Macroeconomic Fundamentals Need Stringent Attention

A healthy economy cannot be realised without increasing output, creating employment opportunities, stabilising prices, balancing the budget and creating a healthy balance of payments, writes Mesfin Namarra (, former member of parliament and NBE.

Despite massive investments by the government, Ethiopia’s macroeconomy has over the years increasingly worsened. There is a foreign currency shortages, double-digit inflations, unsustainable debt levels and massive trade deficits.

At this juncture, desirable factors – such as increasing output, fuller employment, stable prices, balanced budgets and a healthy balance of payments necessary for a healthy economy seem to be more distant dreams. But there is no need to lose hope if the political will exists and proactive regulations and institutional capacities are made robust.

Increasing output is the basis of all growth and development. By putting well-articulated policy measures in place, agricultural, industrial and services production should steadily increase at a rate that exceeds that of population growth.

The double-digit gross domestic product (GDP) growth rate that is contradicted by international financial institutions such as the World Bank and the International Monetary Fund (IMF), and seems less likely given the crippling macroeconomic unease, can be realised. But this can only happen if there is the will to make the bureaucracy, as well as institutions such as the National Bank of Ethiopia (NBE), autonomous. Otherwise, what we have is a government unchecked for its poor handling of the economy.

Increasing output has a direct relationship to employment. It is an issue that genuinely taints the current love affair between government and the youth. Too many small and medium-sized enterprises (SMEs) have failed. Doing business is also complicated by bureaucracy, poor contract enforcement and lack of access to credit. And operating firms have a hard time expanding given the prevailing macroeconomic crisis.

One of these bottlenecks hampering the growth of the private sector is unstable prices. The situation in Ethiopia now is similar to that of East Germany in the late 1980s. Moderate inflation of even up to five percent a year is considered detrimental to growth. Ethiopia recorded an average  13pc inflation rate in the just-ended fiscal year.

Inflation can only be controlled by a steady increase in the production of goods and services at a rate exceeding that of the population growth. Currently, we are facing a rate similar to galloping inflation. This is not entirely attributable to the low production of goods and services. It is due to the unequal distribution of resources in the nation that has left too much in too few hands.

High inflation is also connected to deficit financing by the central bank. This has to do with the lack of a balanced budget. Of course, there is no such thing as “balanced,” technically. When government revenue is less than its expenditure, there is a budget deficit. When the opposite occurs, it is a budget surplus.

A budget deficit is not a malady by itself; it is the way governments finance them that could be inflationary. If a government keeps on financing its deficits by limitless borrowing from the NBE, which is tantamount to printing money, it faces what we are facing today. The perception of an autonomous central bank has long been eroded given that the governor of the central bank until recently, Teklewolde Atnafu, is also a member of the ruling coalition’s Executive Committee.

The central bank has to be a body that can check the government’s spending. Otherwise, there is no accounting for expenditures being made in times of election seasons. The NBE should put the long-term health of the economy as its ultimate priority and work to improve the foreign currency reserve and employment, as well as reduce inflation.

Effective policy making and robust institutional capacity should be able to lead to a healthy balance of payments. The difference between merchandise exports and imports depicts trade balance while current and capital accounts included reveals the state of the overall balance of payments.

In Ethiopia, we currently have a trade balance deficit of about 13 billion dollars while all forex receipts from exports of goods have stagnated below three billion dollars. The foreign currency generated from the export of services, remittance, and external assistance helps catch up to our import bills. But they could not be sustainable means to addressing the deficit.

All these macroeconomic variables are closely related. Increasing output can send a positive shock wave through fuller employment, relatively stable prices, near balanced budget and a healthy balance of payments. But productivity will not grow as long as the government is not inclusive of the private sector, and fails to provide necessary regulations and institutions to support better output.

By Mesfin Namarra (
Mesfin is a former member of parliament and NBE.

Published on Jul 21,2018 [ Vol 19 ,No 951]



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