Ethiopia: PM Abiy Acknowledges Monetary Policy Setbacks in Tackling Inflation, Calls for Tougher Measures

Addis Ababa — During his recent parliamentary address on 06 February 2024, Prime Minister Abiy Ahmed admitted that the much-anticipated monetary policy introduced in August 2023 to tackle inflation has fallen short of expectations.

In a candid acknowledgment of the policy’s limitations, the premier recognized that his administration’s ambitious vision for curbing inflation has encountered obstacles.

“While there has been a modest improvement in addressing inflation, we have not achieved the level of success we had anticipated,” he told legislators.

Back in August 2023, the government introduced a monetary policy aimed at reducing inflation to below 20% by June 2024 and further to 10% by June 2025.

The implemented monetary reform includes restricting direct advances to the federal government and imposing a 14% limit on domestic credit growth for commercial banks. However, this approach has faced criticism due to its perceived negative impact on both financial institutions and borrowers.

Using an analogy to painkiller medication, the premier emphasized that these policy measures should be viewed as temporary solutions. Instead, he stressed the necessity for more rigorous reforms that can offer sustained solutions to the ongoing challenge of inflation.

“The time has come for bold action and the implementation of tougher reforms to ensure a lasting solution,” he conveyed.

Advertisement The Prime Minister’s recent statement marks a notable departure from the earlier announcement made by Mamo Mihretu, the Governor of the National Bank of Ethiopia (NBE), a few months ago. Previously, Mamo had announced that the monetary policy implemented since August 2023 had resulted in a steady decline in headline inflation, signaling optimism for the nation’s economy.

Last November, Mamo spoke with confidence as he presented the institution’s quarterly report to legislators regarding the monetary policy designed to combat surging inflation since August 2023.

Citing official statistics showing a decrease in the headline inflation rate from 35% in March 2023 to 27.7% in September 2023, Governor Mamo assured lawmakers that the strategic monetary policy implemented by the central bank to combat inflation was yielding promising results.

Since Mamo’s appearance in parliament last November, significant developments have unfolded.

The annual inflation rate in Ethiopia rose to 28.7% in December 2023, up from 27.7% in September of the same year, according to the latest price index released by the Ethiopian Statistical Service.

Both food and non-food items experienced price hikes during the period, with food inflation surging to 30.6% from 26.7%, while non-food items rose to 30.6% from 30%.

The time has come for bold action and the implementation of tougher reforms to ensure a lasting solution.”Prime Minister Abiy Ahmed

Financial institutions such as the International Monetary Fund (IMF) also project that the inflation rate will continue to rise. According to the IMF’s projections released in October 2023, inflation is expected to remain in double digits in 14 countries, including larger economies in the region such as Ethiopia, Ghana, and Nigeria.

The IMF report attributes the expected surge in inflation to the ongoing foreign currency shortages and the rapid decline in the value of Ethiopia’s local currency.

Ethiopia is among the countries globally grappling with a significant depreciation of its currency. Recent data from the Troubled Currencies Project, which monitors exchange rates in both black and spot markets, indicates that the Ethiopian birr has depreciated by almost 40% against the US dollar since January 2022.

During his parliamentary address, the Prime Minister emphasized that inflation is the result of various economic challenges inherited by the current administration.

In addition to the volatility observed in the global market, he asserted that internal instability has hindered the country’s efforts to address the macroeconomic issues currently facing Ethiopia.

“Our internal problems are preventing us from swiftly standing on our feet,” he stated.

The Prime Minister has emphasized a significant gap in monetary policy implementation as a major factor contributing to the problem.

He specifically refers to a mismatch between the money injected into the economy through loans and the funds withdrawn from the market via deposit mobilization by commercial banks.

Over the past six months, there has been a notable increase in deposits mobilized by the banking sector, totaling 100 billion birr, thereby pushing the outstanding balance to 1.3 trillion birr.

“Even if it is mild, this has an effect on tackling inflation,” the Prime Minister commented.

However, during the same period, credit disbursed amounted to over 170 billion birr, with 83% allocated to the private sector. While this may be perceived as a success compared to previous practices where the majority of credit went to state-owned enterprises, the Prime Minister indicated that it has a negative impact on inflation.

Additionally, the Prime Minister highlighted that controlling and reducing inflation has become the foremost challenge, not only for Ethiopia but also for many African countries and even developed nations. He informed legislators that inflation is the result of various economic breakdowns and cannot be effectively addressed solely through monetary policy.

“One of the contributing factors to rising prices is our inability to produce in accordance with demand,” he explained. “Given that the country cannot satisfy its own demand, we are compelled to procure numerous items from the international market, where prices are currently experiencing unprecedented increases.”

In addition to inflation, the Prime Minister outlined a range of macroeconomic challenges facing the country, including a substantial current account deficit.

During the first five months of the current fiscal year, the country’s export earnings from goods and services totaled $4.5 billion, while the import bill surged to $7.5 billion. Similarly, last fiscal year saw earnings from goods and services at $10.7 billion, while the import bill reached a staggering $17 billion.

Another lingering macroeconomic issue mentioned during the parliamentary session is the insufficient improvement in government revenue collection, which does not correspond to the size and growth of the gross domestic product (GDP).

In the first half of the current fiscal year, the government collected revenue totaling 265 billion birr, representing a 17% increase compared to the same period last year. However, the Prime Minister highlighted, “Despite the increase, the collected revenue remains insignificant relative to our GDP.”

He referenced the experiences of African countries such as Morocco, which successfully raised the tax-to-GDP ratio to 30%, and noted that even some East African countries achieved a tax-to-GDP ratio of 15%.

The Prime Minister emphasized that for a country like Ethiopia with a GDP of eight trillion birr, the current tax-to-GDP ratio, standing at less than 10%, is insignificant. “In a country with lower government revenue collection, significant economic development is not feasible.”

However, Prime Minister Abiy emphasized that such macroeconomic problems do not hinder the country from remaining among the few nations in the world that are registering the fastest growth rates.

According to the IMF’s latest projections, Ethiopia is expected to achieve a 6.1% real GDP growth rate by the end of 2023, with a 6.2% growth rate predicted for 2024. This surpasses the growth rates anticipated for other East African economies such as Kenya and Uganda, which are expected to grow by 5% and 4.6%, respectively, in 2023.

However, the government anticipates a growth rate of 7.9% for the current Ethiopian fiscal year.

Source:

Leave a Reply

Your email address will not be published. Required fields are marked *