Thursday, June 4, 2009

Ethiopian Prime Minister Meles Zenawi talks about economy

Question: The last time [on March 19, 2009] you appeared at Parliament, you spoke about the shortage of foreign currency that Ethiopia has faced and said that your administration is addressing the problem. What can you tell us about it now?

PM Meles Zenawi: In terms of availability of foreign exchange, the [Ethiopian] economy, as a whole, is structurally in a foreign exchange deficit; after all, it is a developing country. Therefore, on balance it would be natural if we are to import capital. Nevertheless, the disequilibrium between demand for foreign exchange and the availability of foreign exchange is less than healthy at this time. That needs to be addressed; the gap needs to be reduced and the government has been taking a number of steps to try and reduce the gap between supply and demand for foreign exchange.

One of these methods is to let the market equilibrate supply and demand and that is done through depreciation of the currency. The currency had depreciated significantly in recent months and that has, to some extent, positively affected the situation. In the long run, the key issue is to try to improve the generation of foreign exchange by the market and among other things, it means that we have to improve our marketing, particularly the agricultural marketing system.

One of the challenges that we faced this year is that in our attempt to modernize the marketing system of coffee, people who had vested interest in the previous system have been acting in a manner that would sabotage our efforts to improve the marketing system and that has affected the performance of our export sector. We are taking steps to make sure that the modernization of the agricultural marketing system is perused with vigour and determination.

At the same time, we need to reduce our imports; that can be done, among other things, by encouraging import substitution. As a matter of general policy that has been the case in the past. We need to do more in that sense. So we need to do more to generate foreign exchange through agriculture and industry, and we need to reduce our imports. We are tackling the problem structurally on both ends; supply and demand.

Q. Do you stand by your Finance Ministry’s projection of 11.2pc growth for this year? IMF and World Bank have projected significantly lower figures, almost half. At your last press conference, you had indicated that inflation will be in single digits by June. Do you feel that your government is going to meet that target?

I stand by the 11.2pc projection. The closer we get to June, the firmer the projections become. We are very close to June now, and indications are that the Finance Ministry’s projections are likely to be borne out by the facts of the final turnout. We understand why the IMF had cut down its estimates. The normal practice is that IMF projections are always significantly lower than those of the Ministry of Finance.

At the end of it all, the estimates of the ministry itself has turned out to be underestimates throughout the last three to four years. So the final turnout turned out to be slightly higher on balance every year. I expect the same will happen this year. As far as inflation is concerned, month to month average, I am sure, will be a single digit by June and the 12-month moving average will hopefully be a single digit by the beginning of the Ethiopian calendar year.

Q. Recently your administration has been undertaking various moves in the tax area and in the coffee export area as well. Over recent weeks, your government has taken over the stocks of [coffee] at exporters who you said have hoarded coffee. You revoked their licences. There is also this move in the tax area here and there. What are your comments on that?

What happened is the decision was made to modernize the agricultural marketing system in general, and the coffee market system in particular. While this had been a long standing ambition of the government, it had to expedite this process [recently] because some of our coffee was being discarded by important importers, such as Japan, because of contamination. The system had no possibility of traceability and countries buy because they have confidence not only in the product that they are buying, but also because of its system audit that gives the guarantees.

The system audit of our coffee marketing system was such that it could not give guarantees to any buyer. So we needed to speedup the process of modernization of the agricultural marketing system, and the coffee marketing system to the improve tractability, among other things. So we introduced a new law, which included the commodity exchange as the final terminal market for coffee.

That system is the most modern system which is used in developed countries. But we had a system that was already in operation and there were vested interests as far as the old system is concerned. Those with vested interests had shown that they were very unhappy with the new law by effectively sabotaging our export of coffee. As a result of that, we had a series of meetings involving various government officials, including a meeting that I attended in December 2008 with the coffee exporters.

