For years, Ethiopia withstood economic hardships. But citizens say surging consumer costs over the last five years strain that resilience more than ever before.
Basic goods prices have skyrocketed, squeezing family budgets dry. A trip to market now stirs fear rather than excitement as consumers weigh purchase options. Workers also feel the pinch, as wages stretch thinner.
Consumer inflation has eased slightly but remains painfully high at 29.3 percent. While an improvement over previous peaks that went as high as 37 percent, the central bank says more progress is needed. The reality on streets often feels worse.
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In the last five years, Ethiopians have witnessed prices rise drastically across all necessities. The cost of teff, the grain that makes injera flatbread, has nearly tripled, stretching family food budgets to the limit. Housing has become less affordable too, with rental prices in cities doubling as landlords pass on increased construction materials costs.
Even bus and minibus fares have jumped dramatically, as transport service providers face higher fuel costs. The price of imported goods isn’t exempt either – medicine, clothes, cooking oil, all cost significantly more than five years ago. Some analysts attribute rising global commodity prices and a weakened national currency as factors, along with other age-old supply side problems.
“We have a cost of living crisis,” Governor Mamo Mihretu of the National Bank of Ethiopia acknowledged, laying bare that inflation has climbed unjustifiably high.
Speaking at the conference of the Ethiopian Economics Association last July, Mihretu painted a sobering picture. “Fuel alone will cost over four billion dollars this year, double recent levels,” he said – foreign exchange diverted from infrastructure and development. Global food and fertilizer prices have also doubled, consuming scarce dollars, Mamo noted.
Growing debt piles add further pressure. Stimulus to weather COVID saw fiscal largesse and monetary looseness, fueling demand as supplies lagged, according to Mamo. At home and abroad, “pent-up spending and lagged policy effects have inflated private sector debt,” he explained.
Meanwhile, traditional financing flows have ebbed, the Governor said. “Official aid, private capital and Chinese funding – once gushing sources – now trickle where they once torrented.” The IMF calls it an “unprecedented squeeze” as borrowing costs rises while cheap money disappears.
As if external headwinds weren’t enough, domestic conflict distracted from reforms aimed at reining in deficits and relaxing monetary policy, Mamo stated. The consequences of this “polycrisis”, as he termed it, could set development gains back years if unaddressed.
It looks like the central bank now wants to reverse the trend. The National Bank of Ethiopia (NBE) announced stringent measures on August 11, 2023 to rein in inflation by decelerating the loan disbursement growth of the banking system.
Governor Mamo aims to slash inflation below 20 percent by mid-2024 and under 10 percent a year later. To meet these goals, the NBE imposed a strict 14 percent credit limit on banks for the coming fiscal year. This means banks’ fresh loan disbursement cannot grow by more than 14 percent in a year.
Lenders must now rein in loan books in line with the annual ceiling. The NBE also sharply reduced direct advances to the government, limiting such lending to just one-third of prior-year levels. Addis Ababa will need to mobilize more bonds and bills instead.
The central bank further tightened liquidity provisions. It increased the emergency lending rate for banks facing shortfalls, from 16 percent to 18 percent.
Exporters may get relief, with the NBE cutting the foreign exchange surrender requirement to 50 percent of proceeds for exporters of goods and services. The remaining 50 percent can now be kept or deposited domestically.
The NBE unveiled aggressive measures to rein in unchecked credit growth and prices. But some question their impact and whether inflation targets can be met.
London-based financial expert Abdulmenan Mohammed (PhD) says credit ceilings, while necessary, will distort credit allocation and bank efficiency. “Government borrowing and credit expansion has driven inflation,” he notes. “Tightening credit is essential, but will negatively impact economic activities and asset prices.”
Economist Patrick Heinisch acknowledges credit growth curbs and slower lending in Ethiopia and abroad will weigh on growth. Still, some slowdown is needed as “lending must be proportionate to overall economic growth to avoid fueling inflation.”
Regarding higher emergency lending rates, a Senior Executive of one of private banks says “it will discipline banks, not overburden them.” Banks have previously relied on the facility for aggressive lending.
Most experts agree recent declines signal base effects from last year’s high inflation may drive further modest decreases. But Heinisch cautions “there are risks from extreme weather, security issues and commodity prices that can lead to higher inflation.”
Abdulmenan questions whether targets of below 20 percent inflation by mid-2024 and 10 percent a year later are realistic. AkliluWubet, President of Wegagen Bank, stresses “it is our responsibility to fight inflation, no matter the consequences on the financial sector.”
In the end, central bank’s overarching goal is to transition Ethiopia’s monetary framework to a more modern interest rate-based system, away from the current reserve money targeting approach. But such reforms require extensive groundwork, according to financial analyst Abdulmenan.
While questions remain, some see cause for hope in Ethiopia’s battle with inflation. A senior banker and an economist commended the government’s actions, saying “limiting direct advances will help rein in money supply growth.”
Financial expert Abdulmenan added: “Government borrowing from the central bank has been the main driver of inflation in Ethiopia.” By restricting this facility, the NBE moves to stem a core inflationary pressure.
Observers note recent inflation declines and acknowledge base effects may drive further modest decreases. Economist Patrick Heinisch believes factors like “fiscal consolidation and central bank measures taking hold” could see prices reach NBE’s mid-2024 target of below 20 percent.
In the meantime, citizens wait anxiously to see prices stabilized, as the policy overhaul aims to reverse unsustainable trends. If successful, it could put the nation on a path towards durable inflation control and future economic opportunity. For now, Ethiopians cling to hope these reforms finally combat their unrelenting inflation crisis.
