ANNEX V No. E 78 CONFIDENTIAL ~-- --"
· ..- ~ -.,'
his report is restricted to those members of the staff to whose work it directly relates. Public Disclosure Authorized
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized
ETHIOPIA
A PRELIMINARY ECONOMIC SURVEY
February 1950 Public Disclosure Authorized Public Disclosure Authorized
Economic Department J. H. Collier ETHI()PIA
REO SEA
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OF ADEN
I I BRITISH SOMALI LAND I j
SUDAN
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KEY
_._._.- INTERNATIONAL BOUNDARIES MILES ------PROVINCIAL BOUNDARIES , 111111111 RAILROADS o 100 200 PRINCIPAL MOTOR ROADS (Not all usable in rainy season 1 --- RIVERS
M-33 La.RD. - Economic Dept. TABLE OF CONTENTS
Summary ...... ~ ...... - ...... i
Economic Resources and Develonment Problems • • • 1 Agricul ture •• • • • . • • • ." • • • • • . . 1 iJiine:ral s • • • • • • • • • . 2 Trallsport ...... • • 3
External Trade • . • • • • •• .. .. • " •• .- • .' ... .. It ...... • " 6
Currency and Bankin~ •••• • ..... If ••• ·.'· •••• •• 10
Public Finance • • • • ...... 13 Budget ...... 13 External Debt 14
Balance of Payments and Present International Position ; ¢ 17 Balance of Payments • • . • . • • • . .. .- ...... 17 Effect of the Devaluation of Sterling 19
Conclusion ...... , ...... II .. • 22
The Problem'of Local Financing • . . • • " If .. .. . , , .. 22 Servioing the Loan • • • • • • • • • . .. . "" . . 24
Appendix ...... 26 Brief Sketch of the History of Ethiopia . . . . . 26
BibliographY SUM!WtY
1. Ethiopia has furnished the Bank ld th details of certain "First
Priority Projects" with an estimated total cost of $8.9 million. They form part of a $25 million program \lrhich is itself part of a "!vfaster Plan" costing
$91 million. The "Master Plan" "ras originally prepared by a United States
Technical Mission to Ethiopia in 1944-45 J and consists of a $70 million dollar program of public I.forks and services and an industrial program requiTing a fi~ed capital of $17 million and a working capital of $4 million. The expen diture ~fas to be spread over 10 years, the estimates including the cost of foreign technical personnel.
2. The economy of Ethiopia is ,,'holly agricultural. The population
(about 10 million) mostly inhabit a mountainous plateau in the north l,rest of the country. The soils are predominantly fertile and c~pable of producing a large variety of crops from '\ ;. The mineral resources of the country have not been thoroughly ex plored. Gold is the only import~~t mineral export but the Sinclair 011 Company is at present drilling for 011. - n- 4. The currency sy~tem "Tas completely reorganized in 1945 ,.,hen the Ethiopian dollar was established (Eth. $2.48 =U.S. $1). Previously the main currena,y had been the Maria Theresa dollar, a full-bodied silver coin. The Central Bank, the State ]ank of Ethiopia. began operations in 1943. S. The budget. in its present-day form, is also a comparatively ne1!r development. It is not very long since government revenue could more correctly have been called "tribute" and ~,ras often collected in kind from the provinces. This, and the primitive nature of bookkeeping, hampers the Government1s efforts to increase and collect taxes. A more efficient revenue system is a necessity for any sustained development program. For the last t',tO years the budget has been appro~imately balanced but no reliable information on this point has been obtained. 6. Ethiopia had a small favorable trade balance in 1946, 47 and 48 but appears to have had a deficit in 1949. The devaluation of sterling affeeted the country adversely as a large part of the note cover ,..ras held in the form of sterling securities. In late September 1949, it ','as found necessary to impose exchange controls. Ethiopia has been obliged to purchase dollars from the Fund on ti<10 separate occasions, $300.000 in 1948 and another $300,000 in Cctober 1949. HOi.rever. the U.S. trade statistics sho"r Ethiopia as having a substantial export surplus ,«Ti th the U. S.; the exchange controls may therefore have a marked effect in improving the dollar position. 7. Since the \.rar Ethiopia has obta.ined a credit of 7.5 million kronor from S1Heden and two credits from the U. S.; a $3 million Export-Iumort Bank loan and a credit of $1 million under the "rar Surplus operations. lio re:oay,... menta are yet due, or at least none appear to have been made for there is no item for servioe of the debt appearing in the balance of payments. The total amount involved is the equivalent of about U.S. $5.25 million. - Hi - 8. From the figures at present obtainable it seems that the avail ability of local financing is more likely to set a limit to the scale of possible Bank operations than is the balance of payments. The 3thiopians propose to reduce the proportion of the note issue '''hlch is required to be covere~ by foreign exchange from 75 per cent to 30 per cent. This would release about Eth. $17.5 million of foreign exchange of ",hich it is hoped that at least half (i.e. about U.S. $).5 million) "rill be used for develop ment purposes. 9. A judgment of the repayment capacity of Ethiopia from the point of vie", of her dollar balance of payments must await further information of the "/orking of the ne"r exchange controls. ECONOruc RESOpRCES Arm DEVELOPMENT PR9BLEMS Agriculture 10. The population of Ethiopia is probably about 10 or 11 million and the area of the country is 350,000 square miles or about four times the size of Great Britain. The inhabited section of the country is a mountain plateau ,.rhich is highest in the north and slopes gradually dO'l}rn tOl'Tards the south. There is a large Variety of soils, predominantly fertile, and many different crops can be grOl/TIl, from cereals of the temperate zone, such as Ilrheat and bar ley in the north, to coffee on the southern slopes of the plateau. Agricul tural methods are generally primitive although terracing, contour~ploughing and irrigation are skillfully practised in some areas. ','ihile the heavy rain fall and mountainous country give rise to urgent ~roblems of soil conservation these do not appear to dominate the economic scene as is the case in some other parts of Africa. It seems to be generally held by agriculturalists that the possibilitie~ of economic development, both agricultural and pastoral, are considerable. Cereals are by far the most important crop and the largest export, fol101,red by coffee, hides and skins and oilseeds. OUsseds are a ne,·' development and exports have increased rapidly since 1946. 