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Economists at the central bank ought to be told one glaring fact. If they think their job is to maintain price stability and view themselves as defenders of the national currency, they have failed miserably on both accounts.

They have failed to control inflation, a macroeconomic problem which has persisted for an unreasonably long period of time. They have failed to keep sufficient balance of payments through their monetary instruments and measures. As a result, the stability and value of the Birr have been jeopardized, putting into doubt the competence of policymakers and their advisors at the central bank; they have infused confusion into the public on their very role as well as relevance.

It should be hardly surprising if the public raises a question whether authorities at the central bank have any clearly defined role to play in the economy.

Are they simply acting as a mere untrustworthy currency board that has no defined role and capacity to act in times of economic turbulence, such as what we have come to witness now or should we expect more from them?

Of course, the role of central banks varies from country to country. In economies that tend to favour the Keynesian view, the role of central banks in an economy remains limited, while the government plays an active role through its fiscal policies. In contrast, central banks have a bigger role in an economy and enjoy expanded autonomy in exercising their power in economies that favor the monetarist approaches.

There are, indeed, those who use both. The merit of using both policies in balanced proportion lies in the fact that proper monetary policies help in deterring the government from reckless inflationary fiscal ventures. On the other hand, where fiscal policies seem sensible to use, the government can play its appropriate role. The combination requires both the central bank and government to have balanced and clearly defined roles in the economy. This arrangement in turn helps to bolster government credibility and accountability to the public.

Today, countries, particularly those in the developed world, whose governments adopted a monetary policy regime, have strong and in some cases very powerful central banks whose influence in the economy stretches to the extent of determining the activities of some major markets. Central banks in these countries have active roles in the economy in two ways.


Through their exceptional expertise on the monetary variables and a better understanding of the matrix of the economy in such regimes, they actively assist the politicians in setting economic goals and targets during their terms in power. They are also free to use any monetary instrument and measures they deem necessary to affect the economy in line with the set goals and targets.

Unlike governments before the Second World War, which had but a single dominant  economic policy advisory that ultimately molded their policy regime, today’s governments around the world are blessed with more alternative policy advice. In this complex global economic order of the 21st Century, it is hardly possible to find a school of thought with a dominant voice. There are many alternatives.

The choice is for the government to make and the challenge is to keep a good balance of the available policies and instruments to regulate the economy. The fact that the Keynesian thought is old does not mean that governments do not refer Keynesian books today. In fact, governments around the world still take a bite from it.

For instance, both of the recent American administrations - the Bush and the incumbent - have attempted and, are determined to rescue the present economic crisis through Keynesian methods.

Prime Minister Meles Zenawi’s administration has the right and authority to adopt policies and development philosophies, which it believes are right. Accordingly, it is currently pursuing an economic policy that can be described as one that encompasses the basic tenets of a free market economy. The Prime Minister himself recently said the country sits in the middle of a process that builds lily-white capitalism.   

It still deviates significantly from the ideals of the free market economy, with a visible tendency towards the Keynesianism. Never mind that his administration prefers the brand ‘developmentalist state’, which is often publicized by its PR machinery.

A careful look at this administration’s policies, its economic moves, goals and targets,  and its depressing attitude towards the autonomy of the central bank, however, are highly debatable among academicians in general and monetary economists in particular. All seem to derive from the basic development philosophies it adopted, which have much resemblance to the Keynesian economic notions and almost devoid of monetarist thinking.

The fact that the government’s main policy objective is sustaining high economic growth with significant reduction in poverty; and short run economic goals targeting economic growth rate has undermined the role the National Bank of Ethiopia (NBE) could have played using monetary instruments.

For instance, the government massively employed different Keynesian methods to control the not yet subsided inflation. This is partly because if it allowed the central bank to use monetary instruments at its disposal to put the inflation under control, independent of executive intervention, it would have put a hold on the state’s appetite to spend more. This shows that the central bank is not autonomous enough and has become irrelevant in controlling emerging economic instabilities.

The ideologies followed by the administration also give little importance to the merits of having an independent central bank in the functioning of the economy.

What else could be more telling evidence than to know that the Governor of the National Bank of Ethiopia (NBE) is a member of the ruling EPRDF, thus asks his chairman for policy direction at party conventions? How is the Governor expected to be tough on the administration’s adventurous public spending that is inflationary?

Some economists might have the view that the existing macroeconomic problems could have been better handled through monetary measures rather than through the tested and failed approach – the fiscal. Still others might prefer to live with the problems so long as they are unable to thwart the growth trend and thus have no effect on the possible gains from the growth. Yet, the administration might like us to believe that the measures it took so far are a success story. I seriously doubt this.


By Haftamu Tafere

The writer can be reached at



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