Economic reform targets jobs, forex, locals

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(Photo: Anteneh Aklilu)

Ethiopia is trying to reform its economy and as a result it plans to amend the public enterprises proclamation for the first time in 25 years.
Public enterprises have suffered from poor management and project handling. They are often also in debt. The government hopes that changing rules around public enterprises will improve the situation. On Monday August 12 a discussion entitled: ‘Addis Woge’ facilitated by the Office of the Prime Minister reviewed the changes the country has been going through and new policies that Prime Minster Abiy Amhed wants to implement.
Brook Taye, an advisor at the Ministry of Finance (MoF) and one of the three panelists, said that in the past seventeen months the government’s economic reform plan has centered around sustainable solutions for problems like inflation, the hard currency shortage and settling public debt, making it easier to do business and privatizing government entities. Privatization has been an area of focus during the reform process.
“As you know the public enterprises like sugar projects, rail lines and energy are highly indebted. To alleviate this, the government has negotiated with four Chinese financers and rescheduled their debt settlement,” Brook said.
This has provided relief for the government and helped it to analyze ways to settle loans related to privatization, the advisor said.
The government is working hard to finish the projects and get them up and running so they can pay off their loans. A consultant has estimated the sugar projects’ value. They have also conducted environmental and factory assessments. When all these studies are completed, hopefully in a few months, six sugar factories will be ready for privatization.
The government has already shortlisted the potential buyers of these sugar industries.
During the privatization process the government also established the Ethiopian Communication Authority. This will provide a legal framework for privatizing telecom. Plans are for around 49 percent of the telecom to be sold off.
They have evaluated the public enterprise law to determine how the telecom should be administrated. “To improve public enterprises, we’ve looked at debt and ways of handling projects and administration, so we will make amendments based on this feedback,” Brook said.
For some reason public enterprises did not understand the concept of debt ratios until they were hopelessly in debt, he said.
In the new draft law, the debt ratio must be balanced with enterprise revenue. As a back-up if this fails to occur, the board of directors of that enterprise will be informed and the supervisor will have to take action.
Inflation and access to foreign currency need major structural changes and as a result are being studied carefully for ways major improvements can be made.
Messay Tadesse, who comes from the private sector, underlined that the government has a clear stand on the privatization process for the inclusiveness of local contribution. “The share of local investors and local citizens should be part of privatization process,” Messay a private businesses consultant said.
Including the Diaspora in the financial sector is a good move which can bring significant change to the economy because it would make accessing finance easier. However, some laws like suppliers’ credit should focus on Ethiopian businesses, according to Messay. He said that if the law includes locals accessing suppliers’ credit it would change the role of the domestic business in the economy.
About two years ago, the central bank amended the suppliers’ credit directive that includes foreign investors’ access to the suppliers’ credit, which was used by hard currency generators. The program was designed to allow them to access hard currency without a hassle. However, local investors who wanted to engage in a similar investment with foreign investors had to wait for the LC process at banks. This took a long time because foreign currency is scarce which made it difficult to import raw materials and spare parts.
On different occasions local investors expressed their thoughts that the directive would force domestic businesses to close because they could not compete with foreign investors or supply their products to the local market. Then, because inputs for their products are scarce their production cost would rise and this would create additional problems since it is harder for them to mass produce than their competitors.
“We believe that if the law allows locals it would drastically change the market,” Messay said regarding access to the suppliers’ credit for local investors.
He said that private businesses create about 500 thousand jobs every year, but access to finance is the major challenge for the private sector. “The access to finance mainly focuses on the manufacturing industry. However this impacts support sectors like marketing, packaging or logistics. But the finance goes to manufacturing,” Messay said.
The 27 percent NBE Bill is also the other problem imposed on private banks. For every loan approval they must purchase this from the National Bank of Ethiopia. “The question of how long this will continue is important. Since they continue applying the NBE Bill, the share of money supply to the public sector is higher,” he argued.
Brook Fikru, who spoke about improving coffee earnings said that they are focusing on incremental and fundamental change. “There are many people involved in the coffee business so it would be hard to implement progressive changes but over time we can make progress,” he said. Brook, who primarily represents coffee buyers, says this method has worked in other businesses as well.
“We cannot run the coffee business like foreign companies,” he added.
He said that the country has registered economic growth in the past since the baseline was very low. “However, the quality of growth is questionable. The economic growth should be inclusive and economic freedom will be considered,” he added.
Regarding inflation, Brook expressed his concern that the financial sector should maintain the value of the currency. “Someone who saves their money at banks, when the value of money is dropping is experiencing a fundamental problem. The major banking problem in the country is maintaining the value of money. Otherwise it is difficult to register change for the society,” he elaborated. “The reform should be measured by the change of a single family,” he added. Currently the lending interest rate at banks has reached up to 25 percent at commercial banks, while inflation has been the major issue for over a decade.
Brook said that compared with the problems in the country the planning for change is vital. “I believe our planning the role of the private sector and the government has not been properly developed compared with the problems,” he explained.
Mamo Mihretu, advisor of the PM, said that the government’s economic reform direction draft document has been discussed at the Council of Ministers in June. He said that the government reform has focused on the change of public life. “The reform called ‘home grown economic reform program’ has been finished and will be tabled for discussion by experts in the near future,” he said.
The program targets the stable macroeconomic sphere with the support of the private sector to create more jobs.
The job creation, export slow-down accompanied by foreign currency challenge, poor project performance and debt burden, inflation and weak private sector involvement related with access to finance are the major areas that would be solved by the program.
To achieve the reforms macroeconomic reform, structural and sectoral reforms are the pillars, according to the PM’s advisor.
Under the macroeconomic reform five sub points are included including: the reform of public enterprises including the change of the public enterprises law amendment that includes improving project handling. Under the macroeconomic reform proper fiscal policy measures will be taken with the goal of improving the tax system and reducing the budget gap besides accelerating the privatization process, according to Mamo.
Regarding to improve access to hard currency the government has targeted to work on export, remittance and privatization process.
Structural change is also expected in agriculture, mining, and manufacturing, to bring in more hard currency and create more jobs.
Mamo said that the government will give proper attention to investors when it comes to reforming the mining sector. “The tourism sector is also the other area that the government gives attention to reform the economy,” he explained.
The ICT and creative industry are also expected to be part of the economic reform program that will be implemented in the coming three years.
Tadesse Tilahun, CEO of NOC who attended the discussion, commented that the private sector should have a role in the public enterprises by involvement at the board. “To improve the project management at public enterprises the role of experts from the private sector is crucial since it is not politics due to that individuals from private sector should involve on boards at the public enterprises,” Tadesse said.
Tewodros Abraham, who came from the logistics sector, said that opening of the logistics sector to foreigners is a good move. But he argued that the government is taking reactive measures on the logistics sector than give prior attention like sectors for instance the price of commodity hike is related with logistics. “Access to capital and issue of land are crucial for the sector. The manufacturing industry shall get finance but if the logistics sector do not get equal opportunity it would be difficult to provide value added services for the industry,” Tewodros said.
Attempts are being made to obtain input from the public regarding economic reform. He stressed that discussion with the public with regard to privatization of mega projects is crucial. He admitted that creating jobs is a major challenge but that with a lot of effort progress can be made.
Roba Megerssa, CEO of Ethiopian Shipping Logistics Services Enterprise, said that there is not a logistics financing scheme so more should be done to reform logistics.
“Due to lack of attention and cooperation the sector is being affected. For instance, because coffee is not packaged here but instead is sealed at the port; for every TEU there is an increase of USD 13. The case is related with the axel load issue with other countries like Djibouti but it can be solved by discussion,” Roba said.