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From: Berhane Habtemariam (Berhane.Habtemariam@gmx.de)
Date: Thu Jun 09 2011 - 10:49:03 EDT
Ethiopia's Investment Plan May Be Unsustainable, World Bank Official Says
By William Davison - Jun 9, 2011 2:51 PM GMT+0200
Ethiopia's dependence on foreign capital to finance budget deficits and a
five-year investment plan is unsustainable, said Ken Ohashi, the
<http://topics.bloomberg.com/world-bank/> World Bank's country director for
the Horn of <http://topics.bloomberg.com/africa/> 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 <http://topics.bloomberg.com/interest-rates/> 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 <http://topics.bloomberg.com/international-monetary-fund/>
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.
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