Sufian Ahmed, Ethiopian Finance and Economic Development Minister, has indicated that the Central Bank’s tightening of lending to the private sector is a temporary measure that will help the government bring inflation down from 45 to 16 percent. He said the process may last between four and six months.
Inspite of the effects of the global economic meltdown which has affected the cost of oil and other imported commodities to Ethiopia, Sufian Ahmed insists that the country’s economy can still achieve an 11 per cent growth rate this year. “In the last five to six months, inflation has been going down. We have had to fight using both fiscal and monetary instruments. The credit tightening is temporary until inflation starts slowing down […] We expect a double-digit economic growth this year. The challenges we face at the moment are as a result of the global financial crisis,” said the minister.
Refering to the positive challenges his government is facing, Mr. Ahmed said: “If we still expect a double-digit growth despite the challenges we are facing, you can judge what type of challenges we are facing.”
Ethiopia’s central bank, the National Bank of Ethiopia (NBE), has taken steps to limit bank lending by asking the local commercial banks to triple their reserve money requirements to 15 percent from 5 percent. The move to limit bank lending was aimed at boosting foreign currency reserves, which have fallen to drastically low levels, leaving the country with just enough funds to cover for 1.6 months of imports.
Ethiopian Prime Minister Meles Zenawi said tightening the credit was done to avoid the possibility of using bank interest rates as the other tool to curb bank borrowing. The government has also introduced measures to reduce money flow to the economy at just 8 percent to curtail inflation. 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.
Ethiopian bankers have welcomed the efforts to tighten the lending to the local market, saying this would help banks to stay afloat during the financial crisis. The government hopes to relax the current tightening of the fiscal policy when inflation cools down within the next six months. According to the Minister, inflation is expected to slow down to 16 percent by the end of the year and to a single-digit early next year. “The credit tightening is temporary. When the inflation starts slowing down, the credit will start flowing,” he said.