Inflation clearly relates to the cost of imports, most obviously to the price  of oil, which takes up the lion’s share of the import bill. Current international oil prices are at a record high, and 80pc of Ethiopia’s export earnings are consumed by its import.

The impact is not limited to oil, though; oil prices affect almost every other sphere of the economy through transport. Inevitably, the impact is serious, and negative. This is why the government is currently engaged in introducing alternative energy sources. Promising sources include bio-fuel where Ethiopia has huge untapped potential.
 

Inflation here, particularly in urban areas, is clearly related to developments in agriculture. Despite a substantial growth in agricultural development in recent years, the supply of produce to urban centres has not been kept up accordingly.

Ethiopia is no longer receiving hundreds of thousands of tonnes of grain in food aid. International assistance to food insecure areas now comes in the form of funding to be used for the purchase of grain from the local market, which can then be distributed to areas where there is food shortage. Urban areas are not covered by this.

This is happening at a time when farmers are finding their negotiating capacity over prices increasing. They are refusing to sell at prices unacceptable to them, unlike before when prices were dictated to them. The results are clear; higher food prices in the cities. The solution is equally clear; increased productivity in order to cover growing demands.

The most important factor is the influence of the money supply and the country’s overall economic growth. It is very clear that the economy has been growing fast.

The problem is that the money supply has been growing faster. The result is that the amount used to buy certain items some years ago, simply is not sufficient now. People need more money for the same number of items. The overall economy has to grow faster than the money supply.
 

A point that deserves to be underlined here is the effect of cash available to private banks for lending to the private sector in recent years. They were required to keep no more than five per cent of their funds as reserves with the central bank, while their counterparts in other African countries are demanded to keep 10pc. As a result banks had huge amounts of money available for lending, thus more money in circulation in the economy than necessary.
 

This was the reason behind the National Bank of Ethiopia’s (NBE) decision last year to increase the reserve requirement by banks to 10pc, in addition to a percentage point adjustment in the interest rate on deposits to four per cent in a bid to encourage savings. I would say it is a step in the right direction, although I would like to see the central bank increase the rate even further to continue its efforts to control the overall money supply.
 

This is not specific to Ethiopia. A decade ago, Germany - when it was experiencing severe inflationary pressure due to the cost of the unification - raised the minimum interest rate on deposits from around four per cent to nine per cent. The outcome was less money in circulation and the successful levelling of the figures for money supply and economic growth.

The need for import substitution in particular items, notably cement, is worthy of mention. The current construction boom has meant a sharp rise in cement imports.
 

Again, this has a domino effect on other items. A number of new local cement factories are being built, allowing imports of cement to be phased out. The same will occur with other items. This will certainly have a substantial impact in reducing inflationary pressures in the coming years.
 

However, the question remains on how the poor sustain their lives today.

The government recently tried to distribute grain, sugar and oil at cheaper prices at the kebele level for the most needy. The effects were good but this still needs to be continued on a massive scale, and efficiently, while other government policies have yet to reach their full impact.

The government does seem to have some good ideas, but there is a real need to speed up the immediate processes to limit inflation while putting major resources into the longer-term solutions.