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Inflation: 2nd in the world
The third macro economic analysis of Access Capital’s research wing called for the establishment of an Ethiopian Bond Exchange (EBX) market with its associated secondary market platform in its annual review. Moreover the report defied reasons given by the government for the rampant inflation that blames external factors. It also stated that the inflation rate of Ethiopia is the highest in Africa and the second highest in the world next to Belarus.
Bond issuance is becoming common in Ethiopia. Outstanding bond issued reached 29.1 billion birr as of September 2010, mainly reflecting EEPCO and DBE bonds as well as 6.6 billion birr in bonds issued by regional governments making the total amount of bond issued at both the federal and regional level well over 35.5 billion birr. However, the outstanding bond issuance figure is even higher now following the launch of the Grand Renaissance Dam Bond and a DBE Savings Bond, explains the Access Capital review.
“A formally established Bond Exchange could usefully standardize bond issuance practices and requirements. It will also serve as a central depository for registering, disclosing, and trading bond issues by public or private entities. In essence, this would be the equivalent of an organized stock exchange but where only the issuance and trading of bonds (as opposed to stocks) is conducted,” states the report. “In line with the plans already in place in this area, establishing a secondary market as part of this bond exchange would also be of much value, as this considerably expands the pool of interested bond buyers.”
Such a market can improve investor’s confidence quickly and conveniently for liquidating their bonds at least at its initial purchase.
“It is worth noting that a formal bond exchange market can be a useful alternative supplement to prospective share companies which seek to raise funds directly from the public and have, so far, been the primary avenue of raising funds for new business ventures outside the banking system,” states the report.
There were 22 medium to large size companies seeking to raise a combined startup capital of 6 billion birr as of December 2011. A bond exchange market would offer them another avenue for raising funds with a more open and transparent set of disclosure and accountability requirements.
Contrary to some of the widely held views on the cause of high inflation in Ethiopia, Access argues that Ethiopia’s inflation is not mainly due to external factors or somehow an intrinsic and unavoidable feature of fast-growing countries.
“Access reading of the relevant data instead points to inflation being linked largely to domestic and policy-related sources. This offers ground for optimism since this implies that internal policy adjustments can help contain it quickly and decisively,” said the report neglecting the government’s argument which says the inflation is caused by mainly imported items.
“Ethiopia concludes the last fiscal year with the worst inflation record in Africa. The inflation level is not only the worst in Africa, where the average rate is 8.4 percent, but also the second worst in the world, behind only Belarus. Given the sharp jump in inflation in the last fiscal year and still elevated level this year shows that inflation is now mathematically almost assured to average in the double digits for the GTP period. Even with zero inflation for the next three years, average inflation for the five-year period will turn out to be near 10 percent,” adds the report.
All regions are showing high inflation but differences among them are becoming unusually large. Food inflation rates among Ethiopia‘s nine regions range from a low of 27 percent in Addis Ababa to a high of 99 percent in Benishangul Gumuz, with many of the highly populated regions somewhere in the middle of Oromia showing 51 percent, Amhara showing 50 percent, and SNNP showing 62 percent. Some remote and less-populated regions are indeed showing high inflation like Benishangul Gumuz and Gambela.
“The commonly held view that recent inflation was caused mainly by external factors is not the only widely held misperception regarding Ethiopia’s inflation; others include the view that inflation has been a tolerable and temporary problem, that it is mainly due to poorly functioning wholesale and retail market structures, and that it is simply the price to be paid for growing that is so fast. In our judgment, these views are simply not supported by relevant data,” the report concludes.