Governor Mamo Discovers Central Bank's Voice in Inflation Age

Aug 19 , 2023.

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It is rare to see Ethiopia's central bankers publicly vocal and outspoken on issues affecting the economy. It is unusual to have them take the stage to provide insight into developments affecting the macroeconomy and declare their policy intentions.

Governor Mamo Mehiretu, barely a year in office, appears to be treading on promising ground, although the economic ground beneath his feet remains precarious. In the face of potential fiscal backlash, his commitment to reining inflation can only be a beacon of hope in an environment of despair and anguish.

The often-hallowed halls of the National Bank of Ethiopia (NBE) on Churchill Road have been a flurry of deliberations lately. Two weeks ago, a bold set of resolutions emerged designed to rein in the stubborn spectre of inflation that has haunted the economy for decades.

Amidst global macroeconomic conundrums, the Governor's declared intentions to move away from a state-centric approach offers a glimmer of optimism, however cautious. His announcement could be a refreshing change from tradition, if not signalling the Central Bank’s metamorphosis. Gradually, NBE may be untethering itself from the Government's apron strings.

In essence, the Governor's recent proclamations are a gust of fresh air in the Ethiopian economic narrative. He might be on the cusp of a monetary policy shift by anchoring his strategy on price stability by setting a target for inflation. The road ahead is fraught with troubles, but with unwavering commitment, he might finally exorcise the inflationary spectres.

Governor Mamo's ambition is palpable. Yet, challenges abound for him. He made it clear that his eventual goal is to steer away from credit ceilings by mid-2024, migrating to a sophisticated interest-rate-based monetary policy. However, the clock is ticking, and the preparations for this colossal shift need to be meticulous.

Ethiopia's relationship with inflation has been persistent, if not intimate. The last decade bore witness to an average inflation rate of 16pc. The statistics paint an even more vivid picture of the recent past, with the rate soaring to 29.3pc as of June 2023. Though slightly improved from the staggering 37pc peak, it should remain a critical concern.

Ethiopia's inflation dilemma is rooted deeply in both supply-side constraints. It is also an outcome of misguided macroeconomic policies, carrying with it more than just statistical concern — it gnaws at the daily life of the average Ethiopian.

Eroding real household incomes, it chips away at the livelihood of the vulnerable, making the daily quest for sustenance an uphill task.

External pressures have also exacerbated the economic fragility. The tumultuous global market has witnessed skyrocketing prices for essential commodities. In the two years since 2020, the world saw global oil prices jump by 140pc, fertiliser costs show two-fold increases, and freight prices increase by a whopping 300pc.

For a country like Ethiopia, reliant on imports three times larger than its exports, such external shocks have an outsized impact.

Yet, while global fluctuations have left their mark, internal policies have equally been at play. In response and their desperations, successive governments have traditionally leaned towards expansive fiscal and monetary policies. Although designed to cushion against myriad shocks such as conflicts and droughts, such measures have inadvertently stoked the fires of inflation.

But, a glimmer of hope could spring as the resolutions from the Central Bank's board of directors, chaired by Girma Birru, signify a turning of the tide. Charting a new course, the NBE's strategy focuses intently on curbing inflation. Setting ambitious targets, the Bank is eyeing an inflation rate below 20pc next year, with a longer-term vision of pushing it under 10pc by 2025.

The Bank says it is taking a multi-pronged approach. A significant part of this strategy is constraining credit growth. While a drastic measure, it is also a necessary one. Limiting the flow of easy money can help temper runaway price increases. Another significant move is reducing direct advances to the Government, signifying a departure from the easy monetary policy of the past two decades.

The Central Bank has also increased the interest rate on its emergency lending facility available for commercial banks by two percentage points to 18pc. Such a move, while making short-term borrowing more expensive, could serve to rein in excessive lending, a key driver of inflation.

The Central Bank under Governor Mamo does not seem just playing defence. Recognising the importance of exports for the economy, it reduced the foreign exchange surrender requirement to 50pc from the 70pc that has been a source of anguish for exporters. Such a move can breathe life into the export sector, which is vital for reversing the declining trends in export earnings.

Critics of central banking under the Revolutionary Democrats' reign have long championed the role of autonomous central banks in ensuring economic stability. Mamo's newfound direction resonates with this sentiment.

Historically, central banking has been deeply entwined with governments' fiscal plans, often facing challenges prioritising macroeconomic stability over short-term gains. Ethiopia's tale has been no different. The NBE's loose monetary policies often complemented successive administrations' expansive fiscal positions.

Curiously, Governor Mamo's latest manoeuvres suggest there could be a welcome evolution.

The shift towards an inflation-targeting regime could mark a watershed moment. Such a strategy, focused on price stability and backed by publicly declared objectives, has been a bedrock for economic stability in many countries. It offers accountability and clarity, allowing economic actors, from ordinary citizens to foreign investors, to better understand the central Bank's motives.

Inflation targeting provides the flexibility to respond to unforeseen economic challenges, ensuring Governor Mamo is not willing to be shackled to rigid policy tools. In a volatile economic environment, such skill is crucial.

However, for such a system to bear fruit, the Governor should acknowledge that the autonomy of the Central Bank is paramount. Fiscal pressures, especially from the corridors of political power, can often skew his priorities. The road ahead demands standing firm against such pressures.

The policy shift the Governor promised could bring a positive macroeconomic trajectory. A blend of modern central banking practices, underpinned by explicit inflation targeting, can offer the stability that has long eluded macroeconomic policymakers. However, while the Bank's strategic shift could be commendable, success hinges on meticulous execution and unwavering commitment to these new tenets.

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PUBLISHED ON Aug 19,2023 [ VOL 24 , NO 1216]

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