INFLATIONARY PRESSURES AND THEIR SOLUTIONS.
 
I have come through some assessments that reflect both the changes the
country has registered and the challenges ahead. Inflation for example
is currently one subject that is currently heavily debated. There is a
reason to believe. Money has grown faster than the economy that
resulted in higher inflation, which in turn made live difficult. It is
on this point that I would like to share my views with friends that
are interested on the subject matter.
 
I am sure you would share with me of the view that, in order to solve
properly the current inflationary pressure, one would better see first
what are the causes. I would mention three main causes that deserve
appropriate remedy.
 
1. Inflation related to import of goods. Here the lion’s share goes to
the import of oil and like items. Their current international prices
are record high, which could impact other items prices negatively, for
countries like Ethiopia, whose 80% of its export earnings are consumed
by the import of oil. Thus the government is currently engaged in
introducing alternative energy sources like bio fuel. The country has
huge potential that has not yet been taped and efforts so far show
some promises.
 
2. Inflation related to agricultural development. Here again, evidence
shows that although there is substantial agricultural development, the
provision of the produces to the urban areas has not shown any
comparable change. Besides, the seven million or so grain aid per year
the country had secured in earlier years is no more in place. Instead
the government is getting it in a form of money. Using this money, it
purchases local grain that it needs to distribute to areas where there
is a food shortage. Again, the urban areas are not covered by this
distribution. The result is high food prices in the cities. The
solution: to produce more and more, i.e. more supply to cover the
ever increasing demand. That is what the country is striving for.
 
3. Inflation related to the money and overall economic growth. As
reasonable people justly put it, the economy is growing. The problem
here is that money has grown faster than the economy. Using the same
money people have used to buy certain items; today they need more
money for the same items. One point that deserve mentioning is the
amount of money our private banks had as a reserve and had lent to the
private sector until last year. The amount of money our banks had to
put, as a reserve in the central bank was only 5% of their deposits,
which is less by half than in any other African country, which is set
at 10%. So they had huge money at their disposal which in turn they
had lent it to the private sector gratuitously. The result: more money
under circulation in the economy than is normally needed. This was the
reason for the government to take action last year. It increased the
reserve money to 10%. It also increased the minimum interest rate on
deposits from 3 to 4%. The latter is only a sign that it might
increase more as the case may be.
 
I remember when I was a student some years back in Germany when the
country was experiencing inflationary pressures due to the cost of
Unity. The change of increase of minimum interest rate on deposits was
substantial. From around 4% to 9%. The expected outcome would be there
would be less money under circulation, which ultimately will result in
money growth being identical if not equal to the economic growth. A
forth point might deserve attention. The current import of Items like,
Cement and Sugar will be phased out gradually as the country is able
to produce them sufficiently locally. These actions will no doubt have
substantial impact in reducing inflationary pressures in the coming
years. The question here will be how will the most needy, the poor,
sustain live today? This was again the reason why the government was
embarked recently all the way to distribute grains and some items as
sugar and oil at cheaper prices at district level for those that need
it most today. In my opinion this last action needs to be pursued
massively and efficiently as it is still short of expectations.
 
 
Mulu, Vienna
Jan 12 2008