Inflation down, but state breaks its pledge not to print money any longer; economy in trouble

18 May

By Yohannes Anberber*

Posted by The Ethiopia Observatory

-Trade imbalance peaks to USD 6.57 billion

vault, the national treasury was reported to have dipped into the latter’s lending facility during the past nine months to the tune of 3.95 billion birr, the central bank told the Budget and Finance Affairs Standing Committee of Parliament on Wednesday.

According to the report, having passed a whole year without excising its privilege to take a direct advance from the central bank, it is to be recalled that the national treasurer had decided to borrow 6.05 billion birr during the fiscal year to finance its deficit. However, at the end of the nine-month that was covered by the report only 3.95 billion of this money was advanced by the bank. The commitment to refrain from taking direct advance from the central bank was made in light of the macroeconomic challenges of the time, namely inflation. Pundits call it print money; the correlation between direct central bank advance and inflation is also known to be very high. In fact, they say it is almost a one-to-one relationship.

It was only recently that the authorities, including those at the central bank, admitted that the amount of money supply could be a potential factor that is accelerating consumer price inflation in Ethiopia. In 2011 former PM Meles Zenawi started to acknowledge money supply as one cause to the inflation. This was also the time where the monetary authorities accepted the proposal of the International Monetary Fund (IMF) to implement the monetary anchor as an instrument of controlling the broad money supply in the system. The monetary base, a.k.a. the reserve money, was the chosen anchor for the monetary policy through which it can track the change in broad money supply and check its growth. Nowadays, the report on monetary base is compiled on a daily basis while broad money supply progress is tracked on weekly basis.

According to the report, NBE’s target of keeping the growth of the monetary base below 12 percent this fiscal year seems to have materialized with a growth of 7.6 percent during the nine-month period. According to the explanation, the Bank’s monetary anchor was kept within the desired level largely because of a 7.2 percent decline registered its net domestic assets. The resultant effect of the monetary base in broad money supply was also reported to be 19 percent during the past nine months.

Nevertheless, the report concedes that the 7.6 percent inflation rate that was achieved last month was not solely attributed to the monetary policy but rather in conjunction with fiscal policy and other administrative measures like supply of critical consumables. One instrument that served both monetary and fiscal policy goals is Treasury bills, the report detailed, and hence the bank worked hard to sell 82.3 billion birr worth of T-bills during the budget year performing 37.8 percent more than its target.

In addition to that 4.6-billion birr worth of NBE-bills was sold during the nine-month period. And 4 billion birr that was pledged in the form of bond purchase and direct contribution for the Renaissance dam was also collected in the same period.

On other hand, the performance of the banking sector, which the NBE supervises, was another topic covered in the report. The report shows that all the commercial banks, both private and government, turned in an excellent performance during the period raking 5.6 billion gross profit. The sector as a whole mobilized 222 billion birr deposit in the period out of which 132 billion was disbursed in the form of loans and advances.

With a total of 1,581 branches spread all over the country, the report shows that Gambella, Benishangul Gumuz and Afar Regional States are the least banked with .05 percent of total branches and with each having not more than 10 branches. Overall, one branch serves 50,000 people in Ethiopia during the reporting period, and the number of accounts holder has grown to 8.1 million in the span of the nine-month period.

Finally the ever-widening trade balance and its effect on balance of payment was another area of concern for the report. With USD 2.23 billion export earnings over the nine months and USD 8.8 billion spent on import, the trade balance has widened to 6.57 billion birr. While the net private transfer amount, official development assistance and FDI intakes also registered USD 2.1 billion, USD 700 million and USD 546.2 million in their order.

%d bloggers like this: