The monetary policy statement issued by the regulatory National Bank of Ethiopia (NBE) on August 11 addresses a vital issue we have opined about on several occasions before. The statement outlines the policy measures the central bank believes can help reduce inflation in a significant and sustained manner. We have said time and again that the inexorable rise in the cost of living for decades has dimmed the hopes of leading a decent life for the vast majority of Ethiopians. The perennially high levels of inflation with which the Ethiopian economy and its people have been living with has been one of, if not the most, difficult macroeconomic challenges and had detrimentally affected the livelihoods of tens of millions of citizens, reducing the real income of people with fixed or irregular income. The ominous specter of a socio-economic catastrophe that this phenomena poses is liable to precipitate a political instability that must be averted before it causes irreparable harm.
Beginning with the recent hike in the prices of basic food items, Ethiopia has seen successive rounds of price hikes in both food and non-food items for over a decade now. The prices of teff, the staple food of most Ethiopians, and other cereals as well as utility bills, house rent, mass transit services, medical expenses, tuition fees, etc. have gone up astronomically during this time. Needless to say, prices cannot remain flat year on year. However, the manner in which they have been soaring is not only unfair, but also far outstrips the rise in income levels. Although the latest figures released by NBE indicate that year-on-year headline inflation declined modestly to below 30 percent for the first time in two years, it remains high, showing the economy is still laboring under inflationary pressures.
The unrelenting surge in inflation cannot be ascribed to a single factor. There is a mix of determinants of varying degree to which it’s attributable. These include, inter alia, the prevalence of acts which have distortionary effects on the market; such supply-side constraints and cost-push factors as the outbreak of internecine strife that not only disrupted local food transport and distribution networks, but also caused funds which could have been utilized for development or welfare purposes to be diverted for the rehabilitation of the victims of humanitarian disasters; the mounting debt stress prompted by the high level of government borrowing from both domestic and external sources; and the large rise in the cost of imported goods, particularly fuel and fertilizer. Aside from the above, the government’s loosening of fiscal and monetary policies with a view to respond to a raft of headwinds have also contributed its share to exacerbating the problem.
The NBE’s latest policy measures, which it says are reflective of the exigency of addressing inflation in a firm and convincing manner this fiscal year, center on limiting credit growth for the public and private sectors alike. As part of the specific package of measures that it hopes will reduce inflation to below 20 percent by the end of June 2024 comprise, credit growth is to be capped at 14 percent, with all commercial banks required to limit the growth of their loan books to abide by this ceiling. Direct advances to the government by the central bank are also set to decline substantially, limited to just one-third of the prior-year levels. The Ministry of Finance is expected to avail itself of this facility if it is the only available financing option in the event that it’s unable to sell treasury bills and treasury bonds in sufficient quantities on the market. Moreover, with an eye to arrest the drop in export receipts in FY 2022/2023, the foreign exchange surrender requirement for exporters of goods and services will be reduced. As such, they will be entitled to retain 40 percent of their foreign exchange proceeds, up from the current 20 percent. These steps may go some way toward bringing down inflation to the level projected by NBE in the short-term. However, they cannot put a permanent end to steep inflationary rises.
As a problem which traces its roots to a bevy of contributing factors, Ethiopia’s backbreaking inflation demands nothing less than a holistic, multi-stakeholder solutions initiative underpinned by coordinated endeavors spanning multiple areas. The major planks of a sustainable solution are primarily anchored in undertaking structural measures aimed at reining in forces which engage in acts that distort the laws of demand and supply and thereby enhance competitiveness; tackling supply-side impediments with the objective of increasing the availability of both basic food and non-food goods and services; and implementing a sound fiscal discipline regimen to lower the government’s reliance on borrowing from domestic commercial banks and the NBE. Commendable as these efforts intended to alleviate the inflation-induced ordeal of ordinary Ethiopians may be, their success depends on the extent to which the government, in particular, is determined to see them through. In the absence of a political commitment, any attempt to bring down the country’s rampant inflation is bound to fall flat.