August 18, 2023

Analyzing Ethiopia's New Monetary Policy: Will It Tame Inflation?

City: Addis AbabaEconomyNewsBusiness

Ethiopia’s new monetary policy targets reducing inflation and increasing foreign currency income, but experts have trust issues

Avatar: Ilyas Kifle
By Ilyas Kifle

Ilyas is a reporter at Addis Zeybe experienced in creative writing and content production.

Analyzing Ethiopia's New Monetary Policy: Will It Tame Inflation?

Ethiopia's recent announcement of a new monetary policy to tackle inflation and bolster foreign currency reserves has generated both hope and skepticism among experts and the public alike. As the nation grapples with economic challenges and strives for stability, the National Bank of Ethiopia (NBE) has taken a proactive stance to implement reforms, stirring discussions about these measures' efficacy and potential implications.

Like many other countries, Ethiopia has experienced inflationary pressures that have strained its economy and affected the cost of living for its citizens. Over the past two years, the inflation rate has surged beyond the historical average of 16 percent, raising concerns about the country's economic resilience. Acknowledging the urgency of addressing this issue, the NBE has devised a monetary policy that aims to curb inflation while fostering a more stable economic environment.

Monetary Policy Reforms:

The heart of the new monetary policy lies in strategic reforms that touch upon various facets of the nation's financial landscape. A fundamental change involves imposing a cap on credit growth for all commercial banks, setting it at 14 percent for the current fiscal year ending in June 2024. This move is intended to promote responsible lending practices and prevent an unchecked expansion of credit that could further contribute to inflation.

Furthermore, the NBE's Emergency lending facility interest rate, an instrument designed to ensure banks' liquidity, will witness an increase from 16 percent to 18 percent. This adjustment aims to strike a balance between facilitating access to liquidity for financial institutions while maintaining prudent monetary policy measures.

In a bid to encourage fiscal responsibility, the national bank has also chosen to limit direct advances to the government for the budgetary year, restricting such lending to one-third of the previous year's level. This shift underscores a broader strategy to encourage the government to explore alternative means of raising funds, such as issuing Treasury bills and bonds.

Expert Opinions and Concerns:

Debates surrounding Ethiopia's economic landscape have intensified, especially concerning whether the nation is facing hyperinflation. Analysts point to factors such as an inefficient domestic financial system, production shocks, revenue generation challenges, and inadequate money supply creation as potential contributors to inflationary pressures.

A key voice in this discourse is Atilaw Alem (Ph.D.), an economic studies expert who highlights the apparent gap between the government's policy-level pronouncements and the actual execution of these policies. This disparity raises questions about the government's commitment to effectively implementing the proposed reforms.

Tilahun Girma, a finance and banking expert, emphasizes the pivotal role of security in attracting foreign direct investment. He further stresses the need for economic decisions that consider the welfare of low-income citizens, a consideration that is essential for sustainable growth.

Government Spending and Inflation:

One critical concern is the correlation between government spending and inflation. Dr. Atilaw highlights a potentially challenging dynamic: as prices rise, the cost of government purchases could also increase, potentially contributing to inflation. He proposes that sustained efforts to curb inflation would require the National Bank to curtail its practice of supplying money to the government.

Tilahun adds that enforcing regulations that control government spending can have a positive ripple effect, leading to increased employment opportunities, growth for small and medium businesses, and new markets.

While the introduced monetary policy changes hold promise, experts caution that these measures might require further refinement and complementing actions. An area of focus is the foreign exchange framework, where enhancements are needed to facilitate import and export activities for investors.

In conclusion, Ethiopia's pursuit of economic stability and reduced inflation through its new monetary policy reflects a proactive approach to addressing pressing challenges. As experts weigh in on its potential effectiveness, the coming months will reveal the true impact of these reforms on the nation's economic trajectory. Striking a balance between policy intentions and real-world outcomes will be pivotal in determining the long-term success of Ethiopia's monetary policy endeavors.