Blog #3: Ethiopia and the Global Financial Crisis of 2007-2008

By Halie Schuster

The financial crisis of 2007-2008 spurred from a catastrophe in the United States’ real estate market. The effects of this crisis rippled across the world and transformed into the Global Financial Crisis and subsequent Great Recession, crippling the world economy. Africa countries, and more specifically Ethiopia, were not immune and Ethiopian lives suffered because of it. However, the impact of the crisis on Ethiopia was primarily indirect.

It’s important to note that Ethiopia’s economy was not completely integrated with the global financial system. Issac Paul explains in The Global Financial Crisis: Origin, Contagion, and Impacts onEthiopia that “in Ethiopia’s financial sector, mortgage borrowing is not a particularly significant activity of the national economy, is not directly affected by any “Sub-Prime Mortgage” crisis” (Paul, 2010). So, while Ethiopia was not explicitly tied to the fall of the real estate market in the same way that the West and parts of Europe was, Ethiopians still experienced economic consequences.

A key feature of the crisis was the decrease of gross domestic product (GDP) across the globe. This was a result of the “credit crunch” – a by-product of the crisis, which caused reductions in consumption, investment, trade, and consumer confidence (UNDP, 2009). The declining global demand and commodity prices, coupled with the falling of sock markets, caused significant depreciation of most African currencies. African countries consequently experienced slowing rates of economic growth, activity shutdowns, reduction in foreign aid, decline in tourism, and sharp increases of national debts. Ethiopia felt this blowout significantly, considering that its economy is fairly open and import and aid dependent.

As of result of these occurrences, Ethiopia was indeed vulnerable to the financial crisis. Ethiopia’s economy had already shown signs of decline and as Getnet Alemu notes in his Global Financial Crisis Discussion Series the negative impacts in “the form of reduced export prices, quantities and hence values, reduced remittances and declining FDI inflows (Alemu, 2010). These foreign exchange constraints heavily weighed on Ethiopia’s economy, especially when considering that a major inflow of money that got spent within Ethiopia was actually coming from the countries that got hit the hardest by the crisis.

To make matters worse, the financial crisis effects in Ethiopia were magnified by local considerations. The Financial Times reported that “drought, hoarding, and a splurge of public infrastructure investment that has left the finances of the country’s cash-strapped government under strain” (Jopson, 2008). Global inflation caused Ethiopia’s food prices to nearly double in the year 2007, pushing citizens and families deeper into poverty despite the economic process made in years prior to the crisis. At the time, just about 10 million Ethiopians out of a population of 80 million were in need of food and financial aid (Jopson, 2008). Given such a dire environment, the Ethiopian government had no choice but to step in.

In an attempt to cushion the impact of this inflation and food insecurity, Ethiopian government removed taxes on grains, flour and cooking oil. And after nearly exhausting its food emergency reserve, the government began importing thousands of tons of wheat from Europe and North America (Jopson, 2008). The country also provided subsidized wheat to low income households. However, these subsided contributions were exclusively given to families living in major cities, in a shady political move, and actually made the crisis much worse in rural areas (Jopson, 2008).

Additionally, the IMF responded to Ethiopia’s inflation peak and falling national reserves by adopting a 2008 policy package that included substantial fiscal and monetary adjustments, eliminating fuel subsides, and proposed measures to protect vulnerable groups (IMF, 2010). This was known as the Exogenous Shocks Facility (ESF) and the agreement ran for 14 months.

Thankfully, this aid was extremely beneficial. Under the IMF’s reform measures, inflation sharply declined and international reserves recovered. And there were able to do so without implementing structural program adjustments. Soon enough, Ethiopia was able to recover significantly and eventually started to rebuild the economic growth that they were experiencing before the Global Financial Crisis in 2007-2008.

References

Alemu, Getnet (2010). Global Financial Crisis Discussion Series. Retrieved from

https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/5784.pdf

IMF (2010). IMF Survey: For Sustained Growth, Ethiopia Needs to Promote Re-Monetization.

Retrieved from https://www.imf.org/en/News/Articles/2015/09/28/04/53/socar062210a

Jopson, Barney (2008). High Prices Intensify Ethiopian Hunger Crisis. Retrieved from

https://www.ft.com/content/c5d27092-6c78-11dd-96dc-0000779fd18c

Paul, Issac (2010). The Global Financial Crisis: Origin, Contagion and Impacts on Ethiopia.

Retrieved from https://pdfs.semanticscholar.org/f036/77ae47eeef85eba24db9d8f8eb421906d84f.pdf

UNDP (2009). The Financial Crisis and Its Impact on Developing Countries. Retrieved from

https://www.researchgate.net/publication/46463126_The_Financial_Crisis_and_Its_Impact_on_Developing_Countries