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Ethiopia’s foreign reserve, which could cover less than two months of the country’s import bill as of last September, has now improved to a level where it can cover more than two months of import bill, according to Jan Mikkelsen, IMF Resident Representative to Ethiopia. This increases the capacity of the country to withstand the shocks that negatively affects the economy, argue experts Capital spoke to.
“A more balanced macroeconomic development will help solve the ongoing excess demand for foreign exchange. The good thing is that the government recognises the problem and is looking for ways to make the necessary adjustments. Further, the foreign reserve of the National Bank of Ethiopia (NBE) remains at about two months of imports and has actually risen in US Dollar terms since the beginning of this fiscal year. This is a positive development which will make it easier for the government to solve the problem. It is also my understanding that the government is well aware of the need to keep monetary policy tight and reduce public sector foreign exchange demand to help eliminate excess demand in the foreign currency exchange market,” said Jan Mikkelsen, while briefing journalists in his office last Thursday.
It has been reported extensively that business people in the country were and still are complaining about the acute shortage of hard currency.
Mikkelsen appreciated the public-sector led development strategy of Ethiopia though he warns of the negative impact of heavy involvement of the government in the development process of the country which he fears might result in the crowding out of the private sector. Since inflation is coming down with continuously strong economic growth, the focus should remain on policy options to sustain this growth and deflation process, he stated.
“Monetary policy should remain monetary policy to fight inflation and an expanding public sector puts the private sector under pressure. Unless the necessary balance is struck between public and private investment, the resultant effect will slow down economic growth and the creation of employment,” he said.
The latest price data base released by Access Capital’s research team confirms a decelerating inflationary situation in the country. For instance, on the basis of weights utilized for Addis Ababa’s official price index, the research team calculated a year-on-year inflation rate of 12 percent for 184 items it covered in its city-wide survey. This inflation estimate is approximately equal to the 12.4 percent year-on-year inflation reported for Addis Ababa by the Central Statistical Agency (CSA) last month.
In June 2012, the IMF mission to Ethiopia predicted a single digit real economic growth for the previous and current Ethiopian budget year. It also foresees decelerating inflation that will eventually settle within single digits if tight monetary and fiscal policies are in place. The mission stayed in Addis Ababa from May 30 to June 13 and projected real GDP growth at 7 percent and year-end inflation at about 22 percent. A similar growth rate and single digit inflation is predicted for 2012/13 if tight monetary and fiscal policies are maintained.
The Ministry of Finance and Economic Development (MoFED) reported that Ethiopia achieved 8.5 percent growth rate, well below the overall minimum 11 percent target set in the Growth and Transformation Plan (GTP), the governing economic plan of the country that ends in 2015. The prediction of the IMF seems closer to what the government reported for the first time since Ethiopia began registering double digit growth rates almost a decade ago.
The Ministry also reported that the country’s per capita income has reached 9,370 birr in the 2011/12 budget year. This is a significant increase from the one registered at the end of the 2010/11 budget year which is 5,800 birr.
Agriculture continues to dominate the Ethiopian economic scene. It contributed the lion’s share to the Gross National Product (GNP) constituting 45.3 percent followed by the service sector with 44.2 percent and the industrial sector with 10.5 percent. The GNP is estimated to be 737 billion birr in 2010/11 fiscal year. GNP is the total value of goods produced and services provided by a country in one year, equal to GDP plus net income from foreign investments.
Broadly speaking, tight monetary policy is necessary to strengthen the deflationary process and maintain exchange-rate stability. The move will imply relatively tight domestic credit conditions for the country as a whole. In other words, tight domestic credit conditions, in the short term, are necessary sacrifices for achieving macroeconomic stability that will support sustained high economic growth in the medium and the long term, according to IMF.