'l'I,ro other ne1l' possibilities ".rhich. ~e contemplated are cotton production and meat canning for export. Ethiopia possesses one 10,000 spindle cotton mill and plans to extend textile production; the encouragement of cotton cultivation is to be linked to this program. 11. The cattle population of ~thiopia is estimated to be 16.5 million and it has been calculated that 350,000 head could be exported annually 1"i thout jeopardizing local supplies. During 1948 Stettinius Associates I.Tere engaged in negotiations 1~,ith the Ethiopians concerning the establishment, among other - 2 - things, of a textile mill and a meat processing plant. While their survey revealed that the textile mill would in itself be a profitable venture, the Ethiopian Government ~'.1anted them to undertake a eountrY-1Joride program of in cref;\sed cotton acreage ",hich they felt unable to do. The meat project also involved difficulties. The cattle "rere grass fed "rithout much possibility of fattening "rhich Nould deprive the plant of economically necessary by products. Secondly, since cattle are a symbol of wealth to many natives it was felt unlikely that a steady supply ,.rould be forthcoming in exchange for Ethiopian dollars. Finally, canned meat 1/>TaS not an economical air cargo and freight rates on the railway ",ere uneconomically high. Both these projects have been mentioned to IBRD as possible candidates for Bank financing. Minerals 12. Ethiopia is reputed to be rich in mineral 1.realth though the extent and accessibility of her resources are not yet clear. Gold. platinum, mica, potash and iron ore are l~Torked and it is probable that the country possesses coal, copper, silver. sulphur and oil. A new gold field has been discovered in the south east and production is increasing. A loan of $3 millicn "ras obtained from the Export-Import Bank and it is likely that most of it '~ill be expended for the purchase of gold mining machinery. 13. The Sinclair Petroleum Company obtained a concession in 1944 carrying the exclusive right to exploit all petroleum resources in Ethiopia for a period of 50 years. The Government is to receive 15% of the Company's production. Exploration and drilling began towards the end of 1947 but "rere interrupted by hostile demonstrations on the part of the local Somali tribes men. Sinclair \,'i thdrew all its personnel in January 1948 and did not resume operations until November. Drilling continued in 1949 and although no oil has been struck, favo~able geological formations were encountered. - :3 - Transport 14. In an isolated and mountainous country such as Ethiopia. transport presents a formidable problem. The Italians, during their brief period of occupation, attacked this problem on an unprecedented scale. They set aside the equivalent of over U.S. $500 million as the first part of a development plan. an amount which is of an entirely different order of magnitude from anything at that time c~>ntemplated else".,here in colonial Africa. The resulting rise in imports "las nearly ),000 per cent and the main achievement the construc tion of an astonishing system of roads totalling 4,347 miles of ,·rhieh 2,145 ~~ere tarred or macadamised. This netto1ork II'as not, of course. constructed purely for economic reasons and the cost of its maintenance alone, even apart from the cost of repairing extensive war damage, constitutes a heavy burden. The Ethiopians themeelves naturally do not I'1ish to give credit to the Italians for any benefits from their administration and they tend to discount the value of the roads; nevertheless, despite the consequential difficulties, one of the greatest obstacles to economic development has been removed. 15. The only railroad in Ethiopia runs from Addis Ababa to the port of Jibuti in French Somaliland. The capital is mainly French but the Ethiopian Government owns 25 per cent of the shares. Until the Italian occupat1on this raiJ,.road '\'Tas Ethiopia's only access to the sea but lid th the construction of roads to lJlassaw'a and later to Assab traffic on the railroad "'as greatly re.... duced. Hoto,ever. since the ,·rar the q~ti ty of freight carried has recovered and attained record levels, and according to the State Bank of Ethiopia the maximum capacity of the railroad haa no~r practically been reached. During the campaigns of 1940-42 the rail",ay lost 11 locomotives, 26 freight cars and :3 passenger oars; i.e. about 5 per cent of its rolling stock. The French authorities give this and the destruction of the bridge over the river A~rash - 4 - as one of the reasons l"hy its freight rates are relatively high. 16. A reduction in transport costs 1prould undoubtedly be of great benefit to the Ethiopian economy. Instances have been reported of goods shipped from the lprest coast of the Un! ted States to Jlbuti at a cost lo,,'er than that involved in moving them through the port of Jibuti and by rail to Addis Ababa. Truck rates from Addis Ababa to Assab are IOl~'er than rail"Tay rates for textiles, yarns, goatskins, sheepskins, cattle hides, bees1·,ax and some other goods 'lrrllile even those for lrrhich the ral ll,ray rates are lONer such as. coffee, petroleum products and salt are often carried by road OI,ring to advantages of convenience. Tlle development of this road haul should succeed, in time, in reducing the high rail charges. 17. The control of the raihray t and the port of Ji but! t by the French has al'1rJays been a matter of concern to the Ethiopian Government and one of its ambitions, mentioned to the IBRD in February 1948 as a possibility for Bank financing, is the construction of its own railway to Assab in Eritrea assuming, tllat is, that the control of Eritrea is given by the U.N. to the Bthiopians. Last year, hOl.orever, the French, perhaps influenced by the attitude of the Etltiopians, declared French Somaliland a "Free Zonel!; a ns,', currency "ras established backed by U.S. dollars and all dues on goods in transi t 1';<1ere abolished. The arrangement is reported to be "forking satis factorily. 18. In conclusion, it 1,.rould seem, from the information at present available I that the most 1!forth t,<'hile field for inve!:'ltment is that of improving the qualIty and probably the quantity of Ethiopia's agricultural exports. 