According to the World Bank, Ethiopia faces various challenges manifested itself by macro-economic deficiencies. Unemployment, foreign currency crunch, debt service, which is currently reached to 27 billion Dollars, inflation, corruption, illegal trade can be mentioned as major factor.
The challenge was aggravated by the war broke out between Russia and Ukraine and in the northern part of Ethiopia and by the COVID 19 two years ago.
The World Health Organization studied the impact of the COVID-19 pandemic on African economies and household welfare using a top-down sequential macro-micro simulation approach. The pandemic is modeled as a supply shock that disrupted the economic activities of African countries and then affected households’ consumption behavior, the level of their welfare, and businesses’ investment decisions.
It is calibrated to account for informality, a key feature of African economies. It is also proved that COVID-19 could diminish employment in the formal and informal sectors and contract consumption of savers and non-savers, especially for savers.
Because of the war in the northern Ethiopia lasted for two years, the economic activities in that region was collapsed. Industries and service sectors were totally shrunk. The revenue that would have been collected was cut off.
Banks and insurance services were cut and money was not transacted, which again affected the economy. Farmers could not cultivate their land and produce crops and the crop that would have been supplied to the market was not delivered. As a result, the product was in short supply, which in turn aggravated inflation by raising the price. The interruption of transport service also dwindle the revenue that would have been collected from the sector. Rehabilitating the displaced people due to the war also burdened the government coffer. Reconstructing the demolished infrastructure forced the government to allocate its financial resources that would have been allotted for other development endeavor.
According to Ministry of Finance, the reconstruction costs the nation to more than 20 billion Dollars and unless it is supported by donors executing the reconstruction project might be unthinkable.
As of economists, there are various factors which contribute to the galloping of commodities’ and services’ prices and among others: illegal trade, the deteriorating of peace and security in various parts of the country, the loan taken by the government from local and foreign banks by various reasons which increases cash flow in the market, the increasing government expenditure, excess remittance, and imported inflation due to the price hike of commodities in the international market, money laundering, black market and others.
It is proved that illegal trade is aggravating and critically harmed the nation’s economy. Resources such as cattle, coffee, mines, fuel, chat, vegetable, fruits and others are smuggled to neighboring countries’ markets through borders. Due to such illegal trade, the supply of the aforementioned products has been shortfall and as a result, experiencing price hike in a frequent manner continued.
According to recent report of Animals’ Quarantine Department, Ministry of Agriculture, ten thousands of cattle are illegally exported to the neighboring countries weekly. If it has been exported in the legal way, the nation would have been garnered handsome amount of hard currency. The other products also could support the nation’s foreign currency reserve, if they would have been exported through formal channel. The interruption of transportation, because of the absence of peace and security, hampered the supply of agricultural products not to reach the market which again contributes for the aggravation of inflation.
It also made difficult the supply of agricultural inputs such as fertilizer, pesticides and herbicides to farmers which again caused the low productivity of the sector. Government’s deed in disseminating borrowed money from local banks into the local market also posed the shortage of commodity supply. It is for the reason that when excess money is circulated in the market, it makes scarcity of commodities in the market and to mitigate the problem, the National Bank of Ethiopia recently announced that it reduced the provision of loan to the government from local banks.
Obtaining hard currency through remittances helps the nation garnering foreign currency capacity. But persons who receive hard currency from their relative residing overseas, exchange it in the parallel market to obtain more local currency which poses inflation. If they exchange in the formal channel, in banks, it would have contributed to raise the nation’s foreign currency reserve and reduce inflation.
The price hike of commodities in the international market also poses inflation. When the commodities are imported in the expensive price, they are also supplied to the local market in high price which again burden the consumers’ purchasing capacity. To stabilize the market and to reduce the inflation rate, the government has taken various measures since long ago and some positive outcomes have been witnessed.
Recently, Governor of National Bank of Ethiopia (NBE), Mamo Mihretu said inflation has declined from 29.3% by the end of last June to 27.7% during the first quarter of the current Ethiopian budget year.
Presenting the quarterly performance of NBE to the HPR Plan, Budget and Finance Affairs Standing Committee recently, the Governor said inflation has been declining during the past six months. In September, inflation fell to 27.7% from 35% in March, 2023.
Last August, the National Bank of Ethiopia announced monetary policy measures to reduce inflation in a significant manner. NBE targets to reduce inflation to below 20% by June 2024 and below 10% by June 2025. Among the measures undertaken by NBE for this fiscal year ending June 30, 2024, credit growth is to be limited to 14 percent, and all commercial banks are instructed to limit their loan to be consistent with this aggregate credit ceiling.
According to the Governor, NBE has also sharply reduced Direct Advances to the Government this fiscal year and limited such lending to just one-third of the prior-year levels. The interest rate at NBE’s Emergency Lending facility, which banks utilize when they face liquidity problems, is increased from 16% to 18%, it was learned.
Despite encouraging achievements registered during the first quarter of the ongoing budget year, reducing inflation significantly is still a priority in NBE’s macro-economic stability initiatives. Regarding the financial sector growth, he said that the financial sector has been booming especially during the last few years following the reform as bank branches grew from over 4,000 in 2018 to more than 11,000.
Deposit of commercial banks also increased three times, from 700 billion in June 2018 to 2.3 trillion Birr as of now. The Ethiopian payment system has been also booming, the Governor stated. The digital payment system reached 4.76 trillion Birr, by doubling to the previous year
The standing committee members acknowledged the encouraging achievements registered by NBE in creating healthy financial system, reducing inflation, and the increase in digital payment system, among others. Despite the recent decline, they stressed that coordinated efforts are needed to meaningfully reduce inflation by implementing the necessary directives and policy measures.
Ethiopia is an agrarian economy in which the sector serves as the means of living for about 80% of the population residing in the rural parts of the country. The sector is climate sensitive and when rain fails followed by crop failure which in turn the supply of agricultural products to the local market will be reduced and this is the major factor for the growing inflation which critically affects the urban consumers. Hence, to reduce inflation induced by climate change, improving the sector through supplying modern inputs and enhancing irrigation based farming practices and increasing production and productivity is essential.
As mentioned above, illegal trading of local products to the neighboring countries is a major factor for the growing of inflation because of the short supply of the products to the local market. Therefore, to mitigate the problem, the law enforcement institutions should take strict measure against the culprits.
Corruption also plays a negative role in the economy by posing inflation. Self- interest traders set their own commodity price beyond the consumers’ purchasing capacity through bribing some irresponsible government officials. Therefore, putting in to account the officials for their malpractice is essential. The unnecessary value chain stretched in the agricultural products’ market also causes price hike and to shorten the value chain by removing traders who do not pay tax in the value chain is vital.
Inflation critically affects the poor who has fixed income. According to the recent report, 75% of civil servants earn less than 12 thousand Birr per month and their income do not cover their house rent and food consumption expense. Therefore, to relieve their painful living, the government should engage in stabilizing the prices.
BY ABEBE WOLDEGIORGIS
The Ethiopian Herald December 3/2023
