World Bank: Ethiopia’s Investment Plan May Be Unsustainable.

The following is the analysis by the World Bank on Ethiopian economy based on the concepts of fiscal policy, that shows how the economy is influenced through government spending and taxation, and Monetary policy that indicates the attempts by TPLF minority regime to control the economy through interest rates and the money supply. Here is the article.

Ethiopia’s dependence on foreign capital to finance budget deficits and a five-year investment plan is unsustainable, said Ken Ohashi, the World Bank’s country director for the Horn of Africa nation. The government plans to borrow at least 398.4 billion Ethiopian birr ($23.6 billion) from home and abroad to fund the five-year growth plan, with an additional 75.4 billion birr to finance fiscal deficits over the same period. “I can’t see it’s sustainable short of discovering huge oil reserves, essentially an unexpected windfall,” Ohashi said in an interview in the capital, Addis Ababa, yesterday. “I don’t see how they can sustain such an aggressive investment plan without getting into serious problems.” Ethiopia, Africa’s biggest coffee producer and second-most populous nation, needs to boost its savings rates to finance the investment plans or risk overheating an economy where inflation accelerated to 29.5 percent in April from 25 percent the month before, Ohashi said. It also needs higher exports to repay the foreign loans. “If you’re not as a nation saving enough, you are dependent on foreign capital or other means of financing investment in an unhealthy, unsustainable way,” Ohashi said. “That’s the sort of trap they seem to be falling into.” Negative Interest Rates Plans to lift the savings rate to 15 percent of gross domestic product by July 2015 from 5 percent will be hindered if inflation continues to accelerate, Ohashi said. “If you allow inflation to get out of hand and real interest rates to become hugely negative you totally take away the incentive to save,” he said. The government-set minimum deposit rate is currently 5 percent, a sixth of the inflation rate. Without domestic savings, foreign debts will expand. “On debt there is a danger,” Ohashi said. “If this public investment-led growth at some point really stumbles or stagnates for a while then all these debt equations could unravel.” The need to repay foreign debts and rising imports could also push down the local currency, the birr, which has lost 41 percent of its value against the dollar since the start of 2009, boosting inflation. A joint International Monetary Fund and World Bank study in May 2010 found that Ethiopia’s debt rose to 14 percent of gross domestic product in 2009, according to the Finance Ministry website. The ratio of debt to exports will reach about 133 percent this year, it said. Private Industry Ethiopia’s economic growth may slow to 6 percent in the fiscal year to July 7, 2012, from 7.5 percent this year, the IMF said on June 1. The estimate for 2010-11 is below the government’s projection of 11.4 percent. IMF data show the economy has expanded an average of 11 percent over the past seven years. Ethiopia operates a mixed economy that encourages foreign investment while state enterprises dominate or monopolize key industries such as telecommunications, banking and power generation. Recent state interventions in the market are discouraging private industry, according to Ohashi. “I do worry that without the private sector expanding much more vigorously then rapid growth is not likely to be sustainable and if that’s the case then all these debt balances could go out of control,” he said. IMF, Policymakers Project Vastly Different Growth Scenarios Delegation concludes Ethiopia’s economy will continue to be challenged, particularly by unabated inflationary pressure 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