19. The grading and cleaning Of coffee and cereals, and possibly the processing of meat, might be considered in this connection. Also the present 1,'orld situation in vegetable oils and oilseeds provides an opportunity of - 5 - which it ought to be possible to take advantage. Improvements in the trans portation system are also necessary particularly 'lJ r1 th regaJ'd to road tJ'ansport and the maintenance of both roads and vehicles. LastlY projects producing for the home market. such as the suggested textllern1l1, ~Irould appear to have good economic justification. - 6 - EXTERNAL TRADE 20. Some idea of the 10'l.or level of economic development in :3thiopia may be gathered from the fact that exports in 1948 "rere equivalent to only about U.S. $2.6 per head compared to $10.2 for Nigeria, $16.5 for Iraq and $20.1 for the Gold Coast .• 21. The value of merchandise exports has increased rapidly since the Nar. exports from Eth. $38.1 million in 1945 to Eth. $77.7 million in 1948 and im ports from Eth. $)6.7 million to Eth. $95.2 million over the same period. Although the customs statistics show an excess of imports since 1946 several adjustments must be made before these figures can be compared for balance of payments purposes. Both exports and imports are valued at customs houses "rh1ch are sometimes far from the Ethiopian border. Consequently imports are overvalued and exports undervalued to the extent of transport costs "d thin the countrY, a factor ",hlch in Ethiopia tends to be high. Hhen this and some other corrections are made, it appears that the country had a consistently favorable balance of trade from 1945 to 1949 1,'hen a deficit may have been incurred. 22, Ethiopia! s exports are all agricultural products 1~'ith the excention of gold. There have been some noticeable changes in the composition of ex ports since the "Jar. In 1945 coffee 1"as the most important single item accounting for 45 per cent of the total but a great increase in exports of cereals and oi1seeds had, by 1948, reduced the share of coffee t, 19 per cent. In that year, the last for •. rhieh complete figures are available, cereals accounted for 46 per cent of exports and oils and oilseeds for 10 per cent. 2), Exports of cereals "rere practically non-existent before 1935 but in the post1trar period shortages of supp+y in Europe and the Middle East enabled - .., - considerable quantities to be exported from Ethiopia at high prices. During 1947 and 1948 cereal exports might have been even higher than they "fere if more transport had 'been available. In the course of 1948, hO~'Tever, the price index of cereals declined by 50 per cent. 'lith pressure on prices the high Ethiopian transport costrJJ become a handicap and it is not yet clear ho~~r far Ethiopian cereal exporters '.~ill be able to maintain their position. 24' Coffee exports have been fairly constant in both volume and value since 1945. Ethiopian coffee finds its markets in the Hiddle East, Europe and the tJnlted States but is hampered by high transport costs and inferior grading. In 1948 the value "of coffee exports dropped by about 16 per cent from the 1947 figures. The great rise in coffee prices at the end of 1949 should be of much benefit to Ethiopia. 25. The export of oUseeda, like that of cereals, is a netoT postMar phenomenon stimUlated by ,.Torld shortages and high prices. The value of exports of vegetable oil and oilseeds rose from Eth. $1.1 million in 1945 to Eth. ~8.1 million in 1948. Although prices have declined since 1947 so far no sign has been reported of a decline in export values. The draNback of high transport costs is not as important as in the case of cereals as they do not constitute so large a proportion of the total. 26. Exports of hides and skins have remained fairly steady since 1946 at levels approximating those of pre".1ar. Ethiopial s less important export products include beeswax, honey, civet, clarified butter, spices and eggs. 127 • Cotton manufactures are by far the largest single imported item and although their relative importance has declined slightly since 1945 they still account for 50 per cent of total imports. There toTas a notable increase of j] In November 1948 the price of Ethiopian l·rheat at Addis Ababa 1·'as· only 56.5 per cent of its price ex- J1buti~ - s ( - imports of textiles in 1948 and it Nas reported that the local market l,ras glutted. Salt is an important traditional ;import and the quantities imported are no", at about tldce the pre1,Tar level. Sugar imports have increased very rapidly since the removal of international control. 28, Of increasing importance since the 1,rar are the imports of vehicles, accessories and fuel, metal manufactures and machinery. Total imports in these categories increased from Eth.S7.1 million in 1945/46 to Eth.~17.3 million in 1947/48. 29. The State Ba~~ of Ethiopia has prepared indexes of the volume of exports and imports based on the year 1945. According to these calculations the volume of imports had increased 107~5 per cent by 1948 ",hereas the volume of exports had only increased by 20.3 per cent. The effect of this change If/as partly offset, ho"rever, by the larger rise in export prices than in im port prices; 69.5 per cent as compared to 25.1 per cent. The terms of trade, according to these figures, turned steadily in favor of Ethiopia and by 1948 had improved by 35.1 percent over the base year. 3~ From 1947 to 1948 the export volume index fell from 131.8 to 120.3. This 1,Ta.8 due almost entirely to a decline in the quanti ties exported of the minor products. Though the staple exports remained constant such items as be es""ax , civet, butter, honey, edible oils, lard, ma.caroni, flour and castor oil all declined, in some cases sharply. 31. Information concerning Ethiopia1s trading partners is fragmentary. The Ethiopian customs have only just begun the collection of data concerning the destination of exports and the sources of imports and statistics for a complete year are not yet available. H01,rever, some estimates have been made by the State Bank and checked against the trade figures of other countries. -9 32. Exports appear to have gone largely to Eritrea, the U.S. and Italy. Exports to the U.S. consist of most of the goatskins and bee9~,rax as well as large quantities of hides. sheepskins and other skins and smaller quantities of coffee and platinum. The values, reckoned at the Ethiopian border, are estimated to be Eth. $5 million in 1946, Eth. $7.5 million in 1947 and Eth. $5 million in the first six months of 1948.11 Italy probably took about the same value of Ethiopia1 s exports as did the U.S. The largest customer, hON ever t seems to be Eritrea even all01,ring for considerable reexports from Eritr~~ to the Sudan • .3':3.. On the basis of similar estimates the U. S. has probably supplied around l5~ of Ethiopia's imports (compared to taking 10% of her exports) during the four postwar years. About half of these "rere textiles and the remainder machinery, metal manufactures and vehicles. India and the United Kingdom 1,rere also important suppliers, cotton textiles accounting for almost all the imports from the former and a third of those from the latter. Iran supplies the b~~ of the petroleum. About 10% of Ethiopia's imports came from the U.K .