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By making closed deals, the government of Ethiopia and the IMF ignored the views of citizens who will be affected by their decisions.
By its own admission, the government of Ethiopia says the country has been suffering from high inflation, foreign exchange shortages, weak tax collection, and unsustainable debt. The collective challenge presented by these problems led to the recent rescue package agreed with the International Monetary Fund (IMF).
The authorities say the $3.4 billion agreement is a panacea for the nation’s economic maladies. The reform introduced a market-determined exchange rate system, liberalized interest rates, removed current account restrictions, secured external debt restructuring, and aims to reduce inflation through monetary and fiscal policy tightening.
“Homegrown” Myth
The federal government insists that the policies it agreed with the IMF are “homegrown”. This claim is more spin than a true description. In fact, the authorities broke with a longstanding tradition and have aligned their policies with the classic IMF-espoused prescription, commonly known as the Washington Consensus.
Perhaps the Ethiopian government could pride itself in convincing the IMF to maintain financing of the social safety net program and to raise public sector salaries as well as continue fuel, food, medicine and fertilizer subsidies. These measures are intended to lessen the potential ill impacts of the new policies.
It looks like the IMF had bent over backwards from its established orthodoxy. One reason could be the reality presented by its own assessment, which stated, “Tightening policies and adjustment will constrain economic activity in the near term…Inflation is expected to peak around 30-35”.
Power Asymmetry
But, the new agreement is not among equals.
The IMF is an institution that lends money to countries that will pay it back. The two ways through which the institution ensures repayment is by making both its loans and disbursement tranches conditional on the implementation of polices contained in the agreement. For instance, only $1 billion is to be disbursed to Ethiopia immediately, the rest of the $3.4 billion is to be phased over the coming four years.
For the IMF, conditionalities ensure commitment to policy change by the Ethiopian authorities, thereby guaranteeing its loans are paid back because of the positive effect of the reforms. The instalments are intended to prevent the authorities backtracking on the agreed policies.
These two mechanisms in essence are meant to prevent moral hazard. The logic is that since the government failed to avert the economic crisis that compelled it to sign the agreement in the first place, only conditionalities and delayed loan disbursements guarantee execution of the new, improved policies.
Regardless of the IMF’s self-justifying rationales, the fact remains that conditionalities and tranche financing are coercive instruments and create power imbalances between the agreeing parties. The Ethiopian government is captive for the entire reform period and the IMF enjoys undue influence.
The IMF has additional leverage too—its loan is considered a “seal of approval”. Other multilateral and bilateral lenders step in only after a country signs an agreement with the IMF. It’s for this reason the institution is sometimes called the “gatekeeper”.
That is why the World Bank announced a $1-billion grant and $500-million concessional credit to Ethiopia a day after the deal with the IMF was announced. The Ethiopian government also expects a total capital injection of $10.7 billion.
Closed Deals
The new policies will significantly alter the economic, political, and social structures of the country. Resources are likely to shift from the import to the export sector. Currency rationing and parallel market operations may decline, ending old rent-seeking networks and producing new ones. Higher foreign investment flows create new interests. Lower economic growth and high inflation can lead to the formation of new coalitions and opposition movements.
Therefore, one would expect such important matters would be widely debated and that citizens would have had a say. Far from it: the parties held the negotiations in secret, bar a few photo ops, abrogating their responsibilities for accountability, transparency, and participation.
This is not surprising given that the IMF is governed by unelected central bank governors and finance ministers. The power imbalance within the institution is glaringly obvious. A handful of countries are the chief shareholders, with the U.S. having the largest share and veto power with the privilege to influence the selection of the Executive Board, while the Europeans choose the Managing Director. To demonstrate the point, the U.S. has 17.4 percent of the IMF quota and 16.5 percent of the votes. In contrast, Ethiopia has 0.06 percent of the quota and 0.09 percent of the votes.
The disregard to public opinion is bleaker in the case of Ethiopia. The macroeconomic policy team, led by the Prime Minister and composed of senior advisors and representatives from the Ministry of Planning and Development, the Ministry of Finance and the National Bank of Ethiopia handled the negotiations with the IMF.
The parliament was kept in the dark all along, only summoned in haste to vote in support of the reform package and the loans accompanying it. The bill passed unanimously, with one objection and one abstention. Nothing less is expected in a parliament where the ruling party has 98 percent of the seats. But, it’s a stark example of the executive’s contempt for parliamentary processes.
One incensed Member of Parliament broke ranks by bringing up the constitutional requirements for wider consultation in such matters. He pointed out that consultation with the parliament and the public on major economic policy changes, and particularly exchange rate policies, are obligatory as enshrined under Articles 55 and 89.
In a rare show of dissent from the party line, the MP challenged the Minister of Finance to explain the frequent top-down approaches to policy making. He questioned why the legislature and the executive branches make decisions without parliamentary scrutiny and consultations with the wider public and civil society.
The Minister said that the changes in the exchange rate regime are market-sensitive and must be kept secret. His argument does not hold water, however. The change in the exchange rate system is only one among many in the reform package. Consultations could have been held at any time on the broader reform agenda.
If the parliament was not kept abreast of the new reforms, there was little chance that consultations would be held with the public. The government lost the opportunity to explain its intentions and listen to the public whom its policies affect. The government could have done this through information sharing and dialogue with the Political Parties Joint Council, the Ethiopian Economics Association, the Ethiopian Civil Society Organizations Council, and similar non-governmental organisations.
Tough Times Ahead
The real economic and social impacts of the policies agreed between the government of Ethiopia and the IMF are yet to be seen and they remain matters for future empirical investigation. What everyone agrees on however is that there will be fiscal and monetary tightening, with a consequent economic slowdown, fall in consumer and business spending that will be the antidote to the rising inflation. And in the short-run, it will be painful. More so among a totally disfranchised populace who had no say in the matter.
Rather than the meaningless “homegrown” mantra, a better description of the new agreement is the Addis-Washington Consensus. A non-inclusive consensus, which combines IMF’s traditional macroeconomic stabilization program with the government’s stance to protect vulnerable groups through social assistance and subsidy programs.
Meaningful consultations with key political leaders and social actors in the run up to the agreement would have tempered the criticisms and resentments of this new consensus and perhaps avert protests that may be on the horizon. Most of all, promoting the virtues of democratic participation was simply the right thing to do.
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This is the author’s viewpoint. However, Ethiopia Insight will correct clear factual errors.
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