Ethiopia’s seven-month journey in the [full] implementation of International Monetary Fund (IMF) backed economic reforms, including a floating exchange rate, presents a complex picture.
IMF Managing Director Kristalina Georgieva recently paid a two-day official visit to Addis Ababa ‘to see where the IMF- backed reform is heading’ and for discussions with senior officials and central bank regulators.
While the National Bank of Ethiopia (NBE) touts declining inflation, stark realities persist. The cost of living continues its relentless climb, squeezing even middle-income families, while internal conflicts consume a large chunk of this poor nation’s resources and disrupt key economic sectors.
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The IMF’s most recent review of the Ethiopian economy has drawn criticism from bondholders, who harbor concerns about insolvency.
Despite criticism from all sides, the Abiy Ahmed (PhD) administration defends its way of doing business. The Reporter Magazine’s Bewket Abebe caught up with Eyob Tekalign (PhD), a state minister of Finance and a key member of the Prime Minister’s macroeconomic team, to delve into these contrasting narratives. EXCERPTS:
The Reporter Magazine: Could you give us some insight into the scope of the recent visit by IMF Managing Director Kristalina Georgieva?
Eyob Tekalign(PhD): The visit was a high-level mission. Her objective was to see the progress in Ethiopia in general; a sense of where the nation is heading. She had a meeting with the economy team and the Prime Minister.
It was six years ago when she was a Managing Director at the World Bank that she visited Ethiopia. So, she recalls the ambitions the Prime Minister was sharing about Ethiopia; his plans for transforming the nation at large. I think she saw that in action during her recent visit. She had the opportunity to go out and see different projects and she was very much impressed. To any observer looking at Ethiopia then and now, there is a stark contrast between where we were and where we are at.
She reviewed the overall reform plan and the conclusion was that Ethiopia’s reform agenda is on a very promising trajectory. The most impressive thing for her was how the reform is owned as part of the government’s agenda.
What specific areas were covered in the discussions?
She did not come for a technical mission. The visit did not involve any detailed technical aspect. It was for her to get a sense of where we are rather than to have a technical discussion. We walked her through the key economic reform agendas we are working on; in different sectors.
We talked about potential support programs.
The Prime Minister raised two critical agendas. One is the debt discussions. As you know, she is a champion of the G20 Common Framework. The economy team has requested this should be finalized as quickly as possible.
Second, in that sense, there was a call for continued support; additional budgetary support and more flexibility in terms of disbursement schedule. There is a need for more development finance because the cost of the reform is significant. We are spending more than 360 billion birr on social supports; from fertilizer to medicine, petroleum, edible oil, salary adjustments, etc. That is close to USD 3 billion.
I think she did get a sense of the magnitude of the social support we are engaged in and the overall depth and breadth of the reform. I hope she took it to heart.
The Managing Director mentioned that further work is needed to achieve economic efficiency and suggested the importance of patience and support from the public. What specific areas did the Managing Director identify as needing further action?
Her message there was loud and clear. She was saying that a national development goal is a very difficult task. There are people who think that you can just press a button and change a country from one of the poorest countries to a prosperous one. That is not the case. It requires hard work and collective effort. It requires patiently building each block so that the nation can have sustainable developmentand prosperity.
I am personally surprised about how she read into the challenges and opportunities deeply. It was her call for all Ethiopians to get the job done.
Are there any particular areas where the IMF has strongly recommended further action?
You have it wrong. The IMF is supporting our homegrown reform. It is not bringing a new reform agenda with it. The visit was more celebratory.
How about the elephant in the room: the political unrest and ongoing conflicts in various parts of the country, which are hindering economic reform. The situation has created uncertainty for investors, both international and local, making long-term investments difficult. Was the necessity of resolving these conflicts for the sake of the economy a topic of discussion?
Not at all. That wasn’t an agenda. But we don’t undermine how the political instabilities are pulling us back.
Regarding investment, the notion that investment has been declining is completely wrong. Looking at statistics, from UNCTAD for instance, we have been the second largest FDI recipient in Africa in the last three years. Look at Dangote; it recently decided to triple its investment here. Take the mining sector, for the first time in the history of this country we are seeing big investments which have translated into an 800 percent or so jump in gold export revenues. That happens to be quite an impressive result since July was when we started the full implementation of the reform.
How can the export performance of gold be attributed to policy effectiveness, given its correlation with the historic surge in international gold prices?
