Tuesday, March 26, 2013

NEVIS Review No 13, Section I, Ref # 13.1

NEVIS Review No 13, Section I
Ref # 13.1
March 25, 2013
The trend of inflation in Ethiopia
by Mesfin Tekle

In April 17, 2011, I penned an article on inflation in Addis Fortune newspaper. At the time of writing that article, inflation seemed to have gone out of control. [This is the link to that article: http://www.addisfortune.com/Vol_10_No_572_Archive/Viewpoint.htm

The good news since then is that inflation in the last quarter seems to have come down remarkably giving consumers a breathing room and hope to a frustrated public. However, the government’s promise to bring it down to single digits still remains a panacea. One of the main causes of inflation in Ethiopia is excess money supply. Most of the spending has been on building and expanding the infrastructure of the country to help attract more foreign direct investment and grow the economy. However, in the aftermath of this massive spending, inflation had gone out of control-putting savers and consumers under the strain of inflationary pressure for the last four or five years. Is the downtrend in the rate of inflation in the last quarter sustainable? It may be unlikely. The country still needs to spend more on new and unfinished infrastructure projects. Our export is significantly lower than expected. The target was five billion dollar for the year but reports indicate in seven months export earnings were only 1.7 billion dollars.
NBE is also forcing banks to lend 40% of their loan portfolio to short-term borrowers. Banks have concentrated on lending to long-term borrowers to avoid buying those pesky government bonds. If banks are forced to lend 40% of their portfolio to short term borrowers so the government can absorb 27% of the total loan portfolio to redirect it in to its chosen projects, the unintended consequence might be another bout of inflationary pressure. Moreover, the high cost of living due to untamed inflation has already made life difficult for the average citizen. The purchasing power of the Birr has also alarmingly deteriorated over the years. It is true that per capita income has increased significantly but most of the gain has been lost to inflation, not savings or investment.
Unless we expand our export in targeted sectors and tame the growth of imports, the value of our currency will continue to deteriorate. We also have to seriously look at infrastructure spending, if the funding continues to be tied to an unsustainable easy money policy.
Therefore, the above points are some of the updates in Ethiopian macro-economic landscape since I wrote the article on inflation on 2011.