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
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,
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
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
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
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
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
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.