An economy under pressure??!!  So what else is new in the world?  Given the worst global economic slowdown seen in most of our lifetimes, hardly any nation has been spared from its terrible fallout.  And while some of the pressure points on the Ethiopian economy undoubtedly have their roots in the global recession, others have little to do with it and even when they do, the effects are being manifested in different ways than might be expected.

The bottom line is that Ethiopia’s economy is now facing intense pressure from a variety of directions that pose dramatic risk taken one at a time let alone in seeming concert with each other.  Sometimes, a possible answer for one seems like it may exacerbate another. On the heels of several years of significant GDP growth, it might lead one to ask whether we'll be able to sustain that growth this year or even in the next few ones.  

Global Slowdown Hits Home

The financial crisis may not have hit Ethiopia (which still has a financial system closed to foreign investment) in the way it hit countries with open systems but has done so indirectly by preventing the inflow of funds into the country from primarily 2 sources – FDI (Foreign Direct Investment) and Diaspora remittances/investments.   The reasons for this are self evident – many trillions of dollars in net worth have almost literally evaporated into thin air overnight and consequently left a lot less people with the resources to engage.  Secondly, of those who still have the funds, there is generally a much more cautious approach to investing worldwide than previously. 

Turning to the Diaspora, a population that’s been hit hard by the effects of deep recession in their domiciles simply cannot remit as much it used to and purchases of high end real estate in Ethiopia (primarily fueled by the Diaspora) has almost come to a complete halt given the current climate.  In fact, there have even been reports of real estate contracts abandoned with money left on the table by some Diaspora buyers with lost jobs and erased home equity values being the primary culprits behind such drastic circumstances. 

Finally, prices for many goods and commodities that Ethiopia exports on international markets have declined with the once booming floriculture sector in Ethiopia seeming to take the hardest hit.  But what could have been a ‘silver lining’ in this particular cloud – that coffee prices have remained relatively stable or declined by a much lower amount (in fact, have risen slightly at certain points!), has unfortunately run into another hiccup that could potentially threaten much greater consequences.

Another Coffee Debate?

Only a couple of years after the bruising debate over Ethiopia’s attempts to trademark and license some of its best known names on international markets, another tempest is currently in its early stages.  Ethiopia’s coffee exports have seen a significant drop from the previous year and are responsible in significant measure for the sizable shortfall in export earnings for the first 3 quarters of the current fiscal year.  The government maintains that exporters hoarded their coffee, refusing to sell at lower prices while the exporters themselves and other observers including the SCAA maintain that the adoption of a new trading system centered around the ECX has basically removed the opportunity for exporters (who export 80% of the country’s coffee) to sell ‘specialty coffee’.  Producers (as opposed to exporters) can sell their coffee directly to overseas buyers but the latter are responsible for the vast majority of coffee exports so the argument that this loophole represents a sufficient window for specialty coffee, is not holding much ground.  So yes, it is yet another debate on coffee. 

But it is the timing and present impact of this one which is rather excruciating.  Of course, coffee is the country’s biggest earner of foreign exchange by far.  So the impacts of the drastic drop in coffee exports right now are being felt smack bang in yet another problem area of the Ethiopian economy…

The Almighty Dollar

Foreign currency reserves in the country are at such a low level, that just a little while ago, Coca-Cola had all but disappeared from retailer’s shelves everywhere due to the bottler’s inability to secure the necessary dollars to import the bottle caps from abroad .  Coming just a few months after the soft drink distributor had launched a major advertising campaign (Wustawi Irkata), the hard currency crunch could not have amused Coca Cola's executives.  In fact, virtually all other businesses relying on imports to resell or as inputs for their own production lines, were feeling the squeeze even as the National Bank devalued the birr significantly and black market rates shot up north of thirteen to one.  Recent announcements by NBE that another devaluation is imminent have many in the business community bracing for impact.  Net result?  The familiar bottle of Coke (now back in full effect) will now cost you more than it did at the beginning of the year and the price of all other goods that depend on imports have also gone up drastically.  Just when we thought we were getting a handle on inflation…

Inflation and the credit squeeze

There is no doubt that inflation seems to have cooled off somewhat although that should not be mistaken for price pullbacks of any kind.  As the saying goes here (loosely translated), “Prices never go down in Ethiopia, they only go up” (may be the only country in the world where the price of an automobile can actually appreciate over its lifetime!).  The government believes that slowing inflation rates are due primarily to some of the fiscal steps it has taken to combat it.  While it is true that the directive targeted at private banks to tighten access to credit has no doubt had some contributory effect in slowing down private sector activity, the bottom line is that the vast majority of economic activity in the country at the moment is driven primarily by government spending.  O n infrastructure projects, condo construction, you name it, there are hardly any signs of pullback from agencies like the Ethiopian Roads Authority and others like it.  Meanwhile, it isn't quite clear how far state owned banks are going along with reducing their lending.  

In fact, it is more likely that slowing inflation is primarily due to the lower prices of oil, steel and other international imports in addition to the dramatic slowdown in real state owing to the virtual disappearance of the well heeled buyer.  But even this welcome news on the inflation front has worrisome trends in that the continued squeeze on foreign exchange may in fact undermine these gains if it places sufficient pressure on the prices of imported goods. 

Two of the major imports that Ethiopia generally spends lots of hard currency for are oil and diesel.  And of course it is diesel that powers the thousands upon thousands of generators throughout the country that are currently working overtime to try and alleviate the constant power blackouts that are now a staple of life here. 

Darkness falls across the land

In some weeks, power shedding now hits many areas every other day.  The steady drone of diesel generators trying to help Ethiopians cope, has now become an all too familiar refrain.  They can be found all over the capital in various shapes and sizes.  From the portable units some homeowners have installed in their yards to the van sized ones powering entire office buildings from dawn to well past dusk. Even the state power utility EEPCO itself operates container sized units to generate 60 MW of power that try and make up the shortfall from its hydroelectric power plants. 

Every one of these generators burning through precious diesel represents yet more hard currency reserves that must be dedicated to keeping the country afloat.  Those same reserves which are at dangerously low levels and which depend on the continued growth of exports for replenishment.  And yet it is some of the very businesses that fuel exports which are now suffering the consequences of power shedding along with everybody else.  The entire situation seems like a death spiral that Ethiopians can only hope will be averted in time by the much anticipated rains of kremt.  Only about a month or so away everyone hopes but they cannot come soon enough this year. 

Beating the odds

Sometimes you have to wonder…do normal economic laws apply in Ethiopia?  Because even given all of the pressure on the economy, it is still expected to grow at a rate somewhere between 5 and 11 percent depending on whose estimation you listen to.  That’s after overcoming the 2% loss of GDP expected due to the power shortages.  An estimation that many reasonable observers find to be rather low given that power is effectively out nationwide for about 9% of the time.  But the fact that GDP will grow by some amount appears not to be in dispute by anyone.  It is perhaps a testament that the economic growth which the country has enjoyed for the last few years is neither fragile nor superficial.  And for a populace clutching for any vestige of a silver lining to the dark clouds over Ethiopia’s economy at the moment, this could be the one to grab. 

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