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It is big. It is real. And it’s coming to eat Ethiopia’s economy

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!

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