Although Ethiopia faces a burdensome foreign reserve crisis with current reserves barely enough to cover a little over a month, the country’s Prime Minister, Meles Zenawi has ordered a freeze in government borrowing.
The Ethiopian government, which has previously fixed its public borrowing to 1.5 percent of the country’s Gross Domestic Product (GDP), is aiming to cut domestic borrowing to zero while tightening money flow to the economy at 8 percent.
The measures announced by the Prime Minister are aimed at reversing a potentially dangerous economic crisis, sparked by the country’s growing demand for imports against falling export volumes and worsened by the global financial crisis across the world. “The facts are less bleak than have been portrayed. We have had massive inflationary pressure and there is a serious strain on the balance of payment. We needed steps on the monetary front, foreign exchange markets and fiscal measures,” Meles said. The annual inflation currently stands at 45.6 percent.
Ethiopia, which depends mainly on coffee, tea and leather exports, is suffering from an increase in the level of imports, caused by the rises in the price of crude oil, fertilisers and other essential cereals, against a crushing shortage of foreign currency inflows.
The National Bank of Ethiopia (NBE), the central bank, said foreign remittances had increased over the past half-year by 19 percent, but the Prime Minister said the level of foreign remittances might have been higher were it not for the global financial crisis. “The maximum (step) is to ensure zero borrowing by the government from 1.5 percent of the GDP to zero to reduce the budget deficit. The International Monetary Fund (IMF) have applauded this decision,” the Ethiopian Prime Minister told a news conference.
Ethiopia has limited bank lending in a move aimed at boosting foreign currency reserves. This has been done to avoid the possibility of using bank interest rates as the other tool to curb bank borrowing. “You cannot use the interest rates to reign in the economy. You have to limit bank lending,” the Premier said. NBE has taken steps to limit bank lending by asking the local commercial banks to triple raise their reserve money requirements to 15 percent from 5 percent, private business weekly, the Capital newspapers, reported.
The measures are also expected to curtail the movement of money to the economy to less than 20 percent, from the 23 percent at the end of the last fiscal year, the paper reported. But Meles said that the government’s target is to cut money supply to 8 percent. “The latest credit crunch has come solely as a result of the NBE policy to defeat inflation as their primary objective…but the most challenging issue is the foreign currency shortage and the speedy depreciation of our currency,” Meles said. He said that the depreciation of the local currency, the Birr, was done recently to relieve the economy of the currency imbalance, noting that a speedy depreciation of the Birr could also speed up inflation.
The IMF has agreed to Ethiopia’s depreciation of the currency, which saw the Birr touch an all time low of 11.46 to the US dollar in January, from a high of 9.15 in December. IMF has given Ethiopia US$50 million as a result of the economic policies it has deployed to stabilize the domestic economy and rid the country of an economic crisis. “We may have had a perfect storm, but the storm is behind us now. It is also the opinion of the IMF. If the IMF is happy, we can rest assured the steps are effective. We expect a single digit inflation by June-July this year,” the Ethiopian Premier said.