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‘Inflation will continue to drop’

In its latest report, the International Monetary Fund (IMF) projected that Ethiopia’s Gross Domestic Product (GDP) will remain around a modest 6.5 percent for 2013/14 with inflation continuing its downward trend, contesting the government’s official projection of 11.4 percent.
The report entitled ‘Regional Economic Outlook: Sub-Saharan Africa – Building Momentum in a Multi-Speed World’ was released this week at the headquarters of the IMF Ethiopia regional office. 
The report states that with 5 percent growth in 2012, economic activity in sub-Saharan Africa remained strong, slowing only marginally from the 2010-11 rate.
The report also notes that annual average consumer prices will decline to 8.3 percent in 2013 and 9.6 percent in 2014, down from the past year’s 22.8 percent indicating that inflation will continue to ease to a single digit. “Inflation declined in most regions, reflecting more stable global commodity prices, improved local climate conditions, and tight monetary policies,” the report states. Accordingly, with food inflation declining as the year proceeded, disinflation was particularly marked in eastern Africa, including Ethiopia slumping down from 36 percent in 2011, to 13 percent by end of 2012.
The Central Statistics Agency (CSA) on its part announced in its March 2013 report that year-on-year inflation rate dropped to 7.6 percent in March, from 10.9 percent in February.
The report also indicated that the country’s reserve coverage ratio will stagnate at 1.7 months of imports in 2013, which is similar to the past year’s, but will grow to 1.8 months in 2014.
The challenges, which the country’s economy faces have also been stated in the report. The large GTP financing requirement has consumed the biggest share of the GDP. The report indicated that about 15 percent of the GDP annually goes to the five-year GTP plan and it has put immense pressure on the economy.
IMF Resident Representative, Jan Mikkelson, offered options to narrow the gap of insufficient GTP financing by increased savings, raising tax revenues, printing more money, using foreign exchange reserves and more foreign and domestic borrowing. “Borrowing money from abroad has been mentioned as the best alternative and the option of printing money is considered the least desirable,” experts explained.
Domestic financing is the preferred path to follow under the current situation. For the first 2 years of the GTP, domestic public financing amounted to an estimated 6.5 percent of the GDP.
The IMF also indicated that the government should facilitate more loans from local financial institutions for the private sector, as it will help in creating employment. Maintaining tight monetary policy and ensuring a competitive foreign exchange system, a moderate pace of public spending, a reduction in the crowding out of the private sector, prioritising public investments in areas of expertise and greatest growth impact, plus strengthening the financial sector and key service sectors, IT and logistics, were also stated as policy options for faster growth.