BY ABEBE WELEDEGIORIGIES
During the times when Ethiopia claimed it was registering a double-digit economic growth, the inflation witnessed in food and non-food items critically affected the lower-income group’s livelihood. Among other factors, the price of imported food and edible oil skyrocketed due to the devaluation of birr against the US Dollar.
The borrowing of money from local banks by the government and the finance provided to the youth in the form of revolving fund significantly increased the money in circulation in the market and hence increasing the demand for goods and services and resulting in a higher cost of living. Although the government has taken several measures, still, the solution seems to be out of sight.
In his recent paper Atnafu Gebremeskel(PhD) indicated that it may be relatively easy to identify a country in a state of macroeconomic instability by checking whether there is a high inflation rate, large current account deficits financed by short-term borrowing, high and rising levels of public debt and stagnant or declining GDP. On the other hand, its macroeconomic stability can be observed through current account and fiscal balances consistent with a low rate of inflation.
The objective of the government’s macroeconomic policy in general and of monetary policy in particular, as defined by the Ministry of Finance is to attain relative stability of prices to help and protect the poor from the ills of inflation and encourage savings and long-term investment.
The paper emphasized that the average general inflation rate during the Sustainable Development and Poverty Reduction Program was low. The Growth and Transformation Plan stated that Ethiopia’s monetary policy would continue to focus on maintaining price and exchange rate stability so as to create macroeconomic stability that is conducive for rapid and sustained growth. It further stressed that inflation should be held at single-digit during the GTP 1 and II periods.
Measures should also be undertaken so that the growth of the money supply would not be in excess of nominal GDP growth. A stable foreign exchange rate is envisaged for the GTP period, to encourage export growth and import substitution.
This in turn was expected to facilitate stable economic growth and minimize foreign exchange constraints by strengthening hard currency reserves.
Inflation, which stood at about 6.8 percent in 2015, was projected to reach on average to 8 percent per annum over the next five years. The paper indicated that the government’s monetary policy would be geared towards containing price and exchange rate stability, with the major objective of putting inflation within a single digit. But on the contrary, over the past decade or so, the country experienced a double-digit inflation rate and things seem to worsen in recent times.
Dr. Shiferaw Wadilu is an economist. He recently told a local media that though the problem is basically structural, the aggravated inflation witnessed in recent years is the outcome of various factors including the law enforcement operation against the TPLF junta, the spread of COVID 19 and the rampant political instability. To curb the situation, the government should take short and long term measures.
He said that, first; conflicts that flared up in various parts of the country could hamper the collection of the seasonal agricultural products. These have to be dealt with.
Second, is the impact of COVID-19. The government claimed that even though COVID 19 put pressure on the economy, as compared to other countries the GDP is in a better condition. Yet, others claim that the GDP growth is in a negative trajectory. Hence, it is better to wait for real data to come out to understand the real status of the economy.
Then again, currently, economists claim that the value of birr has been reduced by 24 percent against the USD, by 34 percent against Euro and by 28 percent against pound. Reacting on these facts Shiferaw said that, the devaluation of birr against the foreign currency is not unexpected but what matters is how its inflationary impact on the market is being dealt with.
“I think, it has a huge impact on the prices of imported goods in particular,” he added. As the country’s balance of payment is in favor of imports, this would have a significant impact on the economy.
“There are imported goods which could be utilized as inputs for industrial production and if industries face a shortage of supply of inputs, their capacity of production would be affected,” he said.
Shiferaw further said that the unprecedented high exchange rate of the dollar in the black market directly gives hint to the direction the economy is going. In the last three months only, the value of birr has shown a seven percent decline and had the government not taken some regulatory measures, the crises would have been much severe than what witnessed today.
As to Shiferaw, the government has come up with a 10-year economic plan to address the fundamental shortcomings but some of the problems are structural which needs a long term strategy to improve them.
But, for the short term, the viable solutions are to ease the hard currency shortage, doubling the production of consumption goods, and substituting imported items as much as possible.
But most importantly, the government and stakeholders have to give due emphasis to ensuring sustainable peace and stability. The absence of peace hampers the inflow of foreign currency in many ways.
On the other hand, it is also important to encourage and provide incentives to the Ethiopian Diaspora to send their remittance in the formal channel to strengthen the national currency reserves incentives.
In the long term, the government should exert its energy to bring structural and macroeconomy transformation. In fact, bringing structural change needs durable and sometimes painful measures, he added.
As it is known, almost 80 percent of Ethiopia’s population reside in the rural areas and earn its living from subsistence farming. Almost 50 percent of farmers have less than a hectare land and changing these small plots into a modern farm pose a huge challenge. But it is a must task to bring about structural transformation.
The fragile ecosystem, global warming and climate change might critically reduce the amount of yield nationally and international. Farmers do not have access to finance to improve their productivity.
The absence of a sense of ownership of land on the part of farmers also restricts their aspiration to invest in their land. This can also be considered a factor attributed to the stagnation of the agricultural sector.
As to economists, to transform the economy from agriculture-led economy to the industry led, the stranded labor in the rural parts should move to the non-agricultural sector such as the manufacturing and the service sector. But currently, these sectors are at their infancy level.
Hence, the government should exert rigorous effort to attain a long term goal of structural transformation. There is also a need for amending the land policy which provides a sole monopoly to the government.
The Ethiopian Herald February 2/2021