During that meeting, we discussed the challenges of the coffee marketing system and I indicated to the persons concerned that we are not concerned about past misconducts, the past misconducts are history. Our concern is about the future. So I indicated to them that so long as the actors acted according to the law in the coming months, the government would not look too closely at past performance with regards to hoarding and contraband markets.

I also indicated to them that we would be patient and be waiting for the results over the next few months and if things work out well, everything will be forgiven and forgotten. If, however, the attempt to sabotage our exports continued, then the government would implement the law to the letter.

Since then, a number of senior government officials have been discussing with these traders to encourage them to implement the law. That has not happened. Given the impacts that these merchants have [on the sector], our coffee export market has collapsed. Their initial argument was this is because coffee prices globally have decreased. It is true that it has globally decreased by somewhere in the range between 10-15pc. But we told them that sesame prices have collapsed anywhere between 30- 50pc, and yet sesame exports are up by somewhere again between 30-50pc.

So we indicated to them that their argument that coffee exports are down because of prices is not borne by our data as far as the coffee market is concerned, and also by the performance of the sesame sector. So the idea was to encourage them to move in the right direction and to turn a blind eye to what happened in the past. It didn’t work out that way, so we have taken the legal stages to see to it that those who violated the law are held accountable on the basis of the law. Thus, their trading licences have been withdrawn and whatever coffee they had will be sold in the auction market, and whatever contracts they had entered into would be fully honoured.

As far as taxes are concerned, again, our tax receipts as a proportion of our GDP have been going down continuously. They have now reached an alarming level. In order to correct that, we had prepared plans and programs to improve our tax collection system. The modernization of the tax collection system inevitably hurts some with vested interests who in the past did not pay adequate taxes. So it is possible that some people might have been discomforted as a result of our more effective tax system. But even then, our tax collection system is much lower than the Sub Saharan average. So there is a lot more we need to do to collect taxes.

Q. The tax moves include collecting the tax arrears from the past three years, which can be a large amount of money from large tax payers. The coffee exporters issue has to do with those who account for a large amount of money in the private sector. There is this latest move on the tax area which has to do with VAT and those who have allegedly committed tax evasion. Experts say that this is a calculated move by your administration to reduce the amount of money in circulation through the private sector. You have been advised by various institutions to reduce public spending to fight inflation, and on various occasions, you have mentioned that you are not willing to do so. Developments works by the government will continue despite the inflation. So critics are suggesting that as the government realizes that large amounts of money in circulation is inflationary, it is trying to reduce the amount through the private sector because it does not want to reduce its own spending. What is your reaction to that?

Those who think that we are collecting taxes in order to reduce money supply and we are taking steps against some coffee traders again for the same purpose are highly misinformed. We agreed on a monetary target with the IMF. There was never anytime where we said money supply has no impact on inflation; only illiterates can say that. Some people said that our economy is over hitting and therefore, we needed to reduce growth, but we said no. We said we can reduce money supply without inadvertently or by design affecting growth.

One of these proposals by the IMF was that our budget deficit should be as low as 1.5pc; that is what we have agreed to last year with the IMF. We looked at the figures and we felt that we should and could decrease the budget deficit to zero without affecting government budget, development budget and money supply negatively. This was endorsed by the IMF. We are absolutely on target in money supply terms for months now. So there is no need whatsoever for us to take additional steps to achieve our monetary targets.

In terms of taxes, the steps we are taking are based on a long term plan. At the moment, we were collecting taxes percent in terms with GDP, something around 10pc of GDP. The average for Sub Saharan Africa is something like 18pc. So this government has not been collecting taxes in any significant amount. This has been understood by us for very long time. Then we needed to modernize our tax collection system in order to make sure that our tax collection approaches the Sub Saharan African average.

Now the reforms in the tax system are begging to kick in. As they do so, they begin to bite. When they begin to bite, naturally, some people will be disconcerted. This has nothing to do with money supply.