• another 10% from India and 5% from Iran. ]J See also 11 Conel usionsll, p. ~~ on tbl s po int. - 10 - CURRENCY AND BANKINQ 34- Since the war the currency system in Ethiopia has been entirely reformed. The traditional medium of exchange before 1935 was the Haria Theresa Thaler or dollar, a silver coin cont~ining 360 grains of fine silver. The exchange value of the t1.T. dollar naturally fluctuated ."tith the price of silver and it is estimated that in 1935 between 60 and 70 million of them were in circulation in Ethiopia. The Italians, upon their arrival in Ethiopia, attempted to introduce the paper lira but the Ethiopians refused to accept it even though it was declared the only legal tender. The Italians then introduced a new coin of low silver content but the Ethiopians refused to accept this also even when its silver content was raised. Finally, defeated, the Italians minted Maria Theresa dollars. A somewhat similar chain of events later befell the British in their experience with the East African shilling. 35· In 1940, by agreement with the British, the East African shilling wes introduced into Ethiopia and the value of the H.T. dollar ""88 fixed at two shillings. Both currencies circulated together but by 1944 the rise in the price of silver had trought about an unofficial rate for the H.T. dollar of 3 E.A. shillings. Considerable amounts of M.T. dcllars were eX ported to the silver markets of the 11iddle East and India vdth deleterious effects on Ethiopia's foreign trade and domestic economy. The new state Bank of Ethiopia, which began operations in 1943, could do nothing as it had no control over the issue of either currency. 3& This was the prevailing situation when the currency reform of 1945 was undertaken. A new monetary unit, the Ethiopian dollar of 5.52 grains of fine gold (equivalent to u.s. 40.25 cents) was established. No actual - 1X - dollar coins were issued but arrangements were made to issue notes and sub sidiary silver and copper coins. The new ourrency was made effective on July 2), 1945 at which date Maria Theresa dollars ceased to 1::e legal tender and E.A. shillings were to be legal tender for a further six months only. Large quantities of E.A. shillings were withdrawn from circulation and the proceeds used to purchase sterling securities as cover for the note issue. The Ethiopian dollar was equal to 2 E.A. shillings and the State Bank was given authority to purchase H,T. dollars at parity. However, the M.T. dollars commanded a premium over the Ethiopian dollar which increased until at the end of 1946 the black market conversion rate was 5.50 M.T. dollars to Eth.$lO. In December 1946 the use of Maria Therese dollars was made illegal and holders were required to surrender them within a stated period, The State Bank's buying price for M.T. dollars was raised from Eth. $1 to Eth. $1.5. By the middle of 1947 it was reporteo that the number of H.T. dollars remaining in circulation was less than 10 million. Some of the withdrawn M. T. dollars have been held as cover for the note issue and some have been sent abroad for reminting into Ethiopian 50 cent silver pieces. 3'1... The proclamation establishing the new currency requ,"red the State Bank to keep a currency reserve which should consist of "gold, silver and foreign currency ba~k balances or prime securities readily convertible into foreign currencies to a minimum extent of 75 per cent of said fund and Imperial Treasury obligations to a maximum extent of 25 per cent of said fundll • At the end of July 1949 the reserve fund consisted of Treasury bills to the extent of 19 per cent of the total, foreign securities (mostly sterling) 55~5 per cent, gold 9.1 per cent, silver 14.3 per cent and foreign balances and currency 2.1 per cent. - u 38, The note issue rose steadily until May 1947 when it reached approx imately Eth. :;?49 million. From then until the end of the year there was a contraction to Eth. 1p37 million partly due to Bank policy_ There has since been a slow rise until the middle of 1949 when notes issued again totalled about Eth. $49 million. The cOln issue increased irregularly as new sup plies were received and has remained constant since the beginning of 1949 at E"th. ~j29.4 million. After the currency reform there was a large increase in deposits from Eth. $16.3 million at the end of 1945 to Eth. $26.6 million at the end of 1946. In early 1947 it became apparent that imports were running at a level higher than was justified in the light of long-run market prospects and the conditions for the granting of commercial credit were tightened. In 1948 the State Bank reported a considerable slow-down in internal markets with lo,..rer profits earned on imported goods. The volume of imports, however, continued to increase. The indexes of export and imoort prices both declined throughout the year. 40. There is an Agricultural Bank in Ethiopia which operates under the supervision of the Minister of Agriculture. Its original capital was Eth. ~~1.5 million of which 30 per cent was paid up. Its principal task is to grant short term loans to farmers, but it also ~~ndc on ~ortgages and it is empowered to make loans to commercial and industrial enterprises connected with agriculture. -13 - Pu:BLIC FINANCE 41. Information concerning public finance in Ethiopia is ~ery incomplete. Some budget estimates are available but as there is reason to believe that the actual course of events sometimes differs noticeably from the estimates, it is difficult to discover I.Thether deficits have occurred and if so, to I"hat extent. No consolidated account is available of the public debt though estimat.es can be made from loans "rhich it is kno1.·'n have been contracted. No item for de bt service is included in the budget; there is merely a sub-head IIHinistry of Finance. II Bud.e:et 42.. For the first tl!TO years after the liberation the disorganizt;l,tion of the country 1"as such that it proved impossible to dra",r up a budget at all. Considerable help 1"as received from the British in the form of subsidies 1"hich it is reported totalled ;b3. 