Ethiopia Plans Tight Monetary Policy Following Currency Reform

Ethiopia will keep interest rates high for the rest of the year to combat transitory inflation caused by an overhaul of its foreign exchange policy, central bank Governor Mamo E. Mihretu said.

The bank set its key rate at 15% in July, when it adopted an interest-rate based monetary policy framework, with inflation easing to 17.5% last month from about 29% a year ago. Following the wide-ranging changes, including allowing the birr to weaken 30% in one day, consumer prices are poised to rise again, particularly for food.

“There will be no easing” for the rest of the year, he said in an interview on the sidelines of the World Bank and International Monetary Fund annual meetings in Washington. “We have not made any determination exactly if we’re going to increase the rate, but what can say for sure is that we will continue with the current tight monetary policy stance going forward.”

Keeping rates restrictive is among a suite of measures authorities are using in the wake of the most significant reforms the nation has carried out in at least five decades. The nation in July liberalized the foreign-exchange market, adopted a targeted monetary policy rate and raised taxes, helping it win IMF support as it restructures almost $29 billion worth of foreign debt.

Mamo expects headline and food inflation to fall to below 10% by the end of 2025 as the bank keeps rates high and the economy adjusts to the currency reforms.

“We expect inflation pass-through to be limited, temporary and manageable,” he said.

The government is providing subsidies for several products, including fuel, heating oil and medicines, to help some of the poorest people deal with the transition. Subsidies will be “eliminated in due course,” Mamo said, as they “can’t be a permanent feature of the economy.”

Meanwhile, the nation is simultaneously negotiating with bilateral lenders and foreign bondholders for a rework aimed at cutting its debt burden. Mamo said that those negotiations should conclude by early next year.

Recovering Reserves

The reforms are already paying dividends, he said, with productivity jumping, especially in the agriculture sector as farmers get access to hard currency needed to buy imports. The IMF expects economic growth to jump more than 6% this year.

The bank’s foreign reserves have more than doubled in gross terms since the reforms were implemented, Mamo said. He declined to provide a dollar figure or disclose whether net reserves are positive. The bank plans to start regularly publishing reserves figures in the short term, possibly as soon as this year.

“We’re preparing internally,” he said. “We’re discussing the formatting, so we’ll regularly publish this data.”

The reforms, he said, are part of a reset of the economy that will usher in foreign investment in sectors like mining and agriculture.

“The previous regime has outlived its purpose,” Mamo said. “It was not bringing any tangible benefits to the economy.”

Source:norvanreports.com