Tight Monetary Policy Stifles Growth, Exacerbates Economic Woes
Despite the significant economic challenges Ethiopia has recently faced, the country has the potential to overcome these hurdles. The incumbent government, which took office in March 2018, has made commendable efforts to address the inherited macroeconomic imbalances. However, certain policy decisions, particularly those influenced by International Monetary Fund (IMF) prescriptions, have inadvertently exacerbated the situation. It’s important to remember that Ethiopia is not defined by its challenges but by its potential to overcome its challenges.
The country has grappled with many economic issues, including a widening current account deficit, high unemployment rates, a persistent balance of payments deficit, and high inflation. A misaligned exchange rate, a burgeoning public debt, and growing income inequality have further compounded these challenges. While well-intentioned, the government’s attempts to curb inflation have led to unintended consequences, such as a severe liquidity crunch. This serves as a cautionary tale, reminding us of the importance of carefully considering the potential outcomes of our actions.
The Central Bank’s aggressive monetary policy, aimed at taming inflation, has profoundly impacted the economy. It has resulted in a significant reduction in the money supply, which has caused a ripple effect across the economy, particularly affecting the banking sector.
Banks, facing a liquidity shortage, have struggled to disburse approved loans and process even small interbank transfers. This has hindered economic activities, as businesses, especially exporters and manufacturers have been deprived of much-needed financing.
The export sector, a vital engine of economic growth, has been particularly hard-hit. Exporters, who rely on pre-shipment financing to procure agricultural products and meet global demand, have been unable to secure the necessary funds in recent years. This has resulted in missed opportunities and potential loss of market share.
The current economic situation is reminiscent of other countries implementing stringent IMF-backed policies. It’s crucial that we learn from their experiences, both their successes and their failures, to inform our economic strategies.
Once a beacon of economic hope in West Africa, Ghana provides a cautionary tale of the potential consequences of such measures. The collapse of several banks in Ghana serves as a stark reminder of the risks associated with excessive monetary tightening and financial instability.
To mitigate the adverse effects of the liquidity crunch, the National Bank of Ethiopia must adopt a more nuanced and balanced approach. While maintaining price stability is essential, ensuring adequate liquidity in the financial system is equally important. This balanced approach, which involves managing inflation to keep prices stable while also promoting economic growth to create jobs and increase incomes, is crucial.
The government should also consider implementing targeted measures to support key economic sectors, such as agriculture and manufacturing. These measures could include subsidized credit, tax incentives, and infrastructure investments, eventually aiding the nation’s quest to address supply-side constraints. Additionally, strengthening the financial system and improving regulatory oversight is essential to prevent forthcoming crises. Some banks, especially the late entrants, need help with the situation. If the liquidity problem persists, news of financial institutions collapsing might not be far from the horizon.
By carefully calibrating its economic policies and learning from the mistakes of other countries, Ethiopia can navigate these challenging times and emerge as a stronger and more resilient economy. This proactive and responsible approach should reassure the audience about the government’s commitment to the economy’s long-term health. EBR
13th Year • December 2024 • No. 136