WB: “Inflation might be a problem with current monetary policy”

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The World Bank warned Ethiopia that the current trend of lower inflation rate might not stay for long unless the government tightens its monetary policy.

“Monetary policy has loosened over the past six months including stronger reserve money growth; a return to direct Central Bank financing of budgetary outlays and the impact of changing reserve requirements on base money target, combined with an expansionary consolidated fiscal policy stance, makes it challenging to maintain single digit inflation,” revealed a report recently released by the World Bank, detailing Ethiopia’s current economic state while predicting future prospects.
The report further advised the monetary authorities  “to rethink their current monetary policy strategy” if the country wishes to attain single digit inflation level.
“The current strategy has strengthened the Central Bank’s reputation for being able to control inflation. The current tool kit, however, is essentially limited to foreign exchange market interventions,” stated the report, further suggesting the application of open-market operations, based on an effective inter-bank market, as well as short-term credit facilities to balance Commercial Bank balances with the Central Bank.
The Ethiopia Economic Update II also puts Ethiopia as the 12th fastest growing economy in the World during 2012.  “If the country continues its historically impressive growth performance, it could potentially reach middle income status by 2023,” the report further stated. However, this can be attained only if the government actively participates with the private sector.
“Ethiopia has been implementing a growth strategy, which emphasizes a strong expansion of public investment. So far, this has delivered positive results. However, the public investment rate of Ethiopia is the third highest in the world, while the private investment rate is the sixth lowest. In order to sustain high economic growth, the development of a strong and vibrant private sector is essential,” read the report.
The report also suggested that state-owned enterprises are increasingly absorbing domestic-banking sector credit. “In the six-month period from June 2011 to December 2011, 71 percent of new loans were directed towards public enterprises. This share increased to 89 percent during the second half of 2012. A substantial share of available foreign exchange is similarly diverted towards public investment,” continued the report. Emphasizing on gross domestic savings, transfers, and external borrowing as sources of finance for public investment are suggested, to ease the constraints in funding of projects.
In addition, the report further argues that Ethiopia needs to make progress on two interrelated and equally important fronts: enhancing domestic savings, and resolving the bottlenecks of the trade logistics system.
“Ethiopia’s savings rate is at its lowest in 30 years declining from 10 percent of GDP in 1980s to 6 percent of GDP in the 2000s. This level of savings is much lower than expected given its stage of development,” the report stated. In order to increase savings, the report recommends offering savers higher interest rates, expanding access to both private and public financial institutions, and taking advantage of remittances from the diaspora, among other options.