2.5 million betNeen 1941 and 1946. later budget revenues rapidly increased and in particular there 1,raS an almost spectacular rise in customs recei~ts -- due partly to rising imports but mainly to the increasing efficiency of the Customs Department -- 1,'h1ch became the mos t important single source of revenue. 4}.. The budget estimates for the year ending September 10, 19491/ ShOl,., expenditure and revenue in approximate balance at around Eth. $63 million. Customs revenues accounted for 38 per cent of total revenues, the next most important item being land taxes Nhich supplied nearly 30 per cent :2arnings of government departments 1~Tere responsible for 21 per cent; and income, prop- erty and other taxes for most of the remainder. 1/ The Et.hiopian calendar year ends on September 10 of the Gregorian calendar. The present year is the Ethiopian yea:r 1942. - 1",,- 44' The yield from the land tax increased rapidly after 1944 Hhen it I,ras completely reorganized. The method of paying land taxes is extremely complex and bound up ,dth the old traditional local government system. The collection of income tax is hindered by the rudimentary character of bookkeeping in the country. Improved transportation and more skilled personnel ,.rould be valuable in raising the yield of taxes. The taxable potential of the country is of prime importance for there 1.,rould seem to be no other t~Ta¥ of obtaining internal resources for the development program. It is unfortunate, therefore, that there are no indications of how great this might be. 45'. The main items of expenditure in 1948/4q ,.rere: Interior, Bth.~12.3 million (19.5 per cent of the total); Education, Eth. $10.1 million (16 per cent of total. This reflects the Emperor's great efforts on behalf of edu cation); nar, Eth. $9.1 million; Public "orks, Eth. $4.5 million and l!inistry of Finance, Eth. $3 million. 46. Although revenue and exoenditure estimates balanceo_ at ~63 million, it has been reported that the government encountered some difficulties in meeting its current expenditures. The land tax did not live up to exnecta tions nor, though this is much less important, did the income tax. It is quite likely. therefore, that the financial year 'Hill be found to have ended ,,'1 th a defici t. External Debt 47. Since the 11 beration, Ethiopia has obtained a loan from S"'eden and certain credits from the U.S. as fol101"9:-- a) SW,edish Loan. This "'as 5 million kronor later raised to 7.5 million. The interest ',ras 3~ on the first 5 million and 3.5% on the remainder. The loan '."aa re pa:rable "'i thin 5 years from 1946. Most of it has 'been - 15 - spent. It ~.ras equivalent to Eth. $5.1 million '"hen it '''as contracted but oNing to the clevalua tion of the kronor is no'", equivalent to only about Eth. $3.6 million. b) :SxIm-Bank Loan. U. S. $3 million Has obtained from the Export-Import Bank at 3%. Only $870,000 has been spent and the closing date has tl,rice been ad vanced for a year. The present closing date is December 31, 1950. c) 'Jar Surplus Loans. U. S. $1 million at 2-3/8;'0. $429,000 have been spent but the remainder has in effect been ca."lcelled by the "rinding up of ~'lar Surplus operations. d) Lend-Lease. ft~ agreement has been concluded according to "Thich the U.S. '~Till receive U.S. $200,000 on this account. e) Silver Loan. In 1945, 5,425,000 troy O~"lces of silver I'Jere borrONed from the U. S. intere!'lt free for the purpotle of the ne1.o' Ethiopian coin issue. The loan is renayable in kind "d thin five years after the declaration of the end of the state of emergency by the President of the United States.lI f) 1. H. F! Ethiopia purchased TJ. s. $300. 000 from the Fund in 1948 and a further U.S. $300,000 in Octo ber 1949. 17 The President has not yet declared the state of emergency ended. - 16 - 48. The total of these loans. excluding the silver loan and the Fund operations,is the equivalent of approximately Eth. $13 million or U.S. $5.25 million. It is probable that a small amount of this ~rill be re~ald in ~thiopia by such methods as improvements to the U.S. Embassy buildings, facilities under the F~lbright Act, etc. No payments of service on any of these debts appear to have been made (even though repayments on the ',rar Surplus Loan l,rere over due) up to the end of 1948 for no item for Itamortbation" appears in the balance of payments. i:Io1,rever. even if the whole amount l.rere repaid concur rently over a period of five years the annual service t.rould be in the neighborhood of Eth. $2.5 to Eth. $3 million which is small compared to total exports "Thieh "'ere Eth. $77 million in 1948, - .I..{'"'" - BALANCE OF PAYIv!:2NTS AND PRESE!.'l'T INTERNATIONAL POSITION Balance of Payments 49~ The follot,ring table gives the Fundi s balance of payments statistics for 1946, 1947 and 1948: 194711 IG48.:;./ (Eth. $ HUBon) Goods and Services Exports (f.o.b.) 59.1 88.6 88.) Imports (f.o.b.) -61.0 -77.7 -8).6 Trade Balance -1.9 10.9 L~. 7 Non-monetary gold 8.0 5.1 ).) Transportation and insurance -3.5 -5.0 -5.2 Other -0.8 -1.3 -1.4 Total 1.8 9.7 1.4 Other Non-CoffiQensatory Tr~~sactions Private donationsgj -5.0 -5·0 -4.0 Official donations 1.9 Gold subscription - IBRn -0.1 Amortization -0.3 Loans received ).8 2.7 1.4 Total 0.) -2.) -2.6 Errors and Omissions2! 12.) -20.9 -0.4 Surplus or deficit (-) 14.4 -13.5 ..,.1.6 Compensatorx Official Financing Portfolio Securities -32.5 5.2 0.3 Sterling Balances 18.7 5.3 1.6 Dollar Balances -0,6 0.8 0.1 Other Foreign Exchange -0.1 2.2 -0.4 Total -14.4 13.5 1.6 11 Year ending December 10. £! Includes remittances by foreign experts employed in Ethiopia. ~ Include~ private capital movements. -l~ - 50. It l.rill "be noted that the figures for exports and imports differ from those already given in the chapter on external trade. This is accounted for partly by adjustments for transport costs both inside and outside the cou~try and partly "by alloNances for the export of silver and platinum and export duties and imports of coins and some military supplies. '51' On the basis of those figures Ethiopia had a small surplus on current account in 1946 and 1948 and a much larger one in 1947; or, if private dona tions are included in the current account, there "'as a defic! t in 1946 and 1948 and a small surplus in 1947. The 1946 deficit appears to have been more than offset by private capital imports (!tErrors and Omissionslf) but there seems to have been a considerable priVate export of capital in 1947. 