War-Wracked Ethiopia Tightens Money Supply as Inflation Tops 30%
Ethiopia’s central bank expects new measures aimed at curbing illegal foreign-exchange trading and reducing local-currency supply to gradually bring down an inflation rate that’s at a near decade high, according to Vice Governor Fikadu Digafe.
The East African nation on Sept. 1 doubled the statutory reserve requirement for commercial lenders to 10% and increased the amount of foreign currency they must remit to the central bank, in an effort to rein in inflation that quickened to 30.4% in August. That’s the highest since December 2012.
It has also issued a “due diligence directive” that seeks to indirectly curb inflation by preventing individuals from opening multiple bank accounts and conducting illegal transactions, Fikadu said by phone from Addis Ababa, the capital.
“The main cause of inflation is supply-side shortage,” said Fikadu, who is vice governor in charge of monetary policy and chief economist at the National Bank of Ethiopia. But “you cannot undermine the supply of money,” which also pushes up prices, he said.
Inflation has been fueled by a conflict between federal forces and troops from the northern Tigray region that erupted in November and has spread into the neighboring Afar and Amhara regions. Tens of thousands of farmers have fled their land and factories and roads have been closed.
“The area which is affected by conflict is not producing. You also have some people displaced who have to be supported and that puts pressure on the market as you have to buy things” to help them, Fikadu said. “So directly or indirectly it has an impact.”
Annual food inflation accelerated to 37.6% in August from 32% the previous month as the cost of items from bread to rice increased rapidly. Taxes on wheat, sugar, oil and rice have been waived in a further bid to ease price-growth, State Minister for Finance Eyob Tekalign said Friday.
Still the impact of the bank’s monetary policy decisions should not be underestimated, Fikadu said.
I hope inflation “will come down to some extent because the impact of monetary policy should not be undermined,” he said. “Probably it will be challenging, but we hope it will be down slightly and gradually come down.”
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