The measure in the coffee export sector, as I said earlier, this is part of our ongoing program of modernization of the agricultural market system. It is central to sustained agricultural growth that the archaic marketing system has to be modernized. Our agricultural development is driven by the market. If the system is archaic, the result is that it is going to be a bottleneck for agricultural growth. So this is the reason why have taken these steps; it has nothing to do with monetary steps.

Q. What is going on with the Agriculture Ministry about coffee? Is there any specific statistics about how much coffee the has government seized, what it intended to do with it, will the coffee exporters under sanctions face legal action, will they have to go to court and face charges? And how many of them are involved? And why is the Ethiopian Grain Trade Enterprise entering the market?

Whatever coffee has been seized as illegal will be sold in an open auction market. All the contracts that have been entered by these companies will be honoured, as the requirement of whoever buys the coffee. All of it will be sold and all contracts will be honoured.

I only know of six companies who have legal issues, and I would not be surprised if some of them were to be taken to court. As far as the other coffee exporters are concerned, whatever shortcomings they may have had in terms of abiding by the rule of the law, the government is not pursuing their case in the hope and expectation that the steps taken against these six companies will be adequate signal to the rest of the actors in the sector to behave in accordance with the law.

The Grain Trade Enterprise has entered that market for one simple reason; there is concern that the capability to process the coffee exports of the remaining several actors in the market may not be adequate to push the coffee through the system quickly enough. So the preference would be for the private sector actors. If there are bottlenecks created, we will try to beef it up through the Grain Trade Enterprise. But there is no intention of establishing a public monopoly in any of the agricultural markets because we know that it doesn’t work. That is why dismantled it in the first place, and there is no possibility of us putting it back again.

Q. There is a documentary series on Ethiopian Defence Ministry facilities in particular which is being aired by the state media. In one of the documentaries, it was indicated that Ethiopia produces ammunition and it has a reached a level where every soldier uses armaments produced in Ethiopia. Does that also mean that Ethiopia is at a level where it can export these kinds of armaments? If yes, which are the major markets?

Our main objective is to reduce defence expenditure and its pressure on availability of foreign exchange. To achieve that, we have to increase our exports and reduce our imports. Import substitution and export promotion have to go hand in hand. So import substitution in defence has been one of the reasons why we have mostly been utilizing the infrastructure built by the previous regime. All we have done is supply the skilled manpower and fill in some of the gaps.

The objective is to take our own defence requirements, primarily in terms of ammunition and partly in terms of armaments. At this stage we have not yet been able to supply all of our requirements from domestic sources. The focus is to move in that direction faster and quicker. There may be a few extras that we could sell in terms of some equipment. But it is not significant. Export promotion is not the primary objective of our defence industry.

Q. When you hosted Tony Blair in Addis Abeba about five years ago, in a press briefing you said that “Ethiopia will be food secured and food self-sufficient within the coming three years.” Five years on, the country is not food self-sufficient. What do you think now? Does your administration have any mechanism to change the problems of food security?

In terms of food security at a household level, it has proved to be a tricky question. In terms of food self-sufficiency at a country level, I think the figures show that on average, we produce enough to feed ourselves. This is based on a calculation based on about 2.2Qtls of cereals to feed one person over a year. On that basis, we would need something like 150 million quintals or 15 million tons of cereals.

I think we are producing slightly above that. The challenge here is some of it is exported and it is not distributed evenly across the county. So there are millions of people who are unable to feed themselves. So, in terms of food security at the household level, we have still a long way to go before we can say we have achieved food security. The challenge is not merely that of producing enough food domestically; it is for everyone to have adequate income to be able to buy it.

In developed countries, for those who do not have the resources to buy food, the governments are well endowed enough to provide social safety nets. Therefore, on average, nobody gets hungry in those countries not because each one of them have the income to buy adequate food, but because those who do not have such income are supplemented through some sort of social safety net program. So in Ethiopia, we need to do both to achieve food security at a household level.

The easier thing for us to do is to try to make sure that as many Ethiopians as possible have the income to buy adequate food, because the resources at the disposal of the government level are limited and it would not be able to provide the type of safety net program that the richer countries can.