Though often seen as Africa’s last liberalization frontier, Ethiopia remains far from truly liberalizing—beneath the appearance of reform, illiberal economic policies persist. Read below
The impression of anyone reading the headlines would be that Ethiopia is liberalizing. Talks about securities exchange, financial sector opening-up, retail sector liberalization and market-based exchange rate dominate the air. While it is true that Ethiopia, an economy often touted as the last frontier of liberalization in Africa, is undergoing change, it is far from liberalizing. While the optic is liberalization, the reality is the prevalence of illiberal economic policies.
Take for example the exchange rate policies. It was on July 29, 2024 that the National Bank of Ethiopia (NBE), an old and opaque institution led by an inexperienced lawyer-darling of the international financial institutions, proclaimed that it has changed the exchange rate pivot to markets. Over the next two months, the Ethiopian Birr lost its value by more than 100%. As a result, Ethiopia obtained two tranches of payment from the International Monetary Fund (IMF) in the order of 589 million USD. The game did not last long, though. The NBE started its usual trick of interference.
The first manipulative interference happened when the NBE ordered the banks to take their commissions away from the exchange rate spread and define it based on negotiations. By doing so, it made price discovery impossible. A trader who needs foreign exchange from a bank would have to pay an amount equal to a selling rate plus an unknown amount of commission calculated based on the subjective judgment of the bank. Hence, the exchange rate displayed on the walls of banks became meaningless as it represented nothing.
Furthermore, the old foreign exchange allocation system persisted. Especially, small businesses find it hard to access foreign currency, although the deafening propaganda is that banks have excess foreign exchange.
A market-based exchange rate is one that moves along with market dynamics. In Ethiopia, that is not the case. No major event in the market, from changes in global prices to local conflicts, seems to have no impact on the exchange rate offerings of major banks. Due to their market dominance, the Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE) are used as informal pegs for the exchange rate. CBE’s offering of 124 ETB buying rate and 126.4 ETB selling rate for a dollar has been there for months now, although the market has been seeing considerable ups and downs over time.
Although the initial cheerleading was that the black market would be eradicated, the reality is far from that. The premium between the formal and parallel market has persisted at more than 10% for nine months now.
The recent auctioning of foreign exchange is also not helping. Not only are banks short of liquidity to participate in the auction, but the average rate offered is still lower than the parallel rate, even when the commission is included.
There seems to be a revolving door between banks and the parallel market. Recent statements by banks on foreign exchange allocation fall short of mentioning the major beneficiaries. When compared to the scarcity of consumables observed in the market, the statements leave so much to contemplate whether the foreign exchange allocated was used for the very purpose it was meant for. This shows the whirlwind of gossip in the corridors of cities as varying as Nairobi and Washington DC about Ethiopians buying properties in full cash settlements is likely true. A huge capital flight is underlying the foreign exchange playfield.
Another area of too much talk of liberalization but illiberal policy actions is financial sector opening-up. The widely talked financial sector liberalization is now being dragged using procedural issues. One of the major instruments being used by the government is a very high capital requirement. A recent announcement has put the entry capital requirement at 39 million USD (compared to 6 million USD in Rwanda and 22 million in Kenya). A recent statement by the governor also show that licensing will be limited to five; and will involve subjective judgments such as “banks from friendly countries”.
The investments of the state also show no liberal pivoting. From the Grand Palace to the series of Ecolodges that the state is putting its money in, the investments are neither fixing a market failure nor paving the ground for the private sector to take a lead. Investments in market-enabling sectors, from energy to transportation, have significantly reduced. The fiscal space sees a growing recurrent budget coupled with reduced capital expenditure, which entails current consumption happening at the expense of future growth.
In the old days, the State-Owned Enterprises (SoEs) space was dominated by corporations owned by the federal government. We are now seeing an SoE space dominated by corporations owned by regional states. In some regions, such as Oromia, regional corporations are given the monopoly to control the whole market chain. This extends from trading companies to manufacturing and onto financial institutions.
Hence, the rent collection apparatus has effectively gotten devolved. Very high corruption and excessive militarization of politics in the country mean that the running cost of the government has also gone up. The only way to sustain loyalty in such a large extractive system seems to be opening avenues for rent seeking and corruption to all sections of the state apparatus.
A major showcase of the illiberal nature of economic policy in the country is the tax system. A system once praised for its pace of reform has now turned upside down. There literally is no organized tax system in the country. Everything is left to the discretion of a very corrupt hierarchy of tax officers. Businesses with organized books of accounts are forced to sideline their records and negotiate with tax officers based on random numbers. Small businesses are levied with an amount equivalent to five years of sales. The tax-complaint system is so misguided that one has to pay 50% of the levied amount to even file their complaint.
Business owners are being forced to disclose personal transactions, although no law requires this. Accounting principles are replaced with personal judgments of inexperienced tax officers often hired based on ethnic allegiances. Financial documentation is of no value. Businesses are left with no choice but to bribe tax officers. It all seem to be set for robbing as if there is no tomorrow.
Further, the regulatory regime is rife with authoritarian instruments. A new law, for instance, forces businesses on roadsides to work until 9:30pm or face hefty fines. This is despite the fact that cities are insecure, especially during late hours. Citizens are being forced to contribute to the painting of residential buildings, although they have no say on the decision or the practice.
Public participation in crucial policy undertakings is nonexistent. Rules are thrown top-down, except there is little coherence in implementation at lower levels. The inconsistency, however, is not related to divergence in attitude. Instead, the lack of a coherent state and/or party structure is the major reason for the irregularity in policy actions.
Despite much talk about the liberalization impact of the recent financing deal with the International Monetary Fund (IMF), I rather feel that it is only the narrative that shifted. The underlying state of things is one where a very large and extractive state is trying to fulfill its demand for resources by extracting every surplus in the economy as if it is the end of the world. And this is worsening the state of livelihood of the people. People already suffering from unemployment, inflation, displacement and conflicts are now being forced to shoulder the costs of the illiberal policy actions of a confused state.
For the many market fundamentalists who were filling the air with their imprudent dreams of an economy inundated by foreign exchange, my message is simple – look for your alternative reality in the new episode of Government Cheese. What we instead have is an illiberal economy bordering kleptocracy, rife with nepotism and corruption. As the saying goes “the more things change, the more they remain the same.”
END