52,. The deficit in 1948 appears at first sight to be larr,ely due to the failure of the export figure to increase. HOl,rever, on closer inspection • the cessation of silver exports l!Thich more than offset the increase in merchandise exports is seen to be the main factor respon~ible. The deterioration of the trade balance cannot therefore be taken as a reliable sign of any ','orsening of Ethiopia's position. There ','as also a decline in gold exports ol<'ing to the accumulation of gold reserves by the state Bank. Figures for 1949 are not yet available. ;3.. It should be stressed that the figures for the trade "balance, "'hich are by far the largest part of the "balance of payments, are of doubtful accuracy. They involve various estimates by the State Bank, some of l·,hich have been changed substantially during the last eighteen months. Any inter pretations must be made with caution. 54-. Ethiopial s dollar position for the last t',ro years has been tight. Most of her foreign exchange reserves are in sterling; dollar holdings in July 1948 l.rere U.S. $200,000 all of ,.rhich \.ras earmarked and Ethiopia had to -l~ - apply to the Fund for U.S. $300.000 to tide her over until receipts from the next crop year began to accrue. Effect of the Devaluation of Sterling 55- Some ~rreeks before the devaluation of sterling in September. 1949. the State Bank began to sell some of its sterling assets and total foreign exchange holdings declined from Eth. $35.8 million at the end of July to Eth. $28.2 million on the date of devaluation. Nevertheless ",hen devaluation occurred the loss sustained by the Bank Tlras about Eth. $8 million. In order to maintain the required reserve for the note issue the Treasury had to make various advanoes to the Ba~k and to recover its positicn. the government had to levy ne1!; taxation ,.. ,hich naturally proved unpopular. Importers had little confidence in the ability of the Government to maintain the parity of the Ethiopian dollar and measures of exohange oontrol "rere introduced on Septem ber 23rd. ~6. The excl~nge oontrol regulations required the surrender of all ex port proceeds at the official rate. Hard ourrency nroceeds l.rere exempted from this requirement for a period of 3 months to the extent of 75 per cent. Both exports and imports ',rere made subject to license. The administration of the exchange control regulations is hampered by shortage of personnel and other factors but made easier, in Ethiopia. by the relatively small number of traders and the existence of a very limited number of routes by "rhich Ijerchan diae can be exported. 57. If they are properly enforced these measures ~·'ill cause a rise in the effective rate for the ~thiopian dollar for previously many exporters had disposed of their proceeds to importers at premium rates. Thus the enforce ment of the official rate, as opposed to the blaok rate, at a time "then many other currencies had devalued. presented a double handicap to exporters and - 2() - a double bonus to importers. The ability of the Ethiopians to hold this rate depends therefore on the prospects for exports and imports and the efficiency 1.-ri th l.rhich the exchange control is administered. 58. The most favorable development on the export side is the Drice of coffee Nhich rose by 50 per cent bett"Teen mid-September and mid-Novem'ber. Coffee is not·r required to be sold against dollars. 59. The outlook for cereals is problematic. The "rheat market ·.ras lost to Ethiopia in 1949 ot.ring to hIgh transport costs and 1m~r ocuality of the Ethiopian product. But this tl!aS not unexpected; the importance of "rheat in Ethiopia's exports I/!as all,rays regarded as a temporary phenomenon due to unusually high prices. Recent reports t hOl.rever, indicate that more favorable l'Theat prices have again made it possible to eXDort ,.rheat at a small profit. 60.. Oilseed prices have also declined but as the crop "ras already in, there has as yet been no decline in the volume of exports. Skins appear to be the commodity most affected. Internal prices have declined by about 27 per cent and the amount exported seems to have dropped. Increased competi tion from some sterling countries is thought to be partly responsible. 61.. Ho~·!ever. there are other factors to consider. It is the Government IS opinion that somewhat lO'l'rer prices '"r111 not have much adverse effect on pro duction by the farmers. Another more general opinion, as mentioned before, is that many Ethiopian exports could command higher prices if their quaU ty and grading I,.rere improved. This is the case, in particular, ,·rith regard to coffee, ",heat and oilseeds. The Government is taking immediate stens to remedy this situation and hopes to have four ,,·heat cleaning plants in opera tion by the end of 1950 and has similar plans for coffee and oilseeds, 62. Furthermore the Government is engaged in negotiations for a reduction in freight rates on the J1 butt raihray 1 the importance of ;,'hieh has been -~- stressed already. Truck traffic on the Assab road is increasing and is nOl" said to be greater than that on the raUl.ray. &3 .. Provided exchange controls are effective it should be possibl.e to limit non-essential imports and thus further to strengthen the current balance of trade. The Government hopes that it l.rill be poss! bla to reduce import prices as a result of the enforcement of the official exchange rate and devalu ation else1•r here. Reports have lately indicated a significant drop in such prices. 64; All these considerations ~,ri1l contri buts to determine the long run success of the ne1,r policy. There "'as a period of acute hard currency strin gency in September. 1949. 1plhen the traders and merchants seemed to make a concerted attempt to defeat the purposes of the Minister of Finance. Last October. however, U.S. $300,000 "ras obtained from the Fund and recent reports indicate that since then the official dollar position has been eased, - 22 - CONCLUSION 65. In the light of the information nO\IT available, it is hardly possible to make any final judgment as to the creditNorthiness of Ethiopia. The purpose of the follo1,dng discussion, therefore, is merely to throt!T light upon some of the principal aspects of the problem and to provide some esti mate of the general orders of magnitude involved. The ,Problem of 1oca~ Financing 66. From the beginning of its relations with the Bank. ~thiopia has stressed the necessity of obtaining a loan to cover expenditures in both foreign and domestic currency. At one time ~1r. Deresaa appeared to have had in mind a scheme through "'hich IBRD loan proceeds might be held in the U.S. and Ethiopian dollars issued against them. In the latest application, t ho !1ever f no specific mention of this proposal l.ras made; although some re quirements of local currency 1.1ere clearly included in the totals shovrn, the amounts requested lIJere not broken d01~'n into external and domestic expenditure. 