13 January 2013

Ethiopia: Inflation Targeting Could Take Nation Only This Far - Replace It


It was Meles Zenawi who elevated the status of parliamentary sessions in Ethiopia to proceedings on policy. He utilised them to send signals to the different frontiers of the economy. In the absence of organised stock exchanges and financial markets, his declarations were often the lone signals that both markets and consumers looked towards when making decisions.

With the unfortunate death of Meles, the public do not have anyone else to look to. They are left to live under the shadow of conspiracy theories. No one personality seems to have leverage over the markets the way Meles did.

As it appears, it is taking long for his hand-picked successor, Hailemariam Desalgn, to effectively communicate with the markets. Such a gap was showcased during his latest appearance at the parliament.

Although Prime Minister Hailemariam Desalgn spent close to one and half hours addressing the questions raised by Members of Parliament (MPs), dominantly from those of his party, he sent no new signals to the market. As if to mark a change in era, the economy received very little attention during Hailemariam's address and the little that was said was conventional and insignificant.

Worrisome is the fact that this is taking place whilst the economy is facing pertinent challenges that continue to limit its growth. And, as a result, important players from producers to consumers are living under the waters of confusion.

True, the EPRDFites have enough experience in surprising the market and stirring the waters. Theirs is an approach that is difficult to predict and to relate with ideological underpinnings. Often, they go against the popular tide.

Their Developmental State theory seems to give them the flexibility to borrow policy ideas from both extreme statists and market fundamentalists. What remains confusing, even under Meles, is the boundary marking the line between the two ideologies. That is why markets are often surprised by their declarations.

So much as the policy provisions of the EPRDFites are sudden; their political opponents fail to match them with their own alternatives. The result of such a mix had been a policy sphere dominated by the monopoly of ideas. Little is heard about the possible alternatives to the surprises of the Revolutionary Democrats.

However, there was one way to understand the intent of the surprises as explained by Meles, and his rather technocratic explanation was definitive for the reaction of market players.

In the absence of such an explanation, markets are operating in a state of confusion, the likes of which has never been seen before. And it is over such confusion that Hailemariam's conventional description of market discrepancies came. Certainly, it did not provide any relief to anyone.

If there was anything that the markets might have picked up from the Premier's message, it was the relative lax in terms of implementing both fiscal and monetary targets. This was feasible from his explanation of the country's inflation.

Hailemariam took the whole inflation debate back five years as he related it to the increments in international food prices and crude oil. He settled on discussing factors related to import, while completely ignoring its domestic drivers.

Of course, Hailemariam's description rightly shows the glitches of the very policy framework that the EPRDFites deployed for the past eight years - inflation targeting. They settled for it despite its international disproval and even went so far as to even make it their economic policy anchor.

Partly, their resistance to change originates from their ideological submission. They rightly know that an economy driven largely by the investments and consumptions of a state cannot not develop inflationary traits by virtue of external factors only. Deviating from such a stance, therefore, would mean accepting the very arguments that relate the inflation with public investment, tagged as a neo-liberal stand by the EPRDFites.

Indeed, it took almost five years for the EPRDFites to accept that the sources of inflation in the country were largely domestic. The cause, they noted, was an expansionary fiscal policy (which they prefer to call 'growth') underpinned with an expansionary monetary policy.

Through all these years, however, the main economic policy anchor of the government remained inflation, and the target was to bring it down to single digit levels. Measures from credit caps to price control were taken as means to achieve the target. Lost in the forest of such a perspective was the fact that inflation is a moving target.

Surely, it has been about four decades since the world understood that inflation targeting is not a comprehensive macroeconomic policy instrument. So has it been since structural economic issues topped the agenda of economic policy makers.

The past eight years of inflation targeting by the EPRDFites have also proven futile. Aggregate inflation, both on monthly and yearly basis, could not be lowered more than the globally accepted hyperinflation regime. Therefore, single digit inflation has remained a pipedream.

By sticking to inflation targeting, the EPRDFites seems to give lip service to other fiscal and monetary policy instruments, including rate of growth of public investment and rate of growth of money supply. Equally uncared for are gross official reserve coverage, current account deficit, external debt and rate of growth of tax revenue. No defined targets have been established in these frontiers.

Hence, largely, the era had been about treating the symptom rather than the ailment. And, predictably, the result was a bleeding economy.

It seems that now is the right time to make a detour in policy. A move towards a more comprehensive diagnosis and treatment of the economic challenges is vital if the goal is to realise a stable macroeconomy.

And the new policy chief, Hailemariam ought to lead the process. He should stand taller than the conventional argument of inflation. Learning from the efforts of the past eight years would also be vital.

For the EPRDFites, the shift might call for a change in their planning and strategy setting. It would require a rather detailed analysis of the economic fundamentals and developing reasonable targets for each of them.

But, that cannot be the end of it all. Targets ought to be communicated well with the market and policymakers ought to make sure that the markets have picked up on the right signals.

After all, a stable economy cannot be attained without clear and mutual understanding between the state and the market. And such an understanding cannot be realised without comprehensive information.

Since that is what is lacking from the economic sphere of the nation, the state has to make sure that it exists. Moving way from targeting inflation, just one dimension of the equation, would rightly help realise such an economic regime. It is indeed time for the EPRDFites to stop aiming at one target and to instead direct their bullets 360 degrees!

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