The sluggish graduation of countries from the club of least developed countries (LDCs) remains a daunting reality for global policy makers. Only three countries including Botswana, Cape Verde and the Maldives, have managed to lift themselves up to the next category designated as developing countries, in the past decade, and clearly, the world is faced with a huge challenge. In addition, the current imbalance in the global economic structure remains a headache for international financial institutions and multilateral agencies.

Political creeds from neoliberal bashing to conservative nationalism outweigh reasoned economic debates in most global economic gatherings. No different was the fourth UN conference on LDCs held in Istanbul, Turkey, on May 2011. Standing tall, Prime Minister Meles Zenawi, arguably one of the few vocal economists in Africa, had used the conference to reflect on the orthodox policy impositions of international financial institutions such as International Monetary Fund (IMF) and the World Bank Group (WBG). Entrenched interests of the institutions narrow policy space and bar countries from defining their own future, claimed Meles.

Haunted by the piling debt in the US and the spiralling default risk in Europe, the financial institutions have turned their face away from least developed countries. Complemented with rampant stock market uncertainty, rising commodity prices, enduring uprisings in North Africa and the Middle East, the leadership shuffle and internal restructuring in the IMF provide policy makers in LDCs with a slightly more open policy space, which Meles has been favouring. Yet, sound monetary policy remains far off.

Inflation lingers as the principal economic hitch in Ethiopia. General inflation has spiralled to 39.2pc in July 2011. Whereas food inflation stands at 47.4pc, the non-food price index has ascended to 27.8pc, as compared to July 2010. Similarly, the 12 months moving average inflation has increased to 20.9pc in July 2011. It is primarily driven by excessive monetary growth, as Meles has only recently recognised. Inflation persists. Capital formation is heavily restrained and economic overheating is anticipated.

The rise in general price levels results from an excessive foreign exchange reserve accompanied by broad money growth, argue the Revolutionary Democrats. As it complements economic growth, it would not be structurally vicious. The rising food price inflation is partly seasonal, they claim, and would eventually subside. Should public investments be paced properly, no economic overheating would turn up, they assert.

The assertions are conflicting as the plan had been to tame inflation within single digits during the GTP period, claim the political opposition. Noting that mega infrastructure projects are in the pipeline, shoving public expenditures up, economic overheating is very likely. The money printing spree of the government is disproportionally affecting the poor because their access to finance and bankability is very low, they claim.

Poor financial deepening has lopsided monetary distribution. It compounds the rising monetary velocity and aggravates the impact of inflation. Sluggish flow of real time money builds inflation expectations. Certainly, it puts unbearable burden on the poor.

So long as the mismatch between plan and reality expands, the challenges for Ethiopian policy makers mount. Regardless of opportune timing, most macroeconomic indicators do not stand in their favour. Inflation stands out.

On the asset side of broad money growth, net foreign assets of the central bank increased by 146pc between 2008 and 2010, standing at 15.9 billion Br. Comparatively, foreign assets of commercial banks were around 12 billion Br in 2010. On the liability side of broad money growth, narrow money has consistently increased since 2004/05 at an average rate of 28pc. It stands at 52 billion Br in 2009/10.

Currency outside banks inched 24 billion Br in 2010, amounting to 46pc of narrow money. It complements demand deposits of 28 billion Br. When added with quasi money worth 52.1 billion Br, monetary expansion was hasty.

Anxious of broad money growth, which increased by 35pc in March 2011, IMF had warned of economic overheating. The Revolutionary Democrats only recently became convinced that excessive money supply fuels inflation. However, policy passivity persists in the face of skyrocketing prices.

The saving incentive is absent as interest rate stands at five per cent, 34.2pc lower than inflation in July 2011. With the average lending interest rate at 11pc, cost of capital is very high. Access to financing, however, is very low at 20pc. In the backdrop of such a structural imbalance, gross capital formation is envisioned to be lifted to 28.2pc in 2015. Domestic savings as a percentage of GDP will reach 15pc, according to the GTP.

Despite the provisional policy space, the Revolutionary Democrats fail to institute sound monetary policy that synchronises money supply with general price levels.

The government has embarked on huge public projects. The pace of investments is swift. Had the offline budget requirement of these projects been huge, the burden on the economy would be comparative. It would even accelerate the inflationary trajectory.

Despite the spiralling inflation, monetary policy instruments are not deployed effectively and aggressively. No appreciation of the saving interest rate is foreseeable. The treasury bill market has been weak and did not draw sufficient amount of money from the market. As a result, general prices grow higher than nominal GDP; it reduces real income.

Financial deepening has been weak with the central bank holding a huge asset base and the majority of the credit lines going to public enterprises. In 2010, the ratio of commercial bank assets to central bank assets stood at 0.75, showing the resource bias. Noting that a considerable amount of the commercial bank’s credit goes to state owned enterprises, small businesses are underserved by the financial sector. An undeveloped and concentrated financial sector serves few; it marginalises the majority. This is the story of the structural nature of inflation in the country.

Access to finance remains very limited with 80pc of the population not covered under the formal financial system. Money is owned by the few and hence its velocity is hastened. Accordingly, formal bank credits serve the few. It results in differential resilience for inflation that the poor would be severely affected.

Centralised credit information is not available. No reliable system exists that could monitor the pool of borrowers and distribution of resources. Policymakers are operating in an environment short of full fledged credit information, and tracking the impact of their policy measures would be difficult.  Certainly, this fuels inflation.

Supplemented with poor monetisation of the economy, the problems have internalised inflation. Besides conventional neoliberal bashing, the Revolutionary Democrats should institute sound policies.

They need to stick to their own plan of taming inflation to single digits. Cutting back broad money is an urgent need. Money supply should not be allowed to grow more than nominal GDP growth.

Financial resource distribution should be adjusted to serve the private sector.  Credit to the private sector should be enhanced. Special emphasis should be given to small businesses. As resource concentration is lessened, inflationary pressure would be eased.

Adjusting the savings interest rate should be considered. Any increment should be synchronised with the amount of consumption needed to drive economic growth. It should also be tailored with the envisioned rate of capital formation.

Centralised credit information should be availed to monitor credit. Streamlining real time data on borrower profiles should be the principal objective. To this end, microfinance institutions could be the entry point in rural areas.

While Meles’ arguments on the limited policy space may have traction, the policy makers of his government still face an immense pile of work. Capitalising from the opportunities created by the financial crisis in the West, undoubtedly demands insistent political resolve. There is no better time to prove the rhetoric.