Back in the 1970s, a record high cost of oil – a fourfold increase - festered the whole world. A generation later, an astonishing peak emerges in the oil price – hitting the roof last week at 136 dollars per barrel - bringing havoc to much of the world, as indeed to Ethiopia, with what the government policy-shoppers claim is largely an “imported inflation”.
 

If one looks at the 1.8 trillion dollars consumers of the black liquid pay to oil producers, Ethiopia’s annual expenditure for oil - 2.1 billion dollars - is simply a drop in the ocean. But for a country that earns half a million dollars less of this figure from its exports, an amount that represents close to half of its federal budget for the coming fiscal year, the impact of international price fluctuation is no joy.
 

Wary of the consequences on the public, subsequent governments in Ethiopia have always been reluctant to pass the increased global prices on to the local market. An attempt to do that paid its price in blood; Emperor Haileselassie’s trouble all began with a demonstration staged by cab drivers who protested the escalation in the cost of a litre of benzene at gas-station level. Should the administration of Prime Minister Meles Zenawi keep on doing exactly what its predecessors did, it would hardly be blamed. And it is not alone, for half the world is cushioned from soaring oil price by fat subsidies.
 

This newspaper has a track record for arguing about how unwise subsidies on fuel prices always are, for it believes it is bad for macro economic stability. It widens the budget deficit and becomes inflationary.
 

But when prices jump from the cheap oil (20 dollars per barrel) five years ago to what analysts are projecting will reach 200 dollars in a few months, the government of a poor country such as Ethiopia simply does not have the luxury to pump money into procuring it. Whatever amount of reserve is left in the national coffer would all go towards paying for oil at the expense of other necessities.

Thus, so much speculation is going on in town that the government is set to revise retail prices of benzene, diesel and kerosene anytime soon. There was even a frantic response to this a couple of weeks ago when car owners jammed gas stations across Addis Abeba, in a rush to fill their tanks before prices shot up again. It did not happen though.

Nonetheless, it is a realistic assumption; there could be adjustments to retail prices of fuel very soon. Unfortunately, almost everything else in this country has become subject to public conjecture, one more addition to the many factors contributing to the mad-dash inflation. Whether or not the raging prices reached a level that could be described as “hyper-inflation” is subject of debate among economists. However, prices going up almost daily, if not a couple of times within a day, are a fact evident on the ground. For the first time since September 2006, both overall inflation and food price rises reached a record high of nearly 20pc and 26.6pc, respectively.
 

The sources of these increases are diverse; but lately, inflationary expectation itself has fuelled inflation. People go on panic shopping-sprees, speculating that prices will go even higher, thus compelling them to spend on what they do not necessarily need right away. Indeed, the market has begun to suffer from supply constraint lately; whatever is available and no matter that prices are going up, it is sold fast, including items that could be considered as luxuries, such as meat. There appears to be an appetite for more.

In a way, that is part of the irony. However much urbanities, particularly those from the fixed income bracket complain, the economy shows no sign of contraction or slowdown. Supermarkets are busy, restaurants and pastries are full, and bars and nightclubs are as crowded as ever. There is as much scarcity as there is abundant waste. Where is the money coming from, many wonder?
 

Some economists attribute this contradiction to the Ethiopian culture where the national habit of saving for rocky days is non-existent. Ethiopia’s gross domestic savings per GDP is only at 4.1pc, as opposed to the African average of nearly 22pc. Most Ethiopians appear to be in the habit of spending whatever they make on whichever temptation they seem to suffer from.

Remittance could possibly explain the incongruity between raging prices and unstoppable spending.
 

No one knows exactly how many Ethiopians reside in different countries across the world. What is certain is that their number is in the millions and it is increasing. Remittance could be insignificant in Ethiopia, representing only 0.7pc of the GDP in 2003 compared to others countries such as Egypt (with 4.4pc of GDP in the same year), Morocco (with 7.6pc) and Pakistan (with 4.7pc). Nevertheless, it is growing: The Diaspora sent, to their loved ones back home, over 1.2 billion dollars during the past three quarters of the fiscal year.