67. The principal source through 1"hich Ethiopia intends to obtain local funds for development 1s the proposed change in the reserve require ments of the State Bank, through 1.rh1ch the proportion of the note cover l.'rhich may be held in the form of government securities rather than in gold and foreign exchange is to be increased from 25 to 7010. If the gold. foreign exchange and foreign securities thus released from the currency reserve ~·'ere sold against local currency and the proceeds used by the Bank t:. acquire a corresponding amount of government securities. the government Nould receive about Eth. ;P17.5 million. of ~.. rhich possibly half "Tould have to be used to reimburse the government for the advances made at the time of devaluation, and the remainder could be devoted to the financing of internal development -~- costs. Assuming that the foreign exchange ~lhic:n. "'as sold ~Jas used to finance additional imports of consumer goods. these operations need not have any net inflationary consequences. 68. It ,,'ou1d appear to be possible, hot.rever, for the state BaIL'Lt to retain its present foreign exchange reserves and, ,,'1th the reduced reserve requirement, to expand its note issue through advances to the government to almost three times its present size. There appears to be no present in tention to take advantage of this opportunity, but the fact that such an inflationary expansion T·/ould be technically possible might ,.rell unsettle public confidence in the currency in Ethiopia. Clearl~ the government and the State Bank have a serious responsibility for insuring that local curreney issues are kept 1,7i thin safe limits and that the broad pOT.rers '!rhich T.rould be conferred upon the State Bank through the reduction in reserve requirements are not abused. 69. The flFirst Priori tyll projects recently put fo~·'ard 'by Ethiopia total U.S. $8.9 million; if it is assumed that about one-third of this total represents local expenditure. some Eth. $7.4 m. T.rould be required -- an amount "1hich could 'be met 1.,ri thout difficulty from the foreign exchange released by the ne"T reserve regulations, The larger development progra.m for U. S. $25 million, ho"rever, ~rou1d require Eth. $18.5 million of local expendi ture; for its financing, additional sources of local funds lprould certainly have to be found. 70. Unfortunately 11 ttle is known about the ave11abil1 ty of other sources of domestic funds. The 3thiopian budget does not at present seem capable of yielding much more; most observers, in fact, are agreed upon the need of an early and complete overhauling of Ethiopia1s revenue sYRtem. As to local savings as a source of development funds, the State Baru{ is - 24- currently encouraging s~vings deposits; but little is kno"r!l of the results "'hieb its efforts in this field are likely to yield. Servicing the Loan 71. As is shown by its two recent drat-rings upon the 1MI!', in the last two years Ethiopia has encountered some difficulties in its dollar balance of payments. In 1948 a deficit of U.S. $;00,000 "'as reported -,. at the same time, hot-rever, as U.S. Department of Commerce figures indicate, Ethiopia had an export surplus to the U. S. of U. S. $2.6 million and, from January to October 1949. a surplus of U.S. ~.l million. These differences, indicating a considerable loss of the $ exchange arising from Ethiopials exports to the U.S., are probably explained by the fact that certain Ethiopian exports are reexported to the U.S. from other nearby countries; Ethl~pla has, in fact. only recently obtained an undertaking from the United Kingdom that it would receive payment in hard currencies for its exports to the U.S. via Aden, I'There diversions of this sort are particularly common. The ne1~rly instituted exchange control regulations, too, should permit the Ethiopian Government to obtain a significant volume of dollar proceeds ",hich so far appear to have evaded it; Ethiopia1 s exports of gold ,·,hleh have hitherto been sold at premium priees in Cairo, eould, if necessary, also be used to obta~n hard currency. 72. If dollar proceeds for an export surplus approaching the figures reported by the U.S. Department of Commerce could be actually obtained, the country should have little diffieulty in servicing an IBRD loan of u.s. $6 million, the probable amount of the foreign exchange component of the "First Priori tyll projects. On the 1,'Thole recent reports ind.icate an increasing over all Ethiopian export surplus -- a tendency likely to be ~trengthened further if the various measures contemplated or currently in progress to increase the volume of exports are succes~ful. - 2:5 - '73. From the figures just given it ,'ould appear that the availability of local financing rather than the position of the balance of p~ments is likely to set an ~er limit to the Bank's operations in Ethiopia. This situation may make it desirable to examine ~'hether or not circumstances exist which '!tV'ould justify the :Bank in lending for 10ca.1 expenditures on approved development projects. If local financing were to be provided, the state of Ethiopia's balance of payments might permit loans in foreign exchange up to possibly U.S. $15 or $20 million ...... an upper limit 'lJ!1hich can, ho',rever, haTd1y be determined with accuracy before the results of the countryl s ne'" exchange control system are more clearly kno,",n. APPENDIX ~~ief Sketch of th2 History of E~h~opia '4~ Historical records of an ancient civilization in Ethiopia extend back several centuries B.C. but it is usual to represent the genesis of modern Ethiopia as lying in the Kingdom ofAxum which flourished from the 1st to the 10th century A.D. and which had its origin in Semitic invasions from south west Arabia. It was during this period that Christianity was introduced into the oountry and the connection with the Egyptian Coptic church established, a connection which has lasted until the present day. ". After the decline of the Axumite Kingdom very little is known of Ethiopia until the 13th century, After the 7th century the armies of Islam swept through the Middle East and Ethiopia was completely isolated from the rest of Christian civilization. The natural features of the country, a high plateau surrounded on all sides by inhospitable desert, enabled it, both at that time and afterwards, to maintain its independence aga.inst all enemies until the arrival of Mussolini's armies in 1935. 