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Experts advise gov’t tame inflation

Experts have urged that the central focus of the government regarding the Ethiopian economy must be on taming inflation.

Speaking at a discussion organized by Forum for Social Studies (FSS), the prominent economics professor from Addis Ababa University (AAU), Alemayehu Geda (PhD, Prof.) said that the government’s investment trends has resulted in a huge inflation which is making life difficult for the poor.

Alemayehu, who contests the claim of an annual average economic growth of 10 percent by the country, and putting it at six percent as per his calculations, says that the government’s investment which is 40 percent of the GDP did not go hand in hand with the 22 percent saving. Hence, the “developmental state” opted for loans and grants from both domestic and foreign sources. Alemayehu even contests the domestic saving figures (22 percent of GDP) saying that his calculations put it at 10 percent.

“The government’s external debt now stands at USD 29 billion and the domestic debt also equates this amount,” Alemayehu argues.

Apart from this, the government financed its investments through loans from the National Bank of Ethiopia (NBE) which expanded the supply of money in the market from 68.2 billion birr in 2007 to 740.6 billion birr in 2018, Alemayehu asserts. This is a 27 percent expansion annually, way over the healthy expansion rate by four to five percentage points.

“This money went directly into the hands of people and because of the level of poverty, it was invested on food and other basic needs resulting in high inflation and skyrocketing cost of food and other basic goods,” Alemayehu pointed out.

In addition, Alemayehu added that the credit from different markets which was availed to the elite leadership as well as the supporting business class creating further inequality and capital flight.

The devaluation of the birr, made twice as a result of policy advices from the International Monetary Fund and the World Bank, did not result in the intended promotion of the country’s export sector but rather in the diminishing purchasing power of the birr and increased inflation.

Therefore, the government needs to focus on structural solutions to the economy rather than monetary measures, he stated. The advice to the government is to focus on inflation, to provide structural solutions to structural problems as well as upholding the Developmental State Model along with democratization supported by knowledge-based decision making and economic planning.

Another panelist on the forum, Tewodros Mekonnen (PhD) also agrees that the government has to give more focus to taming inflation. Tewodros indicated that the inflation has demotivated savings and investments and it has moved to assets that are supposed not to lose their value in the long-run from the productive sector.