Previously, due to distorted strategies, exporters used to engage in the sector simply to use the opportunity to [earn foreign currency for] imports. Nowadays, exporting has become a reliable job on its own. There is a before and after. That has to do with policy improvement. Have the stars aligned? Have we had a favorable international environment in the case of the recent achievement? The answer is yes. Mashallah. That is a good thing. But we would not have taken advantage of this hadn’t we worked on our policy. Gold could have been smuggled through informal channels and exports would not have responded as they have done now. So, yes, our policy is an important ingredient in this success.
Open-source reports indicate that gold smuggling is currently widespread. Tigray is a prime example. That is no secret. Has there been any increase in terms of volume?
There might be individuals who, regardless of the government’s efforts, have continued smuggling. Look at the statistics. The revenue generated increased to 1.6 billion. We are talking about 19.8tons of gold exports within seven months, a 8.7 folds compared to 2.3 tons same period last year.
What is the most recent update on the ongoing negotiations with creditors under the G20 Common Framework regarding debt restructuring?
It’s progressing very well. They are finalizing their work. They have given us their offer. We are reviewing that and will give our feedback shortly. That could take a couple of weeks, then an agreement in principle will be announced. It is advancing very well.
On February 17th, a committee of Ethiopia’s bondholders reportedly criticized the International Monetary Fund’s latest report on the country, citing ‘flaws’ that ‘artificially’ outline a solvency issue. What is your take on that?
DSA analysis is jointly done by the IMF and the World Bank. Before the program approval, there was a DSA that the IMF had worked on that formed the program parameters. Bondholders were unhappy, saying the program parameters unduly labeled Ethiopia’s debt as unsustainable. That is their argument. Why are they saying so? Because, depending on that DSA, there would be a debt restructuring requirement both for official creditors and private creditors.
They saw in that DSA that they might have to make more effort in helping Ethiopia, meaning through a haircut. That is why they are disputing it. It is not of our making. It is an external assessment. You may agree or disagree but that is the parameter international financial institutions use. The statement made by the bondholders is inaccurate. The IMF has done a very sensible job on the current state of the Ethiopian economy and some future projections. The world uses DSAs done by the international financial institutions. We cannot be exceptions.
What they refer to is some leaked study from bank consultants. They should ask the bank if they have any questions. But as far as we are concerned, we follow the official line approved by the IMF board itself. The official one is on the verge of finalization. We hope to have more engagement with our bondholders to close this chapter and plan the future investment trajectory of the nation.
Despite the central bank reporting a significant drop in inflation to a relatively low 15.5 percent, the cost of living in Ethiopia continues to rise sharply, placing a substantial burden on the majority of the population, including the middle class. Ethiopia currently has the highest cost of living in Africa, even exceeding nations with higher inflation rates. What do you believe thosegovernment-reported inflation figures help when it comes to the lived experience of ordinary citizens?
The fact that inflation is really declining is a significant achievement, which is a result of coordinated fiscal and monetary policies. On the other hand, yes, we need to do more in terms of reducing the burden of the cumulative cost of inflation over time [cost of living].
It is unfortunate that if you are a civil servant, you probably wonder when you will be paid the right wage that would help you deal with the cost of living. That is the question we always ask ourselves. We cannot achieve this overnight. It requires a collective effort. It requires, among others, increased productivity, a better trade regime, and increasing income.
It is very good that the cost of living is not exacerbated by increased inflation. That is a positive achievement. But making sure that people feel less of the burden of cost of living needs extra work.
The IMF frequently recommends subsidy cuts and tax base expansion for its partner countries, and you have started extensively implementing these recommendations. What is your assessment of its impact on ordinary citizens to date, and what measures are planned to address the rapidly rising cost of living?
Cutting subsidies or increasing subsidies? [Laughs]. If you look at my budget my friend, close to one fourth of it goes to subsidies That accounts for 325 billion birr. These are temporary subsidies to make sure the reform is smoothly implemented. But our overall focus in getting rid of unrequired subsidies will continue. The tradition of subsidizing everything has to stop. Why would I subsidize the American Embassy for their petroleum purchase? There is no reason I should subsidize a private sector that owns five cars. That is a waste of taxpayers’ money. What we do is that we focus on critical areas like public buses.