7'. The first European contact with Ethiopia after the neriod of isolation was the arrival in the 15th century of a Portuguese expedition in search of the legendary Christian kingdom ruled by the legendary Christian monarch Prester John. The following century saw Portuguese Jesuits and later Spanish Jesuits active in the country but in 1633, owing t the in- tolerant attituc'!e of the Spanish Jesuit, Alphonso Mende~, all the Jesuits vrere expelled and their property confiscatec'!. ~7~ After the middle of the 17th century there was a period of disunion within the country. Ethiopia at that time was divided into four main parts, Amhara, Tigre, Gojjam and Shoa and the dominant power was held alternatively by the rulers of Tigre and A.'llhara. Unification was not brought about unti,l the emergence of the Emperor Theodore II in 1855, who distinguished himself by improving the administration and making an effort to suppress the slave trade. He wa s friendly with two Englishmen, John Bell and 1:1al ter Plowden, who came to the country unofficially and remained as advisers. These two men were killed :in a rebellion and partly as a result of this Theodore became involved in a dispute with the British of which the climax was an expedition under the command of Sir Robert Napier in 1868, This force is <', said to have defeated Theodore's army without the loss of a single life and the Emperor committed suioide. The British, not at that time interested in annexing territory in Africa, simply withdrew and left the Ethiopians to fight out the suocession among themselves. 78. Tcwards the end of the 19th century, after the opening of the Suez Canal, European powers began to playa more important role in Ethiopian affairs. A treaty was signed with Italy in 1889 and a dispute about the exact interpretation of one of the clauses of this treaty led to the Italian attack on Adowa in 1896. On this occasion a small Italian force was almost completely annihilated by the Ethiopian Army of the Emperor Henelik. The treaty was annUJJed and the independence of Ethiopia reoognized. 79. Henelik made great attempts to modernize his empire and two notable events of his reign were the establishment of the Bank of Abyssi~ia (later to be the state Bank of Ethiopia) and the commencement of the railroad from Jibuti to Addis Ababa. Permission was obtained from the French Government to bUild the section in French Somaliland and finance was provided by a British company. The French Colonial Party succeeded in persuading the French Govern ment to buyout the British oompany, Menelik, recognizing the danger of - 28 - control of the railroad by the French Government refused to permit the line's completion and it did not finally reach Addis Ababa until 1918'. S~· Towards the end of his life Menelik was stricken with paralysis and as he had no son the question of the succession became the subject of con stant intrigue. He nominated his grandson, Lij Jasu to succeed him and on his death in 1913 Lij Jasu duly became Emperor. He attempted, however, to change the official religion to Mohammedanism, a measure which was so unpop ular that he was deposed in 1917 and his mother Zauditu named Empress with Ras Tafari Makonnen as Regent and heir to the throne. Tafari, son of Ras Makonnen, one of Menelik's ablest lieutenant's later became Emperor Haile Selassie I. Bl. During the next ten years the progressive-minded Tafar! built up his position against the conservativt;'! leanings of the Empress and her powerful Minister of Har. In 1926 he was proclaimed Negus, or King, and became Emperor upon Zauditu's death in 19.30. The dominating role that he has since played in his country's history justifies the following quotation:lI "This subtle, watchful, patient and laborious man has devoted all his powers and used all his authority to carry out a policy of exalting his country in the world by centralizing and modernizing her ancient institutions. All passions seem to have been absorbed into this passion, leaving him invulnerable to many of the ordinary weaknesses of men in power. It is this utter concentration, this wholeness of purpose that gives him the still, tense dignity which impresses all who meet him, His actions seem to show that he has completel~ associated the development of his own power and prestige with those ot the church-state of which he is head. His natural and religious moderation, acdec to the caution which generally accompanies kings "'ho had to acquire their royalty, V M. P;rham~ "The Government of'Ethiopia", London 1948. - Ii9 - has so far pre1rented the insistent pressure of his rl,1le from becoming tyranny." The author goes on, hovT8ver, to critioize his cautious attitude, partioularly towards Europeans, which sometimes prevents him from making full use of men whose ability his country needs. 82. Since the restoration of 1941 the process of modernization ha.s proceeded with even more rapidity. The present government system consists of some dozen ministers all of whom are appointed by the Emperor and a Legislature consisting of' a Senate and a Chamber of Deputies. The 30 members of the Senate are appointed by the Emperor wheree. -1 it is intended that the 60 deputies shall be elected. Provisions have been made for a form of indirect election based on provinces but it is not yet clear how much success has been achieved in putting them into practlce.lI 11' F~r a good short ac~ount of 'th~ hi;tory and government-of"-Ethiopia see M, Perham, "The Government of Ethiopia", London 194P. BIBLIOGRAPHY State Bank of Ethiopia. Monthly Letters. Foreign Economic Administration ~iopia: Handbook of CUfr~~t Information~ Prepared for the U.S, Technical Project to EthiopIa, 1944. U.S. Technical Project for Ethiopia. 1944-45. Reports from Mr. Engert. (Operational File) International r'ionetary Fund Ethiopian Currency Developmen(;. April 3. 1947. RD-226. Ethiopian Exchange Position. August 10, 1948. RD-691. The Exchange Position of Ethiopia. October 14, 1949. RDX-7l. Supplement 1. Confidential Report of the r'!ission to Etpigpia. January 24, 1950. Executive Board Document No. 588. Confidential. M. Perhalll~ The Government of Ethi9Ria. Faber and Faber, Lo~.don 1948.