• Wednesday, November 06, 2024
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Ethiopia’s economic challenges and leadership in financial reforms: Lessons from Nigeria

Ethiopia’s economic challenges and leadership in financial reforms: Lessons from Nigeria

Ethiopia is at a pivotal point in its economic journey, facing the need for critical financial reform amidst ongoing challenges. Over the last two decades, the country has pursued ambitious development projects, often financed through international borrowing. While these investments have fuelled impressive growth, inefficiencies and mismanagement have hindered their full economic impact, resulting in significant public-sector debt.

When Ethiopia’s current government assumed power in 2018, the external debt had reached $28 billion, with exports lagging at just $3 billion annually. Despite launching various reform initiatives, progress was disrupted by global crises like the COVID-19 pandemic, the Russia-Ukraine conflict, and internal unrest. This convergence of issues has led to inflation, budget deficits, and an imbalance in the economy, making significant currency devaluation inevitable.

“For such reforms to yield results, Ethiopia must focus on expanding the formal economy and building infrastructure that supports financial inclusivity.”

In response, starting in July 2024, Ethiopia has introduced key financial reforms, including a shift toward a modern interest-based monetary policy. However, the success of these policies hinges on overcoming challenges within the financial sector, particularly the high levels of informal economic activity. For such reforms to yield results, Ethiopia must focus on expanding the formal economy and building infrastructure that supports financial inclusivity.

Recently, on the 28th of July, Ethiopia devalued its currency, a necessary move given the overvaluation of the Ethiopian birr by 25-30 percent. Though this devaluation shocked many, it reflects broader market realities, with the rate expected to stabilise in the coming months. However, rising inflation, the cost of living, and new taxes on goods such as fuel, beer, and tobacco are likely to exacerbate the economic strain on households. Here we share some insights on how the Ethiopian economy can learn from the Nigerian experience.

Insights from Nigeria’s currency reforms

Nigeria’s experience provides invaluable insights for Ethiopia, as it is faced with similar challenges. Like Ethiopia, Nigeria faced issues related to currency stability, foreign exchange shortages, and economic inefficiencies. Nigeria’s decision to float its currency, the naira, was aimed at unifying the official and black-market exchange rates to promote transparency and efficiency. This cross-country knowledge sharing is crucial for Ethiopia’s economic journey.

One key lesson for Ethiopia is the importance of allowing market forces to determine the value of its currency. Nigeria’s floating exchange rate has made its foreign exchange market more predictable and transparent, boosted investors’ confidence, encouraged foreign investment, and improved the country’s competitiveness in export markets. Ethiopia, too, can benefit from such reforms by creating an environment that attracts investment and supports economic diversification.

However, the Nigerian experience also highlights challenges Ethiopia must consider. Currency volatility, inflationary pressures, and increased debt servicing costs are common risks when transitioning to a floating exchange rate system. Additionally, the impact on vulnerable populations cannot be ignored. Both countries need robust social safety nets and clear communication strategies to manage the socio-economic impacts of these reforms effectively.

Nigeria’s journey: A model for Ethiopia?

Nigeria’s financial reforms serve as a case study in leadership and the art of communication. When Nigeria embarked on its path of economic transformation, leadership played a crucial role in bridging the gap between the reform agenda and public perception. By prioritising transparency, Nigerian leaders fostered trust, an essential ingredient in winning public support for difficult policy measures. One example of Nigerian leaders fostering trust through transparency is seen in the leadership of President Muhammadu Buhari during his administration’s anti-corruption drive. By publicly declaring his assets and pushing for the same level of transparency from his ministers, Buhari built a foundation of trust with the public. “Additionally, Nigerian leaders at the state level, like Lagos State Governor Babajide Sanwo-Olu, have also embraced transparency by holding regular press briefings and publishing detailed reports on the use of state funds.”

Moreover, Nigeria’s approach to stakeholder engagement stands out. By actively involving various sectors—business leaders, civil society, and the general public—in the reform process, Nigeria was able to gather valuable feedback and ease public anxieties. An example where Nigeria gathered valuable feedback and eased public anxieties can be seen in how the government engaged communities during the implementation of certain agricultural policies. In involving community leaders and conducting consultations, they were able to understand local concerns and incorporate feedback into policy design.

Inclusive dialogue helped mitigate resistance and create a sense of ownership among citizens. Nigeria’s strategy also placed a strong emphasis on long-term planning, balancing short-term needs with future ambitions.

These lessons are critical for Ethiopia. A well-communicated, inclusive reform strategy can smooth the transition and reduce the economic shock for the country’s most vulnerable populations.

Leadership with ethics and transparency

At the heart of successful reform lies ethical leadership. Both Ethiopia and Nigeria highlight the importance of making decisions that are not only economically sound but morally responsible. Ethical governance involves transparency in actions, accountability to the public, and ensuring that no segment of society is disproportionately affected by the reforms.

Nigeria’s emphasis on transparency provides a model Ethiopia can follow. By openly explaining the rationale behind reforms, leaders can counter scepticism, build trust, and reduce opposition to difficult measures. Ethical leadership also ensures that reforms are not just about economic growth but about equitable growth—where the benefits of a reformed economy reach all citizens, not just a select few.

Conclusion: Charting a path forward

Ethiopia finds itself at a critical juncture. The choices made by its leaders today will have long-lasting impacts on the country’s future economic trajectory. By learning from Nigeria’s experience, Ethiopia has the chance to implement financial reforms that are transparent, inclusive, and ethically grounded. Leadership in these reforms is not just about steering the economy; it’s about ensuring that every Ethiopian feels heard, included, and supported throughout the transition.

As the country embarks on this ambitious journey, Nigeria’s lessons offer a valuable roadmap. Ethiopia’s leaders must remain committed to ethical governance, clear communication, and strategic planning, ensuring that the reform process ultimately strengthens the nation’s economy and social fabric. Through thoughtful leadership, Ethiopia can emerge from this period of transition more prosperous and resilient than ever.

About the authors:

Clinton Obinna Ogwuike is a director at Michelle Michael Kevin, a leading consulting firm based in Abuja, Nigeria. He also serves as the lead research consultant for multiple economic, strategy, and education projects.

Adewumi Otonne is a research, Programme Design, and Management Associate at the Christopher Kolade Centre, Lagos Business School. Contact: [email protected]

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