Addis Fortune (Addis Ababa)

23 May 2011

Ethiopia: IMF Mission in Town Worried Over Broad Money Growth, Budget Deficit

A six-member mission from the International Monetary Fund (IMF) arrived in Addis Abeba on Tuesday night, May 17, 2011, to conduct one of the two annual consultations the fund performs with member countries.

Led by Paul Mathieu, the mission camped at National Bank of Ethiopia (NBE), located on Churchill Avenue, and is scheduled to stay for the coming two weeks, reliable sources disclosed to Fortune. The following day, members of the mission met with Teklewold Atnafu, central bank governor; and Neway Gebreab, chief economic advisor to the Prime Minister.

They are scheduled to meet with Prime Minister Meles Zenawi on Tuesday, May 24, 2011, these sources disclosed to Fortune.

It is customary for the mission to produce a report on its findings at the conclusion of their visit which will be made public after being posted on the IMF's official website.

The IMF's visit comes at a time when the economy is plagued by a resurgence of the galloping inflation.

Monthly headline inflation recorded in the consumer price index (CPI) for April 2011 reached a staggering 29.5pc, escalating by 4.5 points from the preceding month, according to the Central Statistics Agency (CSA).

"This takes the economy back to square one, where it was in 2008," a macroeconomic analyst, who demanded anonymity, told Fortune.

The worst inflationary phenomenon in recent history was recorded back in March 2008, when year-on-year headline inflation reached 30pc and food inflation peaked at a historic high of 40pc.

The IMF had sent a mission led by Robert Corker, and the Ethiopian authorities had agreed to bring inflation down to single digits, build up foreign exchange reserves from below two months to cover three months of imports, and slash broad money growth to below 20pc.

Two years down the road, Ethiopian macroeconomic policymakers have achieved reasonable results in boosting reserves and discouraging lending through imposing caps on commercial banks' advances. Although this tamed inflationary pressures during the previous year, inflation reared its head again in December 2010.

While Ethiopian macroeconomic policymakers often blame volatile international prices on imported fuel and commodities, as well as inefficient domestic markets, Sukhwinder Singh, representative of the IMF in Ethiopia, disagreed.

"Clearly the international commodity and fuel price shock has had some impact," he told Bloomberg earlier this month. "Loose monetary policy and the large depreciation have played a role too."

The focus of the mission in town is on two major areas it believed has contributed to the loose monetary policy, according to reliable sources. The members will investigate the size of the annual budget deficit and the growth of broad money supply in the economy, disclosed a source knowledgeable of the assignment of the team.

Despite repeated claims by Ethiopian authorities that the 2.8pc deficit in the federal budget runs lower than the Euro Zone average target of three per cent of the GDP, the 7.5 billion Br supplementary budget approved by Parliament increased the deficit to three per cent.

This figure is challenged by macroeconomic analysts who claim the administration often overlooks the loans taken from banks by state enterprises.

The debt owed to Commercial Bank of Ethiopia (CBE) by the state owned utility monopoly, Ethiopian Electric Power Corporation's (EEPCo), is believed to have reached 28 billion Br, nine billion Birr more than in December 2010, sources disclosed.

This was done contrary to the letter of intent Ethiopian authorities sent to the IMF in October 2010, pledging to limit aggregate domestic financing for public enterprises to 10 billion Br, 2.1pc of the GDP in 2010/11. However, credits to public enterprises reached 35pc, according to the data from National Bank of Ethiopia (NBE).

The IMF wants the loans that are advanced to state enterprises such as the EEPCo to be incorporated in the budget deficit, often a point of disagreement with Ethiopian authorities.

A second area of interest to the IMF mission is the growth exhibited in the broad money supply. Two years ago, policymakers projected that this would grow between 35pc and 40pc, after containing inflation to the single digits this fiscal year, according to the letter of intent. Government projection was to increase the broad money supply to around 134 billion Br from 96 billion Br in March 2010, when the inflation rate was 10.6pc.

Policymakers have reasoned that the economy has been growing at 11pc, giving it the ability to absorb the money supplied. They also promised to control the velocity of the money, a technical term to explain the average frequency at which a unit of money is spent in a specific period of time.

At 8.5pc, growth in the real GDP projected by the IMF for this fiscal year is lower than estimates made by Ethiopia's policymakers.

The IMF is alarmed by the current broad money supply, which is estimated at 35pc, according to sources.

"Since the team is undertaking an assessment of the whole macro economy, we cannot comment on anything right now," Singh told Fortune.

While Ethiopian authorities have an ambitious drive for economic growth, they are also embattled by resurgent inflation causing severe macroeconomic instability. How to achieve growth while maintaining a lower inflationary macroeconomic environment remains their nightmare.

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