If observers point their fingers at remittance to explain why outgoing establishments in Addis Abeba are overcrowded, it is partly because in Ethiopia, it has increased to a phenomenon level over the past 10 years. In 1998/99, for instance, the share of total transfer in Birr (658.2 million Br) was only 1.23pc to the GDP; eight years later, Ethiopians abroad had sent home 3.2 billion Br, covering 3.65pc of the GDP.

But remittance is only part of the bigger picture; the amount of broad money supply to the economy has grown substantially over the past four years, it has reached a migraine level for policymakers and their advisors today. Indeed, farmers are better informed than ever before about prices and are in a position to dictate what they would like to fetch; micro finance enterprises pump out more than double (about five billion Birr) the amount they did a few years ago to small businesses in the country; Ethiopia’s development partners, mainly the World Bank, are paying over 1.3 billion Br in cash to farmers through the social safety net programme; and public expenditure has increased exponentially.
 

All these are factors that expanded the monetary circulation in the economy: Not surprisingly, broad money supply increased by 21.3pc during the nine-month period of 2006/07 to reach 54.1 billion Br, and yet again by 23.3pc in the first three quarters of the current fiscal year, standing now at 65.7 billion Br. Belatedly, the key members of the Prime Minister’s economic team confronted the fact that the economy is being besieged by a monstrous inflation, largely due to monetary expansion. They have now ambitiously targeted reducing the money in circulation by 19pc at the end of the current fiscal year.

That policy advisors have turned around to deal head-on with an abundant monetary supply in the economy is a good start. The administration’s budgetary discipline in limiting its domestic borrowing to two per cent of the GDP (five billion Birr) is also a very prudent move.

Ironically, a government that displayed fiscal conservatism is seen to be very reluctant to take bold measures towards employing its monetary policy arsenal. That is partly due to the incompetence of the central bank from playing its rightful role of controlling inflation by adjusting interest rates in spite of the temperature up at Arat Kilo.

What were the governor and his team of advisors, as well as researchers up to when the notes were flooding the market? Why did it take them over four years to increase the interest rate on deposit from three per cent to four per cent in July 2007? Should they have remained inactive from adjusting the interest rate since then, during which time the national Consumer Price Index (CPI) jumped from 15.8pc of overall inflation in June 2007 to 19.9pc in April 2008?

Even now, Ethiopia is one of the most ideal places on earth where borrowers enjoy a negative real interest rate at the expense of the majority of depositors who are subjected to a loss from their savings. A central bank that operates in a country with one of the lowest national savings, even by African standard, appears to have little interest in encouraging people from saving.

Why would anyone put money in the banks, simply to loss about 15 Br from every 100 Br deposited? People have every reason to withdraw their savings to spend them on assets they are certain would appreciate: Notice the rush in investing on leased plots and buying homes?    

Instead of increasing the interest rate on deposits to a level that encourages people to keep their money with the banks, and pushing the one on lending to a degree where borrowers do not go for dirt cheap lending, the central bank opted to force banks to increase their reserve requirement by five percentage point to 10pc, and liquidity requirement by 10 percentage point to 25pc.
 

These measures are simply not enough, for they have yielded little in the past one year. No one should know about this better than Governor Teklewold Atnafu: In the first week of July 2007, he told members of the state media that increasing the interest rate on deposit by one percentage point and forcing the banks to keep more reserves than they used to would help him contain inflation below 10pc. It did not happen; in fact, overall inflation increased by four percentage point to nearly 27.5pc on a month-on-month increase between July 2007 and April 2008, according to the CPI released by the Central Statistical Agency last month.

Why he still thinks that similar measures would bring results any different from the past is something known only to him and his advisors.

It is hard to blame politicians for having large appetites for spending more on publicly financed mega projects, in their bid to please their constituencies, where they have to claim growth payback in exchange for their votes during elections every once in a while. It is wise and courageous central bankers who are trusted by market forces to bring sanity to a fête climate.