Wednesday, February 8, 2023

Enabling new NBE Governor to hit the ground running

The spate of appointments by the administration of Prime Minister Abiy Ahmed (PhD) over the past week has seen new faces ascend to the helm of important federal government agencies, signaling its intention to turn over a new leaf in how it runs the respective sectors the incoming appointees are set to lead. Chief among the new appointments is that of Mamo E Mihretu, who replaced Yinager Dessie (PhD) as the Governor of the National Bank of Ethiopia (NBE). Yinager’s tenure since he was moved over from his position as Commissioner of the National Planning Commission in June 2018 has been a mixed bag. Yinager can claim to have succeeded in fulfilling some of the mandates of the NBE—one of the key macro-institutions entrusted with undertaking a host of such vital functions as ensuring the prevalence of sound financial system, maintaining price stability, and facilitating the economic growth of Ethiopia in furtherance of the overall socio-economic growth of Ethiopia. The measures he introduced helped the country’s economy weather the effects of the COVID-19 pandemic, facilitated the steady growth of the financial sector, and increased financial inclusion, intermediation and financial resource mobilization through the banking system.

Yinager’s reign, however, has been marked by setbacks as well. One of the NBE’s failing is its inability to tame rampant inflation. As the Macroeconomic Committee, which is chaired by Prime Minister Abiy, and the heads of its member ministries have acknowledged on several occasions, the federal government has been found wanting when it comes to containing the inexorable rise in the cost of living that has made life an ordeal for the majority poor. Although the central bank is not solely responsible for managing inflation and the actions or failures thereof of other stakeholders have entailed a negative impact in terms of discharging its remit in this regard, it was inarguably not up to scratch in doing its part while Yinager was in office.

A monetary instrument policy the NBE adopted in 2019 has been one of the major drivers in the rapid escalation of Ethiopia’s inflation rate. The intentional depreciation of the Ethiopian birr against a basket of major foreign currencies at a relatively fast-paced rate is believed to be behind the astronomical surge in the cost of imported goods. The fiat currency fell against the USD from Birr 32 to 1 USD to Birr 50 to 1 USD in just two years while it took four years (between 2015 and 2019) for it to devalue by 11 birr. Many analysts are of the view that the NBE chose to adopt this policy in a nod to the repeated urging of the World Bank and International Monetary Fund (IMF), which have long held that the Birr was overvalued and needed to be at a level reflecting its real value.

The official reason cited to justify the policy was the imperative to bring down inflation, boost stagnating export earnings, and lower the trade deficit by discouraging import/encouraging import substitution. Unfortunately, the depreciation of the Birr has not brought about the desired result. Though export receipts rose for a couple of years, they are expected to plummet soon. At the same time, the chronic trade balance worsened due to the soaring import bill, which is attributable to the simple fact that the import of such basic necessities as food, medicine and fuel as well as industrial inputs cannot be discouraged through currency devaluation alone.

The NBE cannot be faulted for not having a proper grasp of the gravity of the consequences of the interminable hike in the cost of living and the determination to tackle it head on. Even though the central bank has put into play a number of policies and strategies aimed at reducing inflation to a single digit, they have not proved to be enough to arrest or even reverse the problem. A singular shortcoming of the NBE in this respect has been its disinclination to tap reputable experts and consult the wider public in the formulation and implementation of monetary policies.  As the NBE’s new Governor officially takes up his duties it is incumbent on him to address the limitations of his predecessor and display the kind of leadership that empowers all stakeholders to contribute their share in the search for solutions. This said, he cannot succeed in carrying out the difficult responsibilities on his plate on his own. It’s of the essence that everybody, but more so the government, extend him the necessary support wholeheartedly if he is to hit the ground running.   

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