Over the years, you have faced criticism for prioritizing superficial improvements over meaningful long-term investments in the economy. Critics argue that insufficient focus has been placed on crucial areas such as manufacturing, job creation, improving citizens’ living standards, increasing the number of middle-income households, meaningful infrastructure, education, healthcare etc. How do you respond to these criticisms and evaluate your administration’s performance in these areas? The corridor development project is worth mentioning in this regard. The project’s potential economic returns are unclear for many, especially when weighed against other pressing needs.
Let me give you the full context using the corridor development project. It is not that we have misplaced priorities, but that we are actually multitasking all critical priorities. Take manufacturing; talking about the Ethiopia Tamrit (Ethiopia produces) mantra, I know it very closely as I chair one of the subcommittees. We managed to see a 10-percentage point increase in capacity utilization. Similarly, we have saved billions when it comes to import substitution. If you are telling me manufacturing is not prioritized, I just leave it to you.
How about the contribution of manufacturing to GDP, what percentage increase has been achieved, given its priority as you claimed? How many new factories have opened and commenced production in the last six years? This inquiry is particularly pertinent considering reports from the Ministry of Industry indicating that over 400 factories have ceased operations due to conflict.
Not only the number of factories starting production but also the number of factories that got promoted from small scale to medium and large-scale factories has significantly increased over the last years. We both know that flat 5 percent manufacturing contribution to GDP for years. I wish it had increased to let’s say 11 or 12 percent. But at least that curve has started going up now. We have 7 percent or so now.
Speaking of infrastructure, it is one of our priority sectors. They say ‘if you want to be rich, construct roads’. We have a government that takes this to heart. We are constructing 30,000 kilometers of new roads. Job creation; we created a total of 4.9 million new jobs, excluding the foreign placement. There is a cautious effort to create jobs across sectors. Take our work in the digital economy; we have missed the first four industrial revolutions. But we don’t want to miss the fifth. This is probably the first African country that established an AI institution three years ago. Even the westerners are impressed by this forward-looking effort by the government.
Our other priority is to make our cities green, smart, clean, livable, and fiscally sustainable. We have shown our capability in executing projects.
Let me tell you one thing. I remember some 20 years ago when I was a junior in the foreign service. One day, I was in the lobby waiting for someone. Two foreign ambassadors, one who had long been in Addis and the other a newcomer, were talking. The newcomer asked if there were shanty places in Addis Ababa. The other ambassador replied, ‘Addis Ababa itself is a shanty place’. That was how he described Addis Ababa. Look at Addis Ababa now. The corridor development project makes Addis Ababa more business friendly and most importantly one of the best destinations for conference tourism. We had 50 more big events compared to last year. It is a very worthwhile investment.
Conference-related businesses are often seasonal in nature and the jobs created by the corridor development are mostly temporary, ceasing upon project completion. Conversely, the corridor development project has displaced thousands of businesses, disrupting previously active economic areas with significant transaction volumes. How do you reconcile these outcomes?
Those whom you say will be jobless as the project is completed will rather be the next contractors due to their experience from taking part in this project. Conference tourism is a pure business for different sectors such as transport and hospitality.
What we are doing is multitasking, not misplacing priorities. If you want to prosper as a nation, you cannot do it by having a myopic view of development.
That is exactly what your critics argue. They contend that genuine, long-term investments in productivity-enhancing sectors, such as manufacturing, education, and healthcare, remain neglected in favor of superficial projects. They assert that these structural investments should have been prioritized, especially given the destruction of numerous educational and healthcare institutions due to conflict. Conversely, a bigger chunk of resources is allocated to military expenditures (for internal conflict) and vanity projects. Is that not what misplacement is all about?
No. You told me we have misplaced priority against infrastructure, I told you how we have built 30,000 kilometers of new roads. You told me we have not given priority to manufacturing; I told you we have witnessed a ten-percentage increase in its capacity. We have boosted the digital economy from just 50 million to 9.7 trillion birr.
Education—we have built 40,000 more kindergarten . My point is that we have our priorities right. Tertiary education—we have more than enough institutions already. We need to question if they are generating the kinds of students they are supposed to generate and whether they are worth investing in.
My whole point is that you need to have a holistic view. The farmer has to farm. Those who build the cities should build, those who work on the digital economy should work there, you should continue asking questions and criticizing the government, I should continue enforcing policies etc. That is how it works.
Do you believe these things are actually happening in today’s Ethiopia, as you stated?
Trust me, history will mark this period as a key turning point where, despite all the challenges, the country transforms.
