An Ethiopian Journal

"Until lions have their historians, tales of the hunt shall always glorify the hunters"

Will prudence help Ethiopia face the credit crisis?

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Story from BBC NEWS:

With the financial turmoil affecting many of the world’s economies, Elizabeth Blunt in Addis Ababa considers how Ethiopia and other parts of Africa may escape the worst of the credit crisis.

The other evening I came home from the bakers with a couple of very small loaves of bread.My gatekeeper looked at them with disdain. The standard one birr (12 cents; 7p) loaf, once enough for two people’s breakfasts, has shrunk to the size of a large roll.

Ayele shrugged and mimed holding the bread up to the light, the way Ethiopian shopkeepers do with eggs, to check that they are fresh. Not just small, you can also see right through them.

This year Ethiopians have been left in no doubt, that their economy, once sealed in communist isolation, is now part of the world system.

The huge rise in world food prices was felt here straight away, just as it was across the whole of Africa.

Even the donkeys based at the builder’s yard a couple of streets away from my house have their own link to the world economy.

They plod up and down my lane looking positively biblical, but the cement they carry is a globally traded commodity.

The construction boom in Asia has driven up the price of cement and steel and oil, with dramatic effects for Ethiopia which has been haemorrhaging foreign exchange just to keep its economy moving.

For countries like Ethiopia, the current easing of the oil price is a great relief. If the world does go into a slump and the price of commodities drops, then Africa will have its winners as well as its losers.

Stormy future

Oil producers like Nigeria have been awash with oil money.

The former finance minister who begged and pleaded to be allowed to squirrel away some of this windfall for a rainy day was shouted down at the time with pleas that “the rainy day is now”.

But she is no longer finance minister, and Nigeria, along with Africa’s other oil producers, may now find itself facing increasingly stormy weather.

Over the past few years, Ethiopia has been having something of a boom of its own, and Addis Ababa is littered with building sites.

But a lot of these ambitious construction projects seem to have got stuck halfway. Some may have run out of cement, but others, even more of them, have probably run out of money.

Debit not credit

What Africa does not have – and what may now protect it from the worst of the crash – is easy credit.

No sign here of the junk mail that used to come pouring through my letterbox in London, begging me to borrow and offering to let me spend money I did not have.

My bank here would only let me open a savings account.

No chequebook, no overdraft, and although it boasted of having the first Visa cards in Ethiopia, they are strictly debit, not credit cards, and businesses are very wary about accepting them.

There is no stock exchange here, so businesses have to get bank loans, but procedures are old-fashioned, credit is tight and interest rates high.

Right across Africa, funds for lending are usually generated within the country, so the banks have little exposure to international money markets.

There are no mortgages for home-buyers in Ethiopia, for instance, although this is a growing sector in the countries which have the most modern and liberalised banking systems, such as Kenya, Botswana and South Africa, but sub-prime borrowers have not been welcome.

Banks usually demand a big down payment – 20% or 25% – limiting the market to a small segment of the middle class.

Saving societies

All this old-fashioned prudence means most people have to manage without formal credit.

All over Africa, getting your own house demands tenacity and creativity.

A young colleague here in Addis Ababa is a member of a savings club, with friends he has known since they were at school together.Each ones puts in so much a month, and each in turn gets to take the pot. That could be enough to pay for a wedding, for instance, or for furniture for a home, but not the house itself.

His older sister, though, is on her way to getting a house, through what is – in the real sense of the term – a building society.

She is a member of an association which has got a plot of land from the government and is developing it jointly.

In all of this, the only money coming in from outside that is a significant flow in most African countries might be remittances from workers overseas.

And it is one source of funds which might be hit by a recession. But the full impact is only likely to be felt at the highest level.

Ethiopian Airlines, for instance, one of the continent’s biggest carriers, is planning to renew its domestic fleet, and to borrow on the international markets to raise some of the money. That could get harder or more expensive.

And although it is very new, a few African governments are beginning to look beyond getting money through taxation or foreign aid and are starting to issue sovereign bonds.

Ghana was one of the pioneers, and their issue did fairly well. Now, experts here say Kenya has plans for a $300m (£171m) bond issue, but that may now prove too ambitious in the new world economic climate.


Written by Tseday

October 5, 2008 at 10:52 pm

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