When it comes to maintaining law and order, it is crucial to devise national fiscal and monetary policies that are tailored to the context of Ethiopia and take into account the changing global circumstances. Inefficient economic policies must be revitalized and timely actions must be taken by the authorities to prevent complications from escalating.
One of the primary responsibilities of governance is to ensure the stability of monetary and fiscal policies while also upholding law and order. Unfortunately, Ethiopia has been on a perilous journey plagued by skyrocketing prices due to inflation, the black market, and illicit foreign exchange activities.
It is the duty of intellectuals and the entire nation to either fulfill their responsibilities or develop sound policies that can rescue the country from this downward spiral. Additionally, the government must enact laws to confiscate and restore properties that have been looted from the public by corrupted officials. It is also essential to investigate both government and non-government institutions that are involved in corrupt practices.
Merely enacting laws and regulations will no longer provide a lasting solution, as many actors engage in illicit activities under the guise of legal business and social norms. Hence, it needs robust policies cascading from the National Bank of Ethiopia (NBE) and other financial institutions to promote the well-being of the country and its future. However, it is undeniable that a pervasive culture of corruption has been undermining the foundation of Ethiopia.
According to economic professionals and experts, the government’s recent response in retaining and distributing foreign exchange can be seen as a smart move to curb the high inflation rate. An economist at the Policy Study Institute (PSI), Jemal Mohammed (PhD), stated that the NBE’s new monetary policy measure is a critical step towards addressing the rampant inflation and other pressing challenges. He emphasized the need for long and short-term strategies to discourage the thriving parallel market and achieve the intended goals.
Under the new measure, exporters engaged in key export businesses will now have a 50/50 share split of their foreign currency transfer obligation, instead of the previous 70/30 split. This change aims to rectify the financial burden imposed on exporters, who previously incurred losses of up to 20-30 % due to the arrangement. Importers resorted to importing products with high market demand to compensate for these losses.
Furthermore, according to the economist, the new strategy plays a crucial role in reducing the money in circulation, channeling more cash to banks, and contributing to market stabilization. As per the recent ruling, exporters are required to surrender 50 % of their forex earnings to the central bank, while 10 % goes to commercial banks, and exporters retain 40 %.
Governor of the National Bank of Ethiopia (NBE), Mamo Mihretu has highlighted the strong policy reforms made by the Board of Directors to control inflation. These reforms include limiting domestic credit growth to 14 %, thereby compelling commercial banks to adjust their loan growth accordingly. Additionally, the policy decision on direct loans to the government should not exceed one-third of the amount provided in the previous fiscal year.
Governor Mamo also emphasized that when banks face a shortage of funds, the interest rate they pay for credit facilities from the National Bank of Ethiopia will be raised from 16 % to 18 %. Moreover, banks will be required to deposit 50 % of their total foreign exchange earnings with the National Bank.
In the late July, the Governor addressed the 20th International Conference on the Ethiopian Economy, where he acknowledged the “cocktail of challenges” facing the global economy, including high inflation, rising debt, and funding constraints faced by African countries. To tackle these challenges, the NBE will focus on reducing inflation through monetary policy measures, ensuring a stable and inclusive financial sector, and enhancing its role as a learning and knowledge-generating institution.
According to the document of NBE, it is important to note that the ultimate targets of monetary policy in Ethiopia are maintaining price and exchange rate stability, as well as supporting sustainable economic growth. The National Bank of Ethiopia sets money supply as an intermediate target, although it should be noted that intermediate targets are not directly controlled by the central bank.
In conclusion, the effectiveness of monetary policy in achieving its goals depends on the institutional factors that either facilitate or hinder its implementation. The National Bank of Ethiopia’s monetary policy framework aims to maintain price and exchange rate stability while supporting sustainable economic growth.
Price stability is crucial for private sector decisions on investment, consumption, international trade, and saving, ultimately fostering employment and economic growth. Furthermore, maintaining exchange rate stability is essential for Ethiopia to remain competitive in international trade and utilize exchange rate interventions as policy tools to impact foreign reserve positions and domestic money supply.
Monetary policy strategy of a central bank depends on a number of factors that are unique and contextual to the country. Given the policy objective, any good strategy depends on the macroeconomic and the institutional structure of the economy. An important factor in this context is the degree of openness of the economy. The more open the economy is, the more the external sector plays a dominant role in monetary management.
Within a country’s monetary management framework, there are basically three targets: the ultimate or final target, the intermediate target and the operating target. The final targets of monetary policy in Ethiopia are to maintain price and exchange rate stability and support sustainable economic growth. In achieving these objectives, the NBE sets money supply as an intermediate target. It should be noted that intermediate targets are not directly controlled by the central bank, the document stated.
As to the document, traditionally, money supply is defined from its narrow and broader sense. Narrow money (M1) is a measure of money stock intended primarily for use in transactions. It consists of currency held by the public, traveler’s checks, demand deposits and other checkable deposits.
Broad Money (M2) is a measure of the domestic money supply that includes M1 plus Quasi-money (savings and time deposits), overnight repurchase agreements, and personal balances in money market accounts. Basically, M2 includes money that can be used for spending (M1) plus items that can be quickly converted to M1. NBE takes the broader definition of money or M2 as money supply. The current target is to ensure that the money supply growth is in line with nominal GDP growth rate, the document further stated.
The operational target, as elaborated in the document, is an economic variable that the central bank wants to influence, largely on a day-to-day basis, through its monetary policy instruments. They can be used to link instruments of monetary policy to intermediate targets set by the central bank and represent the first impulse in the transmission process of monetary policy. The growth of base money/reserve money is being used as operational target of the National Bank of Ethiopia.
BY LAKACHEW ATINAFU
THE ETHIOPIAN HERALD FRIDAY 18 AUGUST 2023
