News Analysis: Central bank governor foresees promising results in tackling inflation, despite reservations from legislators

Addis Abeba – Mamo Mihretu, the governor of the National Bank of Ethiopia (NBE), spoke with confidence as he presented the institution’s quarterly report to legislators on 29 November, 2023. In the spotlight were the recently implemented monetary measures designed to combat surging inflation.

Speaking before the parliament yesterday, Governor Mamo announced that the strategic monetary policy implemented by the central bank, aimed at combating soaring inflation, is yielding promising results. According to him, the introduction of these monetary measures has led to a steady decline in headline inflation, signaling a hopeful outlook for the nation’s economy.

Over the past two decades, Ethiopia has faced a major macroeconomic challenge due to the soaring prices of goods and services, significantly escalating the overall cost of living. According to the policy document released by NBE in August 2023, the yearly average inflation rate over the past decade was recorded at 16%.

However, inflation trends in the last two years have surpassed this historical average and have persisted for a considerably longer period than initially anticipated. During this period, the inflation rate has consistently remained above the 30% mark, causing a significant decline in the purchasing power and living standards of citizens.

In order to tackle this issue, the government implemented a series of monetary actions three months ago. At the forefront of these measures is Mamo, a graduate of Harvard University’s Kennedy School of Government. With the implementation of multiple monetary policies, Mamo leads the NBE in its mission to reduce inflation to below 20% by June 2024, setting an additional target of 10% by June 2025.

Before his appointment as the 10th governor of the NBE in January 2023, Mamo held the position of founding CEO at Ethiopian Investment Holdings. At present, he also serves as a member of the National Macroeconomic Council, a governing body responsible for shaping the economic policies and strategic decisions of the country.

With the objective of implementing a more stringent monetary policy, the NBE introduced multiple measures, one of which involved the restriction of direct advances to the federal government. “We have successfully decreased the amount provided in direct advances to the federal government by two-thirds compared to the previous period,” Mamo revealed.

Amid the persistent issue of inflation in the country, Mamo underscores the recent monetary policies, which have focused on reducing the money supply, as heading in the right direction.

Official records show that the headline inflation rate decreased from 35% in March 2023 to 27.7% in September 2023. Additionally, food inflation dropped to 26.7% from over 40% a year before. However, there have been price increases, particularly in the cost of cereals, vegetables, sugar, and meat.

Even more concerning is the persistent non-food inflation rate, which has been hovering around 30% with no significant decline in the past three months. During his presentation of the quarterly report to parliament, Mamo acknowledged the potential threat posed by the non-food inflation rate, particularly in regard to expenses such as house rent and pharmaceuticals. He informed MPs that measures are being taken to manage the escalating costs of pharmaceuticals, with the central bank collaborating closely with the Ministry of Health.

According to Mamo, a former senior project manager at the World Bank Group in Kenya, inflation does not solely stem from local factors. He highlighted that global phenomena, such as the ongoing conflict between Russia and Ukraine, play a significant role. “This conflict has a direct impact on our economy,” he stated.

The cost of three strategic import items for Ethiopia, namely petroleum, fertilizers, and pharmaceuticals, has more than doubled in the past three years. Last fiscal year, Ethiopia incurred a hefty $4.1 billion expenditure for fuel imports, equivalent to its export earnings during the same period and constituting a quarter of the country′s annual import bill. Last year, the nation’s import bill reached a staggering $17.1 billion.

The cost of soil fertilizers experienced a particularly sharp increase, especially following the outbreak of the Russia-Ukraine conflict in 2021. Mamo disclosed that Ethiopia spent $2 billion on fertilizer imports last year, highlighting a significant surge compared to previous years when the annual cost of fertilizers was below $500 million.

To effectively combat inflation, the governor stressed that the central bank should not bear the entire responsibility alone. He emphasized the need to address other obstacles, such as the discrepancy between demand and supply, as well as modernizing the logistics sector, challenges that fall outside the jurisdiction of the central bank.

“Tackling inflation is not a task that should be entrusted to a single institution,” he informed lawmakers. “Instead, resolving this issue necessitates the collaborative endeavors of multiple government agencies.”

Mamo also stressed that the conflicts and instabilities erupting in different corners of the country have played a significant role in fueling inflation.

Yet, some legislators have raised concerns about the effectiveness of monetary policy in reducing inflation to a reasonable level. Milkias Ayele (PhD), a member of the planning, finance, and budget standing committee, argued that despite some degree of success, inflation remains at its peak. He also emphasized that the detrimental effects of inflation continue to burden individuals reliant on fixed salaries and the most vulnerable segments of society.

In August 2023, Addis Standard published an article highlighting the significant burden imposed by inflation on individuals, especially those with fixed incomes. The article underlines that as the cost of living continues to soar, individuals relying on fixed incomes are facing the tough challenge of stagnant earnings, which have remained unchanged over the past decade.

In addition to restricting direct borrowing by the federal government, the NBE has also placed a 14% limit on domestic credit growth, instructing commercial banks to align their credit disbursement growth accordingly.

Mamo acknowledges that there may be unintended consequences resulting from this credit growth limitation, “but it is being implemented because it is seen as a key solution to combat inflation.”

One of these unintended consequences is that borrowers are facing difficulties in accessing credit from commercial banks. Milkias has pointed out that this measure is negatively affecting the economy by restricting the availability of funds for investment purposes.

Another MP also indicated that the credit cap is adversely impacting the country’s capacity to generate foreign currency as it diverts credit away from exporters.

The NBE’s decision has also caused concern among executives of banks that have entered the industry within the last two years, as the credit growth restriction will hinder their ability to generate enough revenue.

Nevertheless, Mamo remained determined, voicing the commitment of the central bank to implement all monetary policies aimed at reducing inflation, irrespective of any potential adverse consequences or responses they may generate. “There are costs to be paid to effectively bring down the inflation rate to a reasonable level,” he stressed.

Despite officials’ optimistic outlook, international financial organizations like the International Monetary Fund (IMF) present a rather bleak future. In its regional economic outlook report released in October 2023, the IMF predicts that inflation will persist in double digits across 14 countries, including significant economies such as Ethiopia, Ghana, and Nigeria.

Contrary to the government’s expectations, the IMF report indicates that Ethiopia, grappling with foreign currency shortages and a rapid depreciation of its currency, may witness further escalation of inflationary pressures moving forward.

Mamo, however, emphasized that the policies implemented to address inflation cannot offer a quick solution to the problem. “Nevertheless, the trend indicates that these policies are destined to yield positive outcomes,” the governor told lawmakers. AS