Ethiopia currently is going through a major political transformation that was initiated by Prime Minister Abiy Ahmed when he came to power last April. As the PM pushes through his reform agenda, he is facing two equally serious dangers: 1) possible coup d’etat or assassination by forces who are opposed to the changes that are taking place, and 2) a debilitating hard currency shortage that is paralyzing the economy.
PM Abiy is on the right path as far as creating a stable political environment is concerned. By releasing thousands of political prisoners and calling for a national reconciliation, he has been able to diffuse the widespread civil unrest that had engulfed the country for several years before he came to power. Coup attempt is also becoming less likely each passing day as he gains popular support and brings security forces fully under his command. We have observed that the security around the Prime Minister has been beefed up in recent days, although there are still some visible vulnerabilities.
The weak economy, on the other hand, remains a major threat to the PM’s reform agenda. The civil disobedience campaigns that were carried out in the Oromo and Amhara regions before April this year have crippled the economy. On top of that, senior members of the ruling party and their business partners have looted Ethiopia’s treasury dry, taking billions of dollars out of the country. Corruption is out of control. To make matters worse, the government’s economic policy restricts the expansion of all sectors, but particularly finance and communications that are important pillars of a modern economy. It is irrational to prevent private and foreign investments in those industries. Such policies are put in place by politicians for the purpose of manipulating the economy to advance their own personal and organizational interests, not because they make economic sense.
Unless PM Abiy’s government takes drastic economic measures in the coming few months, shortage of basic commodities will lead to further deterioration of the economy, causing political instability that could derail the reform.
The Prime Minister can fix Ethiopia’s economy quickly by taking the following steps that have been tried and proven to be successful in other countries facing a similar situation:
1. Open up Ethiopia’s financial sector to foreign banks in order to help build a competent capital market within a short time, build confidence in the country’s financial system, make additional capital accessible to entrepreneurs, and force local banks to improve their services by exposing them to stronger competition. Opening up the financial sector and privatizing government-owned banks will reduce capital outflow and pave the way for internationalizing the Birr in less than a decade. Despite its economic success over the past 40 years, China is still having a hard time making its currency fully convertible primarily because of the government’s unwillingness to abandon capital controls. Even though China as a country has become an economic powerhouse and its ruling elites amassed enormous wealth, the average Chinese is still poor. Per capita GDP of China is lower than that of war-torn Iraq. China should not be an economic role model for Ethiopia if we want the Ethiopian people, instead of the ruling elite, to become prosperous. Let’s study Singapore and Israel as role models, instead.
2. Permit local banks in Ethiopia to open accounts both in foreign currencies and birr for their customers, and lift the restriction on payments in foreign currencies, i.e., let businesses in Ethiopia accept U.S. dollar, Euro or any other foreign currency from their customers and tourists. It is done on the black market anyway. Make it legal and let business owners obtain hard currencies from multiple sources, not just from the government.
3. Remove tariffs and import restrictions from basic commodities to help reduce shortages by encouraging Ethiopians in the Diaspora to send cooking oil, sugar, wheat flour, soap, etc. to their families back home. There are over 5 million Ethiopians in the Diaspora. Many of them would be happy to buy and send such commodities to their families in Ethiopia if import restrictions are removed.
4. Create a conducive environment for foreign investors to come to Ethiopia and start new businesses: 1) eliminate unnecessary regulations, 2) reduce or eliminate tariffs on most products, 3) change the existing asinine law that prevents private companies from operating internet and phone companies in Ethiopia, 4) pass laws that protect investor rights and private property, 5) simplify the process of granting permanent residency permits to foreign investors, and 6) reduce income and business taxes.
5. Privatize land-ownership and auction off government-owned land. By privatizing land, the government will generate huge one-time revenue, as well as a recurring revenue from property taxes. The revenue that is generated from privatized land will help pay off debts, and fund infrastructure projects such as roads, airports, maritime ports, railroads, etc.
6. Completely privatize all profitable government-owned industries. The government must remove itself from running profitable businesses. The Prime Minister will have a hard time selling this idea in the short term because the concept of privatization is hard to swallow for many Ethiopians who have been exposed to 40 years of socialist anti-free market propaganda. Therefore, do it incrementally. When the people of Ethiopia see the benefit, they will demand more privatization. Socialism is a poisonous ideology that has brought more misery and suffering in the world than any other ideology in the history of mankind. Take a look at Venezuela, an incredibly rich country that has been destroyed by socialism.
7. Abolish subsidies. Price controls and government subsidies always bring with them shortages and corruption. There is a shortage of bread in Addis Ababa currently because the government is subsidizing wheat flour. The government must get itself out of the business of buying and selling food and consumer goods.
8. Promote tourism. Ethiopia’s unique history and culture are highly attractive to tourists, but because of political instability and various other reasons, Ethiopia’s tourism industry is weak. Tourism can be a huge source of foreign currency for Ethiopia.
9. Issue a government bond and market it to Ethiopians in the Diaspora. The government can raise over $100 million USD within a few months by selling bond to Ethiopians around the world and investors.
10. Seek financial assistance and loans from other countries and international institutions.