Ethiopia’s dependence on foreign capital to finance budget deficits and a five-year investment plan is unsustainable, said Ken Ohashi, the World Bank’s country director for the Horn of 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 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 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.

Source: http://www.bloomberg.com/