, has come down from 28 percent to 18.4 percent. And the overall debt-to-GDP ratio has declined from close to 60 percent to 41 percent. That is again a phenomenal achievement.
Still, the reality is that the country is still struggling to deal with its debt issues. Is that not something for you to worry about as a State Minister?
Well, it depends. What if we were not applying responsible fiscal management? That would have put us in national bankruptcy, like it did many other countries. Now, do we want to get space for more development work by structuring our debt, and by significantly reducing the amount of money we pay annually to service debt? Yes. That is why we requested debt treatment. Because the amount of debt payment you expend every year has an opportunity cost. You could have used it to import tractors, to purchase fertilizers etc.
It is only logical that we get a good amount of space. We are not saying we want to default like some other countries. We haven’t requested debt cancellation. What we are saying is ‘Give us space. We can actually pay you back with interest but at a later time.’ That is the request. I think that is a very fair request. It is a globally accepted request. That is what the G20 Global Common Framework initiated. Had I known that it would have lingered this long, I probably would have considered laming the request or other utilities. But we trusted the multilateral system – the global system. I don’t think you can blame the Ethiopian government for the delays because we have done our part of the job.
Overall, HGER 1.0 was a huge success despite the difficult circumstances. If you look at productivity overall, agricultural productivity for instance, we have put 2 to 3 million hectares of land into production. This is new. The problem with this country is that we have ample potential that we haven’t yet used. ‘Let’s unleash that potential’ is our motto. Putting three million hectares of land into productive use is not a simple achievement. And through this, we have by and large, ensured domestic supply of wheat. We have at least stopped wheat imports, which has been a major agenda since years back.
Are you saying the country doesn’t import wheat?
There is no wheat imported by the government. There is some wheat coming through donors and through the programs that they provide. Hopefully they will, through time, change it to domestic purchases.
But I tell you, in the earlier days when I assumed office, the important thing was to commission suppliers from two different countries to find wheat to buy from as far as Australia. I feel ashamed when I think of that now. I should have spent that time supporting the farmers on the ground.
There are significant achievements but there are also emerging challenges. That is why we decided to develop HGER 2.0, to make sure we maintain the successes from HGER 1.0 and also deal with other new issues.
Inflation has remained one of the macroeconomic bottlenecks of the economy. Ethiopia appears among the top three inflationary African economies and one of the top ten in the world. The central bank has taken monetary policy steps towards addressing inflation, hoping to tie it down below 20 percent by the end of the fiscal year. Even, these steps affect other aspects of the economy, such as investment and saving. Agricultural productivity is also severely affected in parts of the country stricken by armed conflict. How does the macroeconomic committee, of which you are a member, view these issues?
Inflation, admittedly, is an area where we see a persistent challenge – a very critical macro-challenge. Early on, from budget preparation, we have signaled clearly that the government is serious about abating the inflationary pressure. The budget we presented to Parliament is one of the most conservative ever and Parliament approved. Do we have a significant amount of needs in the regions and the federal government? Yes. But we decided to show constraint because, unless we control the inflation, it will affect the successes elsewhere. Not only from the fiscal stance, but also from the monetary policy stance. We decided that we should reverse the loose monetary policy we followed in the last couple of years due to COVID and other factors. We have already begun to see the early fruits of these efforts. The decision to limit total borrowing to 14 percent has sent a signal to banks and already we have witnessed some noticeable reductions in some of the commodity prices. Does this have a cost? Yes. But it was worth it to accept a certain amount of reduction in investment and borrowing so that we can control inflation. That was a cautious decision and I think an appropriate policy decision by the government.
You claimed that there have been noticeable reductions in the prices of some commodities. Which commodities? Can you mention any single one?
You are a journalist. You should go around and note prices. I mean, it is what our surveys indicate. Check and get back to me if there haven’t been any noticeable price reductions. If you think that the survey isn’t right, then we can have a conversation.
But, going around and noting prices shows otherwise, unless you’re referring to the rate at which prices increase.
Why is the price of oil going down now?
You believe that has to do with the measures taken by NBE?
Well, I am just asking you. And it is not just the rate. You know prices of properties were crazy, increasing overnight to any unhealthy numbers. But now, you sense a significant pause there. I mean if someone was asking say 50 million birr for a property and now selling it 40 or 30 million. I don’t know if that isn’t a reduction to you.
Which particular sector is that happening in?
Most importantly, prices of properties.
Yes, housing. It has paused to gallop and has also showed a certain amount of reduction. I mean, we have to do full survey. That is why I am not giving you specific numbers. But I think that there are such signals in the market that is undisputable.
Significantly lower productivity is anticipated in the upcoming harvest season due to conflicts in many parts of the country; especially in Tigray, Amhara and some parts of Oromia, among others. This defies the government’s claim that “agricultural produce is boosting.” How does the macroeconomic committee view this issue?
Sometimes, our thinking is like smallpox – like everyone needs to be infected so that everyone can feel safe.
Do some of the conflicts in some regions affect us? Yes. But overall, what you need to see is how we have always made up for some of the losses. The last few years there have been conflicts in Tigray, for instance. There was a significant growth in productivity elsewhere to make up for that – in the South, in Amhara, in Oromia. Ethiopians have a collective response to compensate for some of the challenges faced in parts of the country. Of course, one should quickly get out of these conflicts. It is unfortunate that we remain in this cycle. Sometimes, our thinking is like smallpox – like everyone needs to be infected so that everyone can feel safe. Hopefully we make a full recovery from this unnecessary and useless conflict. Yes, I am unhappy that these nonsensical conflicts started and some of them are still going on in some parts of the country. But if you look at the fundamentals, it is also a process in the state formation. And I hope it will give us lessons to create a strong foundation for the Ethiopian nation building. And I am optimistic that this will come to pass and our children will not have to deal with this nonsense again.
But how does the macroeconomic team plan to deal with the consequences of the conflicts? Does the situation call for some out-of-the-ordinary approaches or do you consider it business as usual?
No. We have taken all the necessary measures. That is why we needed to prioritize projects in areas affected by conflicts. We have devised a recovery package for the areas that need to get into production. We have prioritized support such as providing fertilizer to reinvigorate industrial activities. We provided an overall package to industrialists and prioritized lending facilities. That is how we supported the economy. That has paid off.
The economy has been a war economy since 2021. The Damage and Needs Assessment report you compiled last April stated that the war cost the nation over 22 billion dollars. And priority needs under the 3RF (Resilient Recovery and Reconstruction Framework) are estimated at 19.7 billion dollars. What financial resources does the project consider? How does the government plan to mobilize such huge funding?
Those numbers should be taken with a grain of salt. Some are underestimates and others are overestimates but this is what we have. It was surveyed jointly with our partners. We have considered all possible sources. We have and will allocate part of the national budget to recovery work and the rest would come from donors, private sector contribution, and so on. A multi-stakeholder effort is what it requires. It is not just about waiting for donors.
Has the required financing been accounted for? Do you know how much to expect from each party involved?
Not mechanically. There is a broader understanding but not to the point of arithmetical accuracy. That has not been done. But we hope our partners will support us. If that falls short, we will pursue all necessary means internally, including maybe asking you to chip in as a citizen.
At the national level, we have started to quickly implement without awaiting the pledges because some needs cannot wait. We have set up a trust fund now, and established offices at both federal and regional levels. We have a full-fledged office here at the Ministry of Finance. Pledges have started coming in, and the EU and other partners have strongly indicated that 2024 will be a better year for significant support.
Can we say the majority of funding is expected from donors?
Well, I wouldn’t put it as the ‘majority’ but I would say we have highest expectations that our partners will support this important initiative.
How much of it has so far been secured? Are there any estimates? What about for the early recovery, which accounts for about 26 percent of the priority needs (around 5 billion dollars)?
It is better to say the largest chunk is expected to come in 2024. The first phase of it. i.e. putting schools back on track, putting their facilities to work, and the like, that has been accomplished largely through local resource mobilization.
Tell us more about the responses donors and development partners have towards the recovery and reconstruction projects. How promising are they?
I think they understand the importance of this. We are in full agreement about how critical this job is. But in terms of providing resources, they claim that they are constrained by a lot of global challenges. They indicate 2024 might be a better year.
Unquestionably, some donors are extremely hesitant to help with reconstruction as long as the fighting goes on. Some worry so much about where their donations end up.
Broadly speaking, we have no issue in terms of where our partners are in understanding the importance of this. At least I have not heard from formal channels any comment of that nature.
You have introduced the recovery and reconstruction project amid ongoing conflicts in other parts of the country, particularly in the Amhara and to some extent Oromia regional states. Is it possible to undertake a recovery and reconstruction project in the middle of active conflict; if not war?
It’s important because you are addressing the root cause of the problem. It is like the chicken and the egg. It is very important to create opportunities, like employment opportunities, for a sustainable peace. So it is absolutely possible. That is why we are doing it. I think the most important point here is that conflicts are destructive, unnecessary and they should be avoided all together. But when, because of some irresponsible politicians, conflicts arise here and there, it doesn’t mean you should stop doing all the development work, sit down and cry over that conflict. That would be equally irresponsible.
So, what we are trying to do is, as we have done so far, approaching from multiple fronts; focus on agricultural productivity, focus on tourism work, focus on rebuilding what has been damaged and also contain the conflicts using law enforcement agencies and others managing those crises. And I hope this will be the last one. Like that infectious smallpox, hopefully, everybody has contracted and recovered and this will be the end of it. But also we should not take it out of proportion. It is not like that the entire country is under siege. This is an exaggerated notion. I mean, where is the conflict you are referring to now?
In some parts of Oromia and a few woredas in Amhara. It is true that there were serious challenges in the Amhara region months back but it has largely been contained. This notion that the entire nation is under conflict is erroneous to say the least. Go out my friend and see, Ethiopians are at work. I was in the Somali region the other month. I was stunned. One Woreda competing with another. I walked over more than five kilometers of farmland where they cultivate onions sold in Addis. I saw ‘Friendship’-like parks being built by the community in Godie and Degahabur. Another team was in Southwest Ethiopia. They were stunned by the management in areas like Guraferda, which was four years back an area of conflict. People are well rehabilitated and fully focused on production. Go to many parts of Oromia – even in those areas where there were conflicts, and you’ll see they have continued to work on the most important tasks.
Yes, there is a heavy cost. We have to deal with it and ensure there is 100 percent peace and stability.
This was the exact same argument you made during a similar interview two years ago. At the time the conflict was in Tigray. Tigray is now devastated and many expect it to contribute little to the GDP even if the guns are silenced. During the past year, Amhara Regional State, which contributes up to 35 percent of agricultural products such as grain, has been a conflict zone. Do you really believe these issues are not as serious as they seem?
It is a very serious issue. That is why this country needs to complete its state formation. We have an incomplete state formation. We do not have a lasting political settlement. We need to agree on fundamentals as a nation. I am not undermining that agenda. That is a very important point and I think it should seriously be addressed. But it is also equally important to note that I disagree with you in that this is a huge country.
Even in Tigray, which you said is devastated, farmers are back on track. They are grateful that at least fertilizer has come on time and they are asking for more tractors. Tractors are being loaded as we speak in Djibouti.
I don’t want to undermine the potential of this country; the resilience of this economy, and how we have managed to overcome many challenges. The flow of development resources during the last three years has declined due to the global situation and the domestic conflict. But we continued to grow and meet all our critical targets. I want you to see that potential. What I see from where I sit is this country’s potential.