The Federal Government of Ethiopia has set an ambitious target to reduce the country’s monetary supply in line with its agreement with the International Monetary Fund (IMF), however the National Bank of Ethiopia (NBE), the responsible entity with regard to monetary issues, has failed to tackle the growing trend of money floating around the economy.
In a joint letter to Dominique Strauss-Kahn Managing Director of IMF, December last year, Sufian Ahmed, Finance and Economic Development Minister, and Teklewold Atnafu, Governor of NBE expressed the serious economic shock their country has been facing due to a weak balance of payment and a mounting inflation.
The letter also revealed their government’s effort in mitigating the shock the country has been facing. “In the monetary area, minimum deposit interest rate was increased and reserve and liquidity requirements of banks rose to restrain domestic credit expansion and monetary growth” the letter reads, “we intend to contain the broad money growth below 20 percent in the current fiscal year”.
However, the economy has been swimming in a huge money supply despite the efforts taken by the bank and the government. Money circulation reached 71.4 billion birr in January 2009, climbing by 4.8 percent from the same period of 2007 with a 22.2 percent annual growth.
Expansion of domestic credit has been reasoned as a contributing factor to the monetary growth, according to the central bank’s quarterly report. In the third quarter of this fiscal year, money supply reached 80.6 billion birr, a 22 percent rise from the same period of last fiscal year.
In a bid to salvage the country from a rising inflation the bank has advised the country’s commercial banks to tighten their lending and also put limitations on government borrowing, a bold step to restrain monetary growth.