Central bank’s role at cross roads

National Bank of Ethiopia (NBE)
National Bank of Ethiopia (NBE)

Addis Ababa, Ethiopia - This week, the National Bank of Ethiopia (NBE) has re-written one of its most frequently amended directives; commercial banks’ reserve requirement. As it was at the moment, the directive has seen its sixth amendment, reducing the rate that banks has to keep at NBE to 5 percent.

As the move amounts to a slack in the monetary policy stance of NBE, professional views on the matter seemed to differ as to the appropriateness and the timing of this measure. In the grand scheme of the matter, however, the old growth-inflation conundrum seems to be back in play, writes Asrat Seyoum.

It appears that the ghost of an old macroeconomic challenge in Ethiopia still roams the policy making corridors of the central bank and the economic planners of Ethiopia. Indeed, one of the earliest challenges to policy making in the country is to manage stable macroeconomic management in the face of fast output growth. According to most professional, macroeconomic challenges manifested in the form of consumer price, inflation began to trouble policymakers as early as 2005, apparently a year after the start of the double digit GDP growth. By that time, the timing of the up-shoot of the two variables seemed to be suggestive of a causal link between one another, hence the debate about whether inflation is an inevitability in the scenario of fast economic growth.

By the time the recorded growth made it to its third consecutive year, consumer price inflation seemed to have gotten big enough to catch the attention of economic professional and international organizations like the IMF. More specifically around 2007/08, the debate between the former Prime Minister Meles Zenawi and IMF economists began to be louder on the issue. It was the official advice of the Fund that Ethiopia had to consider pacing a rather fast track output growth, of course the PM refused, saying it was misguided. Whether inflation in the context of Ethiopia was caused by fast tracked growth or not, the Fund strongly recommended to slow down the rate for the sake of macroeconomic stability. Meles stood firm against the ideals, discouraging aggregate demand to check the progress of price levels.   